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Goldman Sachs

Goldman Sachs has built constructive dialogue into the firm's daily processes. The firm uses mark-to-market accounting to assess the value of each trader's positions. The firm maintains a parallel structure so that a controller supervises each trader's position and marks it to market each evening. This information helps manage trading positions through devices such as internal pricing to ensure that assets do not remain on the balance sheet for too long. The information from each position is rolled up through the organization to the CFO, who obtains a timely firmwide view of positions and exposures. Goldman CFO David Viniar told the FCIC that there may be disagreements between a controller and a trader, and in such cases the controller's view is likely to prevail.

The firm reported that "Dan Sparks, then head of the mortgage department, [told] senior members of the firm in an email on December 5, 2006, that the 'Subprime market [was] getting hit hard At this point we are down $20mm today.

For senior management, the emergence of a pattern of losses, even relatively modest losses, in a business of the firm will typically raise a red flag."[1]

The immediate result, Sparks explained to the FCIC, was that he suddenly received visits from senior Goldman officials who before had never bothered to learn the details of his operations. CFO Viniar convened a meeting to try to understand what was happening. Goldman's senior management decided, in Viniar's phrasing, "[t]o get closer to home" with respect to the mortgage market. In other words, in its combination of long and short positions, the firm would begin taking a more cautious and more neutral stance. It would reduce its holdings of mortgages and mortgage-related securities and buy expensive insurance protection against further losses, even at the cost of profits forgone on what had looked like an attractive position in mortgages.[2]

In January and February 2007 Goldman hedged its exposure to the mortgage market. The firm then closed down mortgage warehouse facilities, moved its mortgage inventory more quickly, and reduced its exposure yet further by taking on more hedges and laying off its mortgage positions. The end result was that Goldman avoided taking the substantial losses it would have suffered if it had not reacted so promptly to signs of problems.

In one area, Goldman was slow to recognize emerging risk: This concerned the firm's reputation. When FCIC staff asked a Goldman risk officer who was responsible for reputational risk, the answer came back that everyone was responsible; the company had not organized to deal with reputational risk. In early 2011 the firm published a response to its problems with reputational risk, including a new committee structure for reporting potential conflicts and a code of conduct. Goldman stated that this would be integrated not only into processes of the firm, but also into its culture:

The firm's culture has been the cornerstone of our performance for decades We must renew our commitment to our Business Principles – and above all, to client service and a constant focus on the reputational consequences of every action we take. In particular, our approach must be: not just "can we" undertake a given business activity, but "should we."[3]

In 2011, Goldman separated its reporting of business segments so as to distinguish investing on behalf of clients from the firm's proprietary trading on its own account, an area of public controversy that had been subject to some reputational risk in the aftermath of the financial crisis.

  • [1] Goldman Sachs, "Goldman Sachs: Risk Management and the Residential Mortgage Market," April 23, 2010, 5. Materials provided to the Senate Permanent Subcommittee on Investigations.
  • [2] Jenny Anderson and Landon Thomas Jr., "Goldman Sachs Rakes In Profit in Credit Crisis," New York Times, November 19, 2007.
  • [3] Goldman Sachs, "Report of the Business Standards Committee: Executive Summary," January 2011.
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