By now, you have probably filed the big Goldman Sachs controversy into the back of your mind, trumped by more current events (hello, Greek crisis and stock market craziness) that, you think, are of much bigger concern to you and your finances.
Think again. The trouble at Wall Street royalty Goldman Sachs may have a huge impact on your finances – and not only if you happen to be a company shareholder. (And, as we’ll explain later, you may be a shareholder without realizing it.)
Before we try to explain the potential outcomes of the Goldman Sachs SEC fraud filings and criminal case, let’s take a look at how Goldman Sachs really makes their money. Then, we’ll go into who their shareholders are and what’s at stake. You may be surprised to find yourself on that list.
Goldman Sachs Is in the Business of…
Unless you work on Wall Street, chances are you think of Goldman as an investment banking company that manages investors’ assets. Yes, you’ve got the right idea. But that’s hardly the full picture.
Goldman recently reported first-quarter 2010 earnings of $3.46 billion on revenues of $12.78 billion. Here is the breakdown of their revenue streams:
* $1.184 billion from investment banking services, just $464 million of which was from financial advisory.
* $1.341 billion from Asset Management & Securities Services.
* $10.25 billion from trading and principal investments, $7.386 billion from FICC, or fixed income, currency, and commodities.
Basically, fees for investment banking and asset management services represent only about 10% of Goldman’s revenues. We’ll tell you what the rest is in a bit.
Meanwhile, take a minute to peruse the company’s “About” page. Be sure to enjoy the corporate mumbo-jumbo about “fuelling job creation and innovation” and “facilitating economic development.”
Then, make a mental note of this statement: “Whether a mid-size employer in Kansas, a large school district in California, a pension fund for skilled workers, or a start-up technology firm, our clients’ interests come first.”
Therein lies the key to the huge potential impact Goldman’s trouble’s could have on us, everyday people. Whether you work for a mid-size employer in Kansas, a large school district in California, a large company or start-up technology firm… chances are the health of your retirement funds may be tightly intertwined with that of Goldman Sachs.
Let’s go back to that last revenue stream, the $10.25 billion from trading and principal investments. This makes up almost 80% of Goldman’s revenues. In other words, the company makes money primarily by investing its own.
Goldman emphasizes on their site that their clients come first, but do they?
As you’ve probably heard, the whole Goldman fiasco revolves around the allegations that the company may have intentionally sold their clients mortgage-backed securities that were doomed to fail. More importantly, they did not disclose that while they were selling them these investments, they were betting against them. That’s a problem. A problem of trust.
As you can imagine, this cannot be good for a business that is charged with managing billions of other people’s money. Goldman’s stock (GS) gives a pretty clear picture of investors’ perceptions of the company: down from $184 a share on April 15 (the day before the SEC filed fraud charges) to $147 as the end of trading May 12. That’s a decline of 20%.
At this point, the outcome of the SEC case has a huge impact on its stock price. “Trading in or out of Goldman is a wager on the legal and political outcomes of their SEC case,” says Michael Wong, an equity analyst at market research firm Morningstar, who covers Goldman Sachs.
Does this affect you?
To state the obvious, most impacted by Goldman’s fate are its shareholders. Those include:
* Individual Shareholders: If you hold GS stock, you’ve lost 20% in less than a month.
* Institutional Investors: Goldman, a favorite of financial ETFs and mutual funds, is 74% institutionally owned. AXA, State Street, Wellington Management, Vanguard, Blackrock, and FMR collectively owned over $2 billion in Goldman shares as of December 31, 2009.
Other parties have a longer-term stake in the Goldman case:
* Politicians: The Democratic Party has been pushing for financial reform for a while now. The Goldman case gives them significant momentum to push their agenda forward before the 2010 general election.
* The SEC: The SEC has lost a lot of respect and clout after the financial crisis derailed the U.S. economy and many perceive them to no longer have the regulatory power that they once did. They are looking to make the case that they are still at the helm.
* Goldman’s Competitors (and their employees and shareholders): On the upside, Goldman has a premier list of clients and a leading position in a number of their niches. Their competitors have sufficient ammunition to discredit their ethical standards and woo clients away. On the downside, the Goldman case may create a flood of new financial regulations and retroactive investigations that could significantly influence how business is done on Wall Street.
* The American Taxpayers: Worst case for Goldman, they simply cannot repair the damaged reputation, lose their clientele, and fail as a business. “Goldman is definitely one of those institutions that could be considered ‘too big to fail,’” says Wong. “If that’s the case, their rescue could come at the expense of American taxpayers.”
* Home Buyers: Goldman is still in the business of trading mortgage securities. Should they become less of a player here, it may hurt market liquidity and make financing a mortgage even more of a challenge.
GE Miller blogs on professional personal finance issues for young professionals at 20somethingfinance.com.