Goldman Sachs controversies
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Goldman Sachs has been the subject of controversies throughout its history.
2003 global analyst research settlement
In 2003, Goldman Sachs resolved regulatory and civil claims regarding conflicts of interest between its equity research and investment banking businesses during the dot-com bubble. This included a $110 million payment as part of the multi-firm global analyst research settlement with the SEC and state regulators, alongside minor multi-bank class-action settlements concerning research coverage of specific entities like Exodus Communications and RSL Communications.[1]
2008 financial crisis
During the 2008 financial crisis, Goldman Sachs was criticized for allegedly misleading its investors and profiting from the collapse of the mortgage market. This led to investigations from the United States Congress, the United States Department of Justice, and a lawsuit from the U.S. Securities and Exchange Commission[2] that resulted in Goldman Sachs paying a $550 million settlement in July 2010.[3] Goldman Sachs denied wrongdoing and stated that its customers were aware of its bets against the mortgage-related security products it was selling to them, and that it only used those bets to hedge against losses.[4][5]
While multiple investment banks were scrutinized by congressional investigations, Goldman Sachs was subject to a dedicated hearing and a critical report from the Senate Permanent Subcommittee on Investigations. On April 14, 2011, the subcommittee released a 635-page report entitled Wall Street and the Financial Crisis: Anatomy of a Financial Collapse, which accused the firm of misleading clients and engaging in conflicts of interest by profiting from the housing market's collapse at their expense.[6] Following the subcommittee's report, federal and local authorities reviewed the firm's practices; in August 2012, the Department of Justice officially closed its investigation and announced it would not file any criminal charges against Goldman Sachs or its executives.[7]
Abacus mortgage-backed CDOs
Unlike many investors and investment banks, Goldman Sachs anticipated the subprime mortgage crisis.[4] Some of its traders became "bearish" on the housing boom beginning in 2004 and developed mortgage-related securities, originally intended to protect Goldman Sachs from investment losses in the housing market. In late 2006, Goldman Sachs management changed the firm's overall stance on the mortgage market from positive to negative. As the housing market began its downturn, Goldman Sachs increased its structuring of these instruments, shifting its macro portfolio to a net-short position that generated significant trading revenue as mortgage defaults rose.[8]
The investments were called synthetic CDOs because unlike regular collateralized debt obligations, the principal and interest they paid out came not from mortgages or other loans, but from premiums to pay for insurance against mortgage defaults—the insurance known as "credit default swaps". Goldman Sachs and some other financial firms held a "short" position in the securities, paying the premiums, while the investors (insurance companies, pension funds, etc.) receiving the premiums were the "long" position. The longs were responsible for paying the insurance "claim" to Goldman Sachs and any other shorts if the mortgages or other loans defaulted.
Through April 2007 Goldman Sachs issued over 20 CDOs in its "Abacus" series worth a total of $10.9 billion.[9]
These securities performed poorly for long investors; by April 2010, at least $5 billion worth of the underlying reference assets had either been downgraded to sub-investment grade ratings or defaulted.[10] One CDO examined by critics which Goldman Sachs bet against but also sold to investors, was the $800 million (~$1.19 billion in 2024) Hudson Mezzanine CDO issued in 2006. In the Senate Permanent Subcommittee hearings, Goldman Sachs executives stated that the company was trying to remove subprime securities from its books. Unable to sell them directly, it included them in the underlying securities of the CDO and took the short side. While the Hudson prospectus described the portfolio contents as assets sourced from the secondary market, critics noted the selection effectively acted as a short position against the firm's existing housing book. Following subsequent mortgage defaults, holders of the long position paid out approximately $310 million to the counterparties holding the short position.[11]
In public statements, Goldman Sachs claimed that it shorted simply to hedge and was not expecting the CDOs to fail. It also denied that its investors were unaware of Goldman Sachs's bets against the products it was selling to them.[4]
2010 SEC civil fraud lawsuit
In April 2010, the U.S. Securities and Exchange Commission (SEC) charged Goldman Sachs and one of its vice presidents, Fabrice Tourre, with securities fraud. The SEC alleged that Goldman Sachs had told buyers of a synthetic CDO, a type of investment, that the underlying assets in the investment had been picked by an independent CDO manager, ACA Management. In fact, Paulson & Co., a hedge fund intending to bet against the investment, played a significant role in selecting the reference portfolio, and within a year of the transaction's completion, the underlying mortgage bonds were entirely downgraded by rating agencies.[2]
