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Goldman Sachs was founded in 1869 by Marcus Goldman. Early achievements included:

  • introducing the use of commercial paper, thus helping entrepreneurs with a new source of funding
  • invitation to join the New York Stock Exchange in 1896.

Goldman was a major player in establishing the U.S. initial public offering market. It managed the largest deals of that time, most notably The Sears, Roebuck and Company IPO in 1906.

The Goldman Sachs Group, Inc. is a global bank holding company engaged in investment banking, proprietary trading and asset management. Goldman offers its clients mergers & acquisitions advice, underwriting services and private equity deals. It is a primary dealer in the U.S. Treasury securities market.

During the 1970s, the firm expanded:

  • opening its first international office in London in 1970,
  • creating a private wealth division in 1971 and a fixed income division in 1972.

Another milestone was pioneering the “white knight” strategy. In 1974, Goldman defended Electric Storage Battery against a hostile takeover bid from International Nickel, led by Goldman’s rival Morgan Stanley.

In the 1980s, Goldman expanded into other markets with the acquisition of J. Aron & Company, a commodities trading firm. Over the next twenty-some years, Goldman developed expertise and presence in metals and energy commodities, including oil speculation, as a principal and an agent.

The 1999 Goldman IPO was an act of greed

One of the largest events in Goldman’s history was its own IPO in 1999, after which

  • 48% ownership was retained by the partnership pool
  • 22% was held by non-partner employees
  • 18% remained with retired Goldman partners and two longtime investors, Sumitomo Bank Ltd. and Kamehameha Activities Assn, a Hawaii school system
  • merely 12% was sold to the public.

Also in 1999,

  • Henry Paulson became Chairman and Chief Executive Officer
  • Goldman acquired Hull Trading Company, a leading market-making firm

Goldman prospered

Mergers and acquisitions activity of note, from September 2000 – 2007 included:

  • acquisition of Spear, Leeds & Kellogg, one of the largest specialist firms on the NYSE
  • merger with JBWere, the Australian investment bank
  • introduction of full-service broker-dealer services in Brazil
  • ownership interest in Burger King

Sizable profits made during the 2007 subprime mortgage financial crisis led the New York Times to proclaim that Goldman Sachs was without peer in the world of finance.

The firm’s viability was soon called into question as the crisis intensified in 2008. Venerable investment bank Merrill Lynch Pierce Fenner & Smith was rushed through a fire-sale, to be integrated within the Bank of America. On Sept. 21, 2008, Goldman Sachs received Federal Reserve approval to transition from an investment bank to a bank holding company.

On Sept. 22 2008, the last two major investment banks in the United States, Morgan Stanley and Goldman Sachs, both confirmed that they would become traditional bank holding companies, bringing an end to the era of investment banking on Wall Street.  The Federal Reserve’s approval of their bid to become banks ended the ascendancy of the securities firms, 75 years after Congress separated them from deposit-taking lenders. (Xinhua, agencies) Editor: Xiong Tong

I found the last paragraph profoundly moving. I never thought reading about the life cycle of a financial institution would bring me to close to tears, particularly not Goldman Sachs. I’m not crying for Goldman Sachs per se. I am sorrowful that institutions that have loomed large in my mind, as bulwarks of stability, even of integrity at times, have experienced so much change.

And are described so eloquently and respectfully in the very last place I would’ve imagined: Xinhua, the Communist People’s Republic of China’s official English language news service.

Looking backward, even through this abbreviated and incomplete account, I see many causative factors.

Hindsight Review

Goldman’s acquisition of Spear, Leeds & Kellogg should never have been approved by the SEC, regardless of whether or not it was a legally allowed transaction. The same can be said for Goldman’s acquisition of Hull Trading. I can justify this statement, as opposed to my (rather judgmental) comment regarding Goldman’s own IPO.

Spear, Leeds was a prime broker. It was an intermediary, facilitating efficient and equitable activity in the U.S. financial securities markets. Spear, Leeds was in the business of lending stock, for a fee. Traders needed to borrow stock before initiating any short sales. It is vital that such activities be run by separate and unrelated corporate entities, else risk the principal agent problem, or more descriptive, as “moral hazard”. There is more, but others have described it better, and in far greater detail already.

Quoted sections are sourced directly from news.xinhuanet.com, China’s official online news service.