Clement Sin Paper 3 - Company Analysis Brian Burns

4/14/12

Company Analysis Investment Strategy: Goldman Sachs Inc.

Analyst: Clement Sin

Clement Sin Paper 3 - Company Analysis Brian Burns

4/14/12

Executive Summary
This report provides sufficient evidence showing that Goldman Sachs has the potential to be a healthy long-term investment. However, until Goldman Sachs fully regains the reputation after a series of controversial scrutiny, investors should only keep close observation on the firms performance. Ever since the downfall of the investment banking industry as a result of the financial crisis, Goldman Sachs has recovered at a promising rate, and has steadily solidified the status of Wall Streets number one as it leads the industry in recovery. Perhaps the most crucial factor in its rapid recovery is the diverse services it offers. While the mortgage and real estate sector has cause the firm close to $1billion worth of liabilities, the trading and principal investment sector was able to perform steadily to limit total damages of the firm. Goldman Sachs must also recover from its recent reputation setback before being considered as a legitimate option for investment. GS was heavily criticized for paying out millions of bonuses to top-level executives after being bailed out by the fed, as well as an alleged fraud in the marketing of one of the firms securities. It will be premature to commit to Goldman Sachs at the moment, yet it will be wise to observe the performance of the stock closely as it proves to have a promising future.

Clement Sin Paper 3 - Company Analysis Brian Burns

4/14/12

Table of Contents o Statement of Purpose o Brief Introduction of Goldman Sachs Inc. o The Overview o Financial Analysis o Recommendation o References

Clement Sin Paper 3 - Company Analysis Brian Burns Statement of purpose

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The purpose of this detailed report is to provide an in-depth and unbiased analysis for Goldman Sachs Group Corporation. More importantly, the goal of this report is to provide evidence on why Goldman Sachs has the potential to be a healthy long-term investment in the future. It is important for investors to diversify their portfolios, and companies should do the same. Goldman Sachs faired the best in its recovery efforts from the financial crisis due to the diverse service sectors. This report will outline the different services and products GS provides, as well as a multi-dimensional outlook on GS group, and shall investigate beyond the numbers side of the companys performance; it will also provide information on recent news and regulations imposed on the company to help the reader determine whether investing in GS will provide them with a solid return and limited risks. Last but not least, the report will take a look at whether GS fulfills Corporate Social Responsibility and satisfies investors morality standards. Brief Introduction of Goldman Sachs Group Under the North American Industry Classification System, Goldman Sachs Group is indentified in the Financial and Intermediaries & Services sector, serving in the Security Brokers and Dealers industry and the Investment Banking and Securities Dealing industry. Founded in 1869 by Marcus Goldman and Samuel Sachs, Goldman Sachs Group is the largest investment banking, securities and investment management firm in the world based on market capitalization. Furthermore, the company has played a major role in the strengthening of the American economy. Most notably, Goldman Sachs was the intermediary that assisted Ford Motors Co. in their initial public offering (IPO) in 1956. Goldman Sachs Group has also been with close ties with the American Government ever since Robert Rubin, former GS chairman was named the Secretary of the Department of Treasury in 1995. Four years later, Goldman Sachs issues its own IPO and became a publicly traded company. For the next decade, Goldman Sachs witnessed the greatest economic boom and Americas first budget surplus since 1969 under the Clinton Administration. During this time, GSs stock prices soared at an intriguing rate as the stock grew from around $80 to $230 in a mere 5 years. However, this spell of positive returns came to a stop in 2008 when Goldman Sachs was hit by the financial crisis as GS was forced to become a bank holding company in order to access federal funds more easily. The same year, Goldman Sachs received $10 billion of taxpayer bailout from the government in the Troubled Assets relief program. However, GS came into controversy following the bailout as they were reported of paying out millions of dollars to top-level employees in bonuses. To make matters worse, Goldman Sachs