The specific synthetic CDO at the center of the SEC's 2010 suit was Abacus 2007-AC1. Unlike many of the Abacus securities, 2007-AC1 did not have Goldman Sachs as a short seller, in fact, Goldman Sachs lost money on the deal.[12] That position was taken by a client (John Paulson) who hired Goldman Sachs to issue the security (according to the SEC's complaint). Paulson and his employees selected 90 BBB-rated mortgage bonds[13][14] that they anticipated would decline in value to maximize the return on their short positions.[3] Paulson and the manager of the CDO, ACA Management, worked on the portfolio of 90 bonds to be insured (ACA allegedly unaware of Paulson's short position), coming to an agreement in late February 2007.[14] Paulson paid Goldman Sachs approximately US$15 million for its work in the deal.[15] Paulson ultimately made a US$1 billion profit from the short investments, the profits coming from the losses of the investors and their insurers. These were primarily IKB Deutsche Industriebank (US$150 million loss), and the investors and insurers of another US$900 million—ACA Financial Guaranty Corp,[16] ABN AMRO, and the Royal Bank of Scotland.[17][18]
The SEC alleged that Goldman Sachs "materially misstated and omitted facts in disclosure documents" about the financial security,[2] including the fact that it had "permitted a client that was betting against the mortgage market [the hedge fund manager Paulson & Co.] to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," ACA Management.[17][19] The SEC further alleged that "Tourre also misled ACA into believing ... that Paulson's interests in the collateral section [sic] process were aligned with ACA's, when in reality Paulson's interests were sharply conflicting."[17]
In reply Goldman Sachs issued a statement saying the SEC's charges were "unfounded in law and fact", and in later statements maintained that it had not structured the portfolio to lose money,[20] that it had provided extensive disclosure to the long investors in the CDO, that it had lost $90 million, that ACA selected the portfolio without Goldman Sachs suggesting Paulson was to be a long investor, that it did not disclose the identities of a buyer to a seller and vice versa as it was not normal business practice for a market maker,[20] and that ACA was itself the largest purchaser of the Abacus pool, investing US$951 million. Goldman Sachs also stated that any investor losses resulted from the overall negative performance of the entire sector, rather than from a particular security in the CDO.[20][21]
While some journalists and analysts have called these statements misleading,[16] others believed Goldman Sachs's defense was strong and the SEC's case was weak.[22][23]
Some experts on securities law such as Duke University law professor James Cox, believed the suit had merit because Goldman Sachs was aware of the relevance of Paulson's involvement and took steps to downplay it. Others, including Wayne State University Law School law professor Peter Henning, noted that the major purchasers were sophisticated investors capable of accurately assessing the risks involved, even without knowledge of the part played by Paulson.[24]
According to testimony before the Financial Crisis Inquiry Commission, hedge fund manager John Paulson initially approached Bear Stearns to structure a similar vehicle, but the head of Bear Stearns's CDO group, Ira Wagner, rejected the proposal, stating that allowing a short investor to select the underlying collateral created an inherent conflict of interest. While Goldman Sachs maintained that it ultimately lost $90 million on the Abacus transaction, critics argue the firm held the long position only because it was unable to successfully distribute the remaining risk to secondary investors before the underlying securities defaulted.[25]
The prospectus for the ABACUS transaction explicitly included disclaimers warning long investors that the protection buyer 'may have information, including material, non-public information' regarding the underlying reference assets which it was not providing to the long investors.[26]
On July 15, 2010, Goldman Sachs settled out of court, agreeing to pay the SEC and investors US$550 million, including $300 million to the U.S. government and $250 million to investors, one of the largest penalties ever paid by a Wall Street firm.[3] The firm did not admit or deny wrongdoing, but did admit that its marketing materials for the investment "contained incomplete information", and agreed to change some of its business practices regarding mortgage investments.[3]
1MDB scandal
Between 2011 and 2013, Goldman Sachs captured a leading market share in Malaysia's investment banking sector, primarily by underwriting approximately $6.5 billion in bond offerings for the Malaysian sovereign wealth fund, 1Malaysia Development Berhad (1MDB), which generated roughly $600 million in fees for the bank.[27][28] In 2015, U.S. and international regulators launched investigations into the transactions, focusing on compliance failures under the U.S. Bank Secrecy Act and foreign bribery laws.[29] In October 2020, Goldman Sachs resolved the global investigation by entering into a deferred prosecution agreement and agreeing to pay over $2.9 billion in fines and penalties to authorities in the United States, Malaysia, Singapore, and the United Kingdom, while its Malaysian subsidiary pleaded guilty to criminal charges.[30]