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Dow 30 Profile: Goldman Sachs
Goldman Sachs (GS - Free Goldman Sachs Stock Report), a leading global investment banking, securities, and investment management firm, has joined the Dow Jones Industrial Average for the first time in its long history. Founded by Marcus Goldman in New York in 1869, who was later joined by his son-in-law, Samuel Sachs, the firm was a pioneer in commercial paper, initially buying promissory notes from tobacco and diamond merchants and reselling them at a slight profit to local banks, then later providing financing for larger industrial companies and initial public offerings (IPOs). Over the past 30 years, the firm has become a global powerhouse and a launching pad for future U.S. Treasury Secretaries, Prime Ministers, central bank chairmen, and leaders of other financial firms.
Since the 1999 IPO
The firm has been in the spotlight in the years since it first went public in 1999, under the leadership of Henry Paulson (it had previously operated as a partnership.) In particular, its involvement in the mortgage crisis of 2007 and financial crisis of 2008 made countless headlines. In September of 2008, in the wake of the collapse of Lehman Brothers, there were concerns of a run against Goldman Sachs, as it was exposed to some of the same businesses and was an investment bank, as opposed to a bank holding company, which meant it had less regulatory oversight and less access to liquidity and financing than traditional banks. In order to restore confidence, the company, under the leadership of Lloyd Blankfein, raised $5 billion by selling preferred shares and warrants to Berkshire Hathaway (BRK/B), which gained Goldman Sachs Warren Buffett’s much-coveted seal of approval. It also raised $10 billion from the TARP (Troubled Assets Relief Program) fund that the U.S. Treasury had instituted to better-capitalize the banks and, thus, shield them from the market panic. As a condition of these deals, Goldman Sachs became a bank holding company, marking the end of an era for traditional investment banking.
The firm operates in four business segments. The Institutional Client Services segment, which accounted for the majority of company revenues in 2012, facilitates client transactions and makes markets in fixed income, equity, currency, and commodity products, for both institutional clients, as well as worldwide exchanges. The Investing & Lending segment, meanwhile, originates long-term loans to clients, and also makes investments in debt securities, public and private equity, real estate, and other sectors. The Investment Banking segment provides a broad range of services to corporations, funds, financial institutions and governments around the world, including strategic advisory assignments with respect to mergers and acquisitions, risk management, and corporate restructuring and spinoffs. Finally, the Investment Management unit provides investment advisory services and offers products such as mutual funds and private investment funds, across all major asset classes to both institutional and individual clients, as well as wealth advisory services to high-net-worth individuals.
In the years since the crisis, Goldman Sachs has been focused on developing its business in emerging markets as well as applying its capital to repurchase its own shares and pay off the preferred stock that it issued. Recent efforts to reduce expenses have helped bolster margins, as the company has slashed its headcount by about 10% in the past three years and is lowering its compensation costs. It is also focused on reducing its exposure to riskier holdings, in part due to the implementation of more-stringent federal regulations on banks. It has raised its cash hoard significantly in recent years, and now holds more than $100 billion in cash assets. Indeed, according to recent stress tests run by the New York Federal Reserve and private firms, its Tier One capital would remain safely above regulatory minimums even in a severely adverse recession.
Earnings have been relatively strong over the past year, as headwinds such as slow U.S. growth and the European sovereign debt crisis, seem to have relaxed in recent months. Meanwhile, positive U.S. economic data has raised equity prices and switched the financial world’s concerns toward what will happen as the Federal Reserve begins to taper its bond purchases, as the unemployment rate, and thus the need for quantitative easing, abates. The restoration of confidence in the global economy bodes well for all of the firm’s business segments.
At the time of this article’s writing, the author had a position in: BRK/B.