Earnings Call, Investor Day
Goldman Sachs at 150: Part 9 – Crisis (2008)
- In June 2006, Hank Paulson resigned as CEO of Goldman Sachs to become U.S. Treasury Secretary under President George W. Bush.
- Lloyd Blankfein, a 51-year-old Harvard-educated former trader, succeeded Paulson as CEO.
- Blankfein had previously pioneered the foreign exchange business, correctly predicting it would become an essential, highly profitable component of the firm years before the rest of the industry recognized its potential.
- The stock market experienced significant declines prior to the 2008 crisis: the S&P 500 fell 34 points to 701, and the NASDAQ dropped 55 points to 1,323.
- By the summer of 2006, a massive financial bubble had formed due to low interest rates, loose credit, and an unsustainably high housing market.
- Market correlations began breaking down in mid-2007, serving as an early warning signal that triggered Goldman Sachs to reduce risk exposure in mortgage and credit spaces.
- In late 2008, the crisis deepened beyond all anticipation, causing venerable firms to fail or be sold at fire-sale prices to avoid bankruptcy.
- The collapse of the U.S. housing market resulted in a cascade effect where commercial paper froze, money market funds ran, and government-sponsored enterprises (Fannie Mae and Freddie Mac) imploded.
- Goldman Sachs managed to avoid significant financial losses during the crisis but described the period as one where they "spent a lot of time scrambling."
- Following the crisis, Goldman Sachs faced intense public backlash and reputational damage despite its financial resilience.
- The firm was targeted due to its status as a successful Wall Street institution, its receipt of government bailouts, and its reported profits amidst widespread economic hardship.
- Executives admitted they were "slow in recognizing" the buildup of reputational risk, which they noted is often harder to manage than traditional financial risk.
- A lack of public narrative and understanding regarding the firm's business model left Goldman Sachs vulnerable to negative media portrayals, such as a critical Rolling Stone article.
- In response to the crisis, the firm established a Business Standards Committee to review every aspect of its operations and improve standards.
- Senior leadership remained at the firm during the crisis, and employee turnover declined as commitment to the partnership intensified.
- Clients largely remained loyal to the firm despite the difficulty of the period.
- The firm acknowledged that regulators, rating agencies, and banks failed to sound the alarm regarding excessive lending, leverage, and the complexity of mortgage-backed derivatives.
- Goldman Sachs committed to increasing transparency, establishing safeguards for derivative use, and engaging in a more robust public dialogue about its role in capital allocation.
- Leadership emphasized that the crisis revealed the firm's significant influence on the world, necessitating a greater obligation to explain its societal contributions.