Tags: Goldman | Gone | Wild

Goldman Gone Wild

By Barry Elias   |   Friday, 28 Oct 2011 08:07 AM

Columbia University alumni were provided an economic and financial briefing by Goldman Sachs representatives on September 4, 2008.

Prior to the session, a Columbia University alumnus informed me that his nephew, a Princeton graduate, accepted employment by Goldman Sachs rather than pursue a career in medicine.

The reason: $50 million per year at Goldman is greater than $150,000 per year as a physician.

During the meeting, the Goldman team sprayed the attendees with an array of data and prognostications, including portfolio recommendations for those with $10 million or $25 million to invest.

Following the session, I informed the Columbia alumnus of the transparent marketing effort on display, which lacked credibility. I had divested from the equities market six months prior.

Roughly a year later, while having dinner with the same individual and other Columbia alumni, I suggested if one had taken the advise presented at that meeting, a $25 million portfolio would have experienced a $6 million haircut within one month.

Not a prudent investment.

That scenario was a microcosm of the financial pathology that decimated our socioeconomic environment.

In 2007, BusinessWeek reported that the New York financial industry possessed 5 percent of the jobs and 20 percent of the compensation (4 times average). At Goldman Sachs, the average annual salary was $622,000 (12 times average). This dollar figure excludes bonuses. In 2006, senior Goldman executives received bonus of $30 million to $50 million, while top traders received nearly $100 million.

Today, average annual compensation expenses at Goldman are $293,000, a 50 percent decrease over 5 years.

In addition, a recent Federal Reserve Bank report indicates the financial industry contributes less than 1 percent to total GDP, while generating 25 percent of the profits. These profits exclude the excessive salaries, benefits, and bonuses received by the financial community.

In an April 2011 report, The Senate's Permanent Subcommittee on Investigations (PSI) suggested that Goldman exploited clients in 2006 and 2007 by exposing them to subprime loans in a misleading fashion, favoring certain clients over others. The report includes a case study that details four CDOs that Goldman constructed and sold: Hudson 1, Anderson, Timberwolf, and Abacus 2007-AC1.

In June, New York prosecutors subpoenaed the bank to explain its actions in the run-up to the financial crisis. In addition to the Justice Department, the New York Attorney General and the Securities and Exchange Commission are also investigating.

The subcommittee concluded that top Goldman executives misled Congress during their testimony in July 2010, based on emails presented during the investigation. Federal agencies are now considering whether these executives committed perjury. The U.S. Securities and Exchange Commission fined Goldman Sachs a record $550 million in July 2010 for its fraudulent involvement with the CDO Abacus 2007-AC1.

This week, the SEC filed a civil complaint against Rajat Gupta, a Goldman Sachs director, for insider trading. They charge that he and Raj Rajaratnam were co-conspirators. Among other charges, the indictment alleges that Mr. Gupta informed Mr. Rajaratnam of Warren Buffet’s pending $5 billion investment in Goldman. Within minutes, Mr. Rajaratnam exercised trades that netted $840,000.

Mr. Rajaratnam, the head of Galleon Management, was recently convicted of 14 conspiracy counts and securities fraud for illegally using inside information to trade Goldman Sachs, Google, Hilton, and Intel equities. The government estimates that these trades generated profits or avoided losses of $72 million. He was sentenced to 11 years.

During the New York sentencing procedure, U.S. District Judge Richard J. Holwell said Mr. Rajaratnam’s crimes “reflect a virus in our business culture that needs to be eradicated.”

The Goldman "magic" may be more illusion than reality.

Perhaps Goldman will survive and even excel in the future.

This prospect seems predicated on their propensity to provide real value to their clients and society.

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