Clement Sin Paper 3 - Company Analysis Brian Burns

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came into scrutiny when the Securities and Exchange Commission sued GS group for alleged fraud in the marketing of one the firms securities. All these recent allegations have damaged the reputation of Wall Streets highest earning investment bank greatly. With the new financial reform in place, it will be interesting to see whether Goldman Sachs will sink or swim in the era of intensive regulation. The Overview Goldman Sachs Group is currently operating through three primary sectors: Investment Banking, Asset Management & Securities Services and Trading & Principal investments. Within these major sectors, Goldman Sachs provides a variety of services to satisfy different consumer needs. Investment-Banking Under the investment-sector, Goldman Sachs provides a variety of investment banking services to corporations, financial institutions, investment funds, the government as well as private ownership. Specific services under the umbrella of Investment-banking offer financial advisory in Asset Management, Banking Deposits, Closed Ended Investments, Mutual Funds and Private Equity. The Financial Advisory offers advisory assignments for mergers and acquisitions, corporate defense activities, restructurings and spin-offs. The company also engages in underwriting activity, including public offerings and private placements of a range of securities and other financial instruments, including common and preferred stock, convertible and exchangeable securities, investment-grade debt, high-yield debt, sovereign and emerging market debt, municipal debt, bank loans, asset-backed securities and real estate-related securities. Asset Management & Securities Services Within this division, GS provides wealth and investment products to institutions and individuals worldwide. Most importantly, Asset Management generates revenue through incentive and handling fees from clients. Asset Management is consisted of two sub-sectors: Goldman Sachs Asset Management (GSAM) and Private Wealth Management (PWM). The GSAM mainly offers investment products for all asset types including money markets, fixed income, equities and alternative investments. GSAM distributes such products directly to the firms clients from the institutional sector, such as pension funds, governmental organizations, corporations, insurance companies, banks and so on. PWM carries out similar services to private clients such as individuals, family offices, endowments and principally foundations. It is important to note that PWM has an emphasis on high net worth clients only. Securities Services provides prime brokerage services and securities lending services to mostly institutional clients; such as hedge funds, mutual funds, pension funds and foundations. Occasionally GS will also provide such service to individuals, but mostly to those of high net worth. This service generates revenue through

Clement Sin Paper 3 - Company Analysis Brian Burns

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interest rates. The Securities lending services also involves the borrowing and lending of securities to cover customers and GSs short sales. The company also performs broker-to-broker securities lending business and the third-party agency lending business through this sector. The Goldman Sachs real estate investment funds also falls under the Asset Management & Securities Services sector. This investment fund primarily invests in real estate operation companies, debt and equity interests in real estate assets, and other real estate-related investments. During the subprime mortgage crisis, the real estate investment fund. As a result of the firm borrowing and investing large sums of money relative to their cash or equity capital, GS became highly leveraged and vulnerable to surprised credit market disturbance. During the financial crisis, five largest investment banks totaled over $4 trillion of liabilities, with the majority coming from the real estate sector. As a result, Goldman Sachs had to be bailed out by the U.S government. Trading and Principal Investments The primary goal of the Trading and Principal Investments sector is to assist customer transactions in fixed income and equity products, c.urrencies, commodities, and swaps and other derivatives. Goldman Sachs also engage in floorbased and electronic market making on American equities exchange. Fixed Income, Currency and Commodities (FICC) is involved in the trading and marketing of interest rate and credit products, currencies, commodities and structures. FICCs products include: Commodities and commodity derivatives Credit products Investment-grade corporate securities High-yield securities Bank loans Municipal securities Credit derivatives Emerging market debt Currencies and currency derivatives Interest rate products Money market instruments Mortgage-backed securities and loans Goldman Sachs also engages in the markets of equity trading or equity-related products by entering into equity derivate transactions. It serves as an agent and market maker for customer transactions by committing capital and providing liquidity to clients with large blocks of stock or options.

Clement Sin Paper 3 - Company Analysis Brian Burns Corporate Social Responsibility

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Goldman Sachs takes part in more CSR activity then any other investment bank. In fact, it has an entire department dedicated to sustainability called Environment Markets Group. According to the company website, Goldman Sachs: Has invested in over $3 billion in clean energy Raised more then $10 billion for clean energy clients globally Market-making in environmental commodities Provided liquidity and risk management for clean energy clients and markets Advised clients to develop environmental friendly strategies Adopted leading-edge environment safeguards across all business facilities and practices Launched GS SUSTAIN, a global equity research strategy that integrates sustainability of corporate performance into fundamental industry and financial analysis In fact, Goldman Sachs is a leader among firms alike in the minimization of impact to the environment. In the environment report published in 2009, Goldman Sachs has equipped teams in sensitive sectors (oil production; automobile) with a due diligence guidelines to train clients for effective business opportunities. For example, Goldman Sachs provides an analysis for the environmental impact for companies before investing into emerging economies. As most of the business activity in these economies employs fossil fuels, GS outlines solutions on alternative energy, as well as providing free advisory on limiting carbon emission. Goldman Sachs also plays a big role in disaster relief, providing over $1.4 billion of relief for the Haiti earthquake, as well as other natural catastrophes. Beyond the relief for the general population, Goldman Sachs also has financial protection policies for companies at risk of such disasters. On top of providing resources for global sustainability, Goldman Sachs implements a strategy called Carbon emissions reduction framework for all Goldman Sachs sites. In 2009, the global headquarters in New York was awarded the Leadership in Energy and Environmental Design (LEED) Gold Certification as recognition to its energy

