Goldman Sachs has traditionally possessed the Midas touch in the investment banking world. A global leader in mergers and acquisitions advice and securities underwriting, Goldman offers a gamut of investment banking and asset management services to corporate and government clients worldwide, as well as institutional and individual investors. It owns Goldman Sachs Execution & Clearing, one of the largest market makers on the NYSE and a leading market maker for fixed income products, currencies, and commodities. Through affiliates GS Capital Partners, GS Mezzanine Partners, and others, Goldman Sachs is also one of the largest private equity investors in the world.
Altogether, Goldman Sachs has operations in more than 30 countries worldwide. The company's structure falls into four business segments: investment banking, institutional client services, investing and lending (which includes its 9% stake in Chinese banking giant ICBC), and investment management. The company converted to a bank holding company in 2008 at the height of the financial crisis. Its Goldman Sachs Bank USA subsidiary handles bank loan trading, mortgage originations, and other activities. The switch to the bank holding company structure allows Goldman Sachs to acquire commercial banks in order to build up deposits and shore up its balance sheet; it also affords the company increased access to government borrowing facilities.
The change also brings increased scrutiny and regulation, though, such as capital adequacy requirements and limits on hedge fund investing. To comply with the 2010 Volcker Rule, which restricts banks from proprietary trading, Goldman Sachs has been winding down units including the Goldman Sachs Principal Strategies and Global Macro Proprietary trading desks.
Uncertainty in the global markets has impacted the firm's business, as have higher debt volatility levels and wider corporate credit spreads. The company's revenues fell some 20% in 2011, largely due to its investing and lending business, which was down 72% in the fourth quarter. (The firm lost $517 million on its ICBC investment.) Its institutional client services business was hurt by its fixed income, currency, and commodities business, which was down 34%. Investment banking was also down, primarily as a result of its equity underwriting business which were down industrywide. The company's market making operations fell to some $9.3 million, down from $13.7 million in 2010.
Goldman Sachs' interaction with the government continued in 2010, when it was accused of fraud. In a lawsuit, the SEC alleged that the firm had misled its clients about a risky subprime-mortgage-related financial product. As the value of the mortgage product plunged during the housing bust, Goldman Sachs allowed one of its hedge fund clients (who heavily influenced the makeup of the product) to bet against the market. As a result, that client reaped billions of dollars. The SEC called it a major conflict of interest. Though denying any wrongdoing, Goldman Sachs paid some $550 million to settle a civil suit related to the case.
As Goldman Sachs has become the poster child (or scapegoat) for the excesses of Wall Street, the firm's distinct business culture and prestige continues to attract the investment banking industry's top talent. Teamwork is emphasized, along with an attitude that the firm is the best at what it does. As Goldman Sachs' perennial rank among the top firms in its industry attests, some of the world's foremost companies entrust the firm with their financial and advisory needs. Goldman Sachs serves governments and high-net-worth individuals, but unlike rivals that are rushing to diversify operations and income sources, the company has focused on corporate clients. It has approximately $840 billion of assets under management.
In 2011 the company sold Litton Loan Servicing to Ocwen Financial for more than $260 million. Goldman Sachs was looking to exit the loan servicing industry, which had come under fire for improperly handling home foreclosures. It arranged to sell hege fund administrator Goldman Sachs Administration Services to State Street for some $550 million in 2012.
However, Goldman Sachs isn't all about cutting back: International expansion is also on its to-do list. In 2011 its asset management arm acquired Benchmark Asset Management in India. The deal added to Goldman Sachs' team in Mumbai. In 2012 Goldman Sachs acquired the Bermuda-based insurance and reinsurance operations of Ariel Reinsurance; that addition should bring in a steady stream of fees.
Also in 2012, the company spent some $5.65 billion to buy back preferred shares that Warren Buffet's Berkshire Hathaway acquired in 2008. The repurchase will save Goldman Sachs money, as it has been paying some 10% interest on the shares (or some $500 million annually). – less