History of Goldman Sachs

GOLDMAN SACHS

Name

Institutional Affiliation

History of Goldman Sachs

The Goldman Sachs Group Inc. is an international financial services consulting firm whose main clients are governments, financial institutions, corporations and high net worth individuals. It has two main divisions which are Global Capital Markets and Asset Management and Securities Services. Global Capital Market specializes in areas regarding to investment banking, principal investment, trading and financial advisory services. Asset Management and Securities Services offer investment advisory services. Goldman Sachs was founded by Marcus Goldman in 1869 and has its headquarters in New York City (Lower Manhattan) and has over forty offices worldwide. In 1887, Henry Goldman started relations with Kleinwort Sons which enabled Goldman Sachs to venture into currency arbitrage, foreign exchange services and international commercial finance (Bronfman and Solomon, 2012).

In 1906, Goldman Sachs co-managed United Cigar Manufacturer’s IPO which was its first IPO to co-manage. This initial public offering was able to raise $ 4.5 million from the market and remains a psychological milestone in the books of Goldman Sachs history. In the same year, it co-managed another IPO for Sears Roebucks. Due to the huge success of these IPOs, Henry Goldman was offered directorships in both firms a practice that have been carried on to the present whereby its major clients seek to have a member of Goldman Sachs in its board of directors (Ellis, 2013). In the early 20th century, it instituted several financial practices that are common today like retirement options and share buy-backs. Examples of its IPO clients at this time are; F.W. Woolworth, May Department Stores, B.F Goodrich, Continental Can and Merck. Soon after Henry Goldman retired in 1917, Harry and Samuel Sachs became limited partners. Arthur, Henry E., and J. Sachs became directors making the firm remain a family business (Endlich, 1999).

Goldman Sachs SWOT Analysis

Like any other business around the world, Goldman Sachs has various strengths and weaknesses in its business model. The strengths include strong investment banking operations, technical expertise, leading brand, geographically diverse business, diverse financial products and an innovative culture. The company’s investment banking operations has seen it manage numerous initial public offerings over the last century. It is said that its workforce is one of the best highly skilled in the banking industry. This is ensured by using effective recruitment and promotion methods that ensure only the best suited applicants get the job opportunities in the best interest of the company. The company is a leading brand because it has been in existence for over a century and so the public has confidence in the company (Endlich, 1999). The innovative culture is a result of hiring expert staff who works towards the betterment of the company. The company has diversified both geographically and in its range of products to reduce its overreliance on a single product or to reduce exposure to a certain product.

Goldman Sachs is not devoid of major weaknesses that threaten to hamper its growth and expansion ambitions. Some of its major weaknesses are concentration on few key products, high attrition rates, bad mortgages, litigation issues, penalties and increasing volatility in earnings. The company heavily relies on investment banking which means that if that particular sector collapses, it would send it to bankruptcy and maybe subsequent liquidation. High attrition rates means that the company continuously seeks and natures new talent because the best talent keeps leaving the firm which is dangerous over the long haul. Bad mortgages result in losses to the company and may result to bankruptcy of the company as what happened in 2008 when Bear Sterns, Merrill Lynch and Lehmann Brothers all collapsed due to subprime issues (Cohan, 2012). Goldman Sachs earnings have been very volatile in the recent past which may signal problems within the company and reduce investor confidence in the company.

The firm is faced by many opportunities like buoyant asset management industry, growing opportunities in investment banking, emerging markets, growth in private equity deals, bailout money and cross selling opportunities. The asset management industry is headed for a boom with organizations investing massively in real estate (Cohan, 2012). This will improve the profitability of Goldman Sachs which is a market leader in Asset Management. Investment banking has not yet reached its full potential as there is still more room for growth. Emerging markets are the surest bets. These markets present best growth opportunities for companies in the developed world. Countries like Brazil with a very large population and an increasing middle class provide an excellent market for their products. It is of essence that companies like Goldman Sachs establish a monopoly in these countries before competitors come in. Cross selling opportunities present themselves when a customer gets introduced to other products rather than what he or she intended to purchase. This results from diversification and is an important sales driver (Bronfman and Solomon, 2012).

Threats that face Goldman Sachs in its pursuit for growth and expansion cannot go unnoticed. Chief among them are mortgage issues, cyclical industry, government intervention. Volatility is stock markets, conflicts of interest and sharp rises in interest rates. Mortgage issues have resulted in bankruptcy of major financial services companies like the Lehman Brothers. They continue to be a threat to remaining financial services players. The banking industry has become cyclical and is hinged on the economy hence reducing its reliability (Griffin, 2012). Government intervention through monetary and fiscal policies results in earnings volatility which repels investors. Volatility in stock markets means that the investment banking arm is more lucrative in a bull market when many companies prefer listing than in a bear market. These results into an earnings famine in bear markets because they are naturally longer than bull markets. Conflict of interest between shareholders and management are a major drawback (Ellis, 2013).

Goldman Sachs Recommendations

Some of the issues that should be addressed with immediate effect are litigation issues. The firm should invest in promoting integrity in its staff members to reduce incidences of lawsuits being filed against them and huge amounts of money being paid out as compensation. Increasing volatility in earnings can be reduced by balanced geographical diversification because earnings volatility is mainly caused by central bank policies (Ellis, 2013). When the firm has diversified evenly geographically, decisions from one central bank will not adversely affect profitability. Concentration on key products means that the firm is not well diversified. Balanced diversification of products can be done by aggressive marketing of minor products. High staff turnover can be minimized by investing in employee loyalty programs and also rewarding employees in form of remuneration and promotions.

Bad mortgages can be reduced by careful assessment and vetting of those who qualify for mortgages. Those who have weak sources of cash flow should be either advised to review their mortgage request downwards to their level or denied the mortgage. This may result in customer complaints but the business life is at stake so it is a small price the company has to pay rather than have a bad loan book (Griffin, 2012).

References

Charles Bronfman; Jeffrey Solomon(2012). The art of doing good: where passion meets action,

San Francisco, CA : Jossey-Bass, A Wiley Imprint

Charles D. Ellis (2013). What it takes: seven secrets of success from America’s great

professional firms. Hoboken, New Jersey: John Wiley & Sons, Inc.

Lisa Endlich (1999) Goldman Sachs: the culture of success New York: A.A. Knopf

Ricky W Griffin(2012) Management. Mason, OH CENGAGE Learning Custom Publishing

William D Cohan (2012) Money and power: how Goldman Sachs came to rule the world.

London : Penguin