Goldman's Reputation Dies Hard
Goldman Sachs' reputation took a hit as a result of the demise of Portuguese bank Banco Espirito Santo. They apparently had loaned the bank money - $835 million to be exact - right before the bank collapsed. To be accurate, Goldman created an investment vehicle that loaned the money to the bank. And the big surprise here is that Goldman itself was stiffed in the deal. We've only just heard about it because such deals are not announced, rather they are crafted in such as way as to avoid public scrutiny. And while the Banco Espirito collapse didn't trigger (at least it seems not to have) a chain reaction in the financial system, it's worth understanding just what the involvement of Goldman says about the present state of this once proud and perhaps still somewhat powerful bank.
Goldman's involvement with Banco Espirito followed an all too familiar pattern. Typically, Goldman would sell pieces of a vehicle like the one they created for BE to investors, i.e., its customers. Indeed, on many occasions in the past, Goldman would sell to its customers items that lost value not too long after Goldman sold them. The way this deal was supposed to work was that Goldman created the vehicle, pledged the money to the bank, and then would sell shares in the vehicle to customers. But a funny thing happened this time around: Goldman had trouble finding buyers. Having already committed the $835 million, the legendary investment bank had to take the hit when Banco Espirito failed. Is Goldman losing its touch?
Since 2008, when the previously invincible GS had to come hat in hand to the government or face collapse, while their reputation has taken a series of hits, they have managed to live off the past and have retained their status as first among equals of the big Wall Street banks. But perhaps this will change now.
While their losses this time won't threaten the bank's solvency, we may be seeing the beginning of the tarnished glory of Goldman being thoroughly erased, leaving just the shell of a bank once known for its integrity, now known more for its predatory practices. But a great reputation such as Goldman once had does die hard, and there's still plenty of money to be made out there. We can expect the GS bankers to go after all they can get while the getting's good.
Goldman's involvement with Banco Espirito followed an all too familiar pattern. Typically, Goldman would sell pieces of a vehicle like the one they created for BE to investors, i.e., its customers. Indeed, on many occasions in the past, Goldman would sell to its customers items that lost value not too long after Goldman sold them. The way this deal was supposed to work was that Goldman created the vehicle, pledged the money to the bank, and then would sell shares in the vehicle to customers. But a funny thing happened this time around: Goldman had trouble finding buyers. Having already committed the $835 million, the legendary investment bank had to take the hit when Banco Espirito failed. Is Goldman losing its touch?
At first, the arrangement appeared lucrative for Goldman. It stood to collect fees from Oak Finance that "will be materially higher than the fees and/or commissions typically charged in vanilla bond transactions," according to the prospectus.At one time, Goldman had a reputation for integrity. It treated clients in a manner few other banks could match. That was when the firm was a traditional Wall Street partnership. But when Goldman followed the trend of Wall Street investment banks going public, their pristine reputation began to suffer as - now playing with other people's money (the shareholders) rather than their own - they engaged in more predatory practices practices. The first time I know of that these practices came to light in big way was their sale of Russian bonds to their customers in the late 1990s, right before the bonds collapsed in value. Goldman had bought the bonds at a discount, sold them at a profit, and the customers were left holding the bag. Indeed this pattern became so entrenched that some analysts followed Goldman's recommendations to its customers and bet against them, with in many cases good results.
But Banco Espírito Santo's financial difficulties made it hard for Goldman to attract buyers.
Since 2008, when the previously invincible GS had to come hat in hand to the government or face collapse, while their reputation has taken a series of hits, they have managed to live off the past and have retained their status as first among equals of the big Wall Street banks. But perhaps this will change now.
While their losses this time won't threaten the bank's solvency, we may be seeing the beginning of the tarnished glory of Goldman being thoroughly erased, leaving just the shell of a bank once known for its integrity, now known more for its predatory practices. But a great reputation such as Goldman once had does die hard, and there's still plenty of money to be made out there. We can expect the GS bankers to go after all they can get while the getting's good.
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