Page last updated at 13:11 GMT, Tuesday, 27 April 2010 14:11 UK

Goldman Sachs' 150-year reputation on the line

By Richard Anderson
Business reporter, BBC News

Goldman Sachs booth on the New York Stock Exchange
Goldman Sachs makes more money on its trading books than its rivals

Despite recent charges of fraud and accusations of reckless risk-taking, Goldman Sachs remains Wall Street's pre-eminent bank.

Many would argue, in fact, that it remains the world's most revered commercial financial institution.

Goldman pays the most, makes the most and carries the most kudos.

Becoming a partner at the firm remains the dream of most ambitious financial executives, while joining its ranks remains the goal of most wannabe bankers the world over.

But for how much longer? Goldman is under attack and fighting hard to protect a reputation it has worked tirelessly to establish for almost 150 years.

Fraud charges

Goldman has come to epitomise the power and extraordinary money-making abilities of Wall Street.

Goldman Sachs Group Inc.

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While the banks continued to make massive profits and help drive economic growth, no one questioned its behaviour.

But once the edifice came crashing down in 2008, Goldman was first in the firing line.

And, some argue, not without reason.

First, questions were asked about Goldman's role in the US government's bail-out of insurance giant AIG in 2008.

Without the bail-out of the insurer, which owed Goldman a huge amount of money, some say the jewel in Wall Street's crown would have struggled.

Next came accusations that Goldman had helped to hide the true extent of Greece's debt by using complicated currency swap trades.

Finally, and most damagingly, Goldman was actually charged with defrauding investors by the US financial regulator, the Securities and Exchange Commission, earlier this month.

The firm has vigorously denied wrongdoing in all instances.

On Tuesday, the bank's boss, Lloyd Blankfein, will defend Goldman's role in the US sub-prime mortgage crisis that precipitated financial meltdown across the world.

Much is at stake.

'Long-term greed'

Goldman was founded in 1869 by Marcus Goldman, who was joined by his son-in-law, Samuel Sachs, in 1882.

Over the next 130 years, the bank became synonymous with innovation and influence, not to mention an ability to generate trading profits far in excess of its rivals.

Goldman chief executive Lloyd Blankfein
Lloyd Blankfein is under fire about Goldman's mortgage derivatives

In the early 20th century, the firm established itself as a major player in the initial public offering (IPO) market, which allows companies to raise money by selling shares through stock markets.

It has since been involved in some of the world's biggest IPOs, including Ford and Yahoo.

It also became one of the first financial institutions to recruit MBA graduates from the world's leading business schools, helping it earn a reputation as hiring only the very brightest and most capable.

In the 1930s, under Sidney Weinberg, Goldman moved into investment banking to complement its trading prowess.

In the 1950s, it became a pioneer of certain types of hedging strategies, the precursors to the complex derivative trades that many argue helped to bring about the global financial crisis in 2008.

It was Mr Weinberg who coined the phrase "long-term greed" as Goldman's overarching philosophy, a phrase that has come to encapsulate neatly all that is wrong with the financial sector in the eyes of those who blame excessive risk-taking by banks for the global downturn.

The firm began expanding internationally in the 1970s, setting up offices across the globe.

In the mid-80s, it set up an asset management arm specifically to run mutual funds and hedge funds, and became one of the first banks to start distributing its research notes electronically.

In 1999, the firm decided to go public with its own IPO.

Wide influence

Today, Goldman's interests extend far and wide. It runs an enormous trading book, offers investment banking and asset management services, makes markets in all manner of financial instruments and devises complex derivative trades.

It also advises a number of governments and powerful multinationals across the globe. As such, it is hugely influential.

In particular, the firm has very close ties with Washington. As treasury secretary under President Bill Clinton, former Goldman boss Robert Rubin oversaw the end of Glass-Steagall, legislation introduced in the 1930s to separate banks' trading and deposit-taking functions.

As a result, US banks were free to make risky trades using clients' money to generate huge profits.

President Barack Obama has suggested that similar legislation be reintroduced in order to reduce risk-taking on Wall Street.

Ex-Goldman boss Henry Paulson also became treasury secretary under George W. Bush and oversaw the bail-out of AIG.

Now, it seems, Washington is turning against Goldman, with senators accusing the bank of profiting at its clients' expense in the run up to the financial crisis.

Mr Blankfein will need all the friends he's got if Goldman is to emerge from its current turmoils with a reputation that is not forever tarnished.



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