portfolio and cutting edge power production systems. While GS engages in a variety of corporate social responsibility activity, especially in environmental protection policies, it has come into much scrutiny in recent times. In 2008, Goldman Sachs received over $9billion worth of bailout from U.S. government in order to avoid bankruptcy. However, Goldman Sachs used the taxpayers money and paid out over $10billion of year ending bonuses to its staff, especially to top-level executives.

Clement Sin Paper 3 - Company Analysis Brian Burns

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This incident was only the beginning of a series of controversies from Goldman Sachs in the last two fiscal years. Goldman Sachs has been linked to multiple accusations of misusing bailout money. As a result of the financial crisis, many investment banks were forced to cut down on budget, but GS was found to continue spending extravagantly for many business activities. Most importantly, in April 2010, Goldman Sachs was sued by the Securities and Exchange Commission for materially misstating and omitting facts in disclosure documents for a synthetic CDO (collateralized debt obligation) product called Abacus 2007-AC1. GS was paid a fee of $15 million USD for structuring the deal. Goldman Sachs was alleged of betting against the mortgage investment, which earned them a sufficient profit. A hedge fund titled Paulson & Co, which was created by Goldman Sachs itself, was listed among the worst mortgages in the world at that time. This product was destined to fail unless a large amount of capital was poured in to bet against it. With that in mind, Goldman Sachs put this hedge fund into the Abacus portfolio. As such, GS & Paulson & co. made an estimated $1billion profit from such investments, in which the investors were never disclosed during the deal.
Financial Analysis From the overview of this report, we have learned that Goldman Sachs group has a very rich diversity in terms of its services. As a result of the abundance of services, Goldman Sachs is effectively diversifying the companys own portfolio. In other words, the performance of Goldman Sachs (NYSE:GS) is closely related to the performance of the American, and even global economy. According to the following chart:

Clement Sin Paper 3 - Company Analysis Brian Burns

4/14/12

The performance of the GS stock (red) is basically synchronized with the movement of the Dow Jones Index, S&P 500 Index and the NASDAQ index. The wide range of clients of Goldman Sachs, from private homes to school endowments and major oil companies, the performance of Goldman Sachs is hugely dependent on the confidence of American consumers. The report will further investigate into more detailed intangibles, but it is important to note that GS is affected by the American economy more so then other companies in America. Factors such as unemployment rate, federal prime rate and interest rates, mortgage rates will have implications on the performance of GS. The primary concern for the invest In the third quarter of the 2010 Fiscal year, Goldman Sachs recorded Earnings per share of $17.74. This number has decreased by 18% from a year ago, when GS was recording approximately $22 earnings per share. This decrease is a direct result of the heightened regulations imposed by the government, which has partially limited the efficiency of the company. While the earnings per share ratio has decreased over the past year, the stock price of GS has not changed sufficiently. When the market closed on November 12, 2010, Goldman Sachs Group stock price is valued at $165 .83, compared to $176.76 one year ago, the stock price has dropped by $10.63, a 6.18% decrease. While the stock has decreased in comparison to annual performances, the GS stock is currently recovering from an economic downturn.

The chart above is the performance of GS stock over a six-month period. When the SEC accusations surfaced around 5 months ago, the Goldman Sachs stock arrived at a recent low, surfacing around $131. Fortunately, GS seems to have regrouped and conformed to the new regulations, and have been on a steady rise ever since despite a minor dip in mid-august. This steady performance in the past 6 months should give investors great confidence in this stock. The income statements from the past three years also show the steady recovery pattern of the company

Clement Sin Paper 3 - Company Analysis Brian Burns

4/14/12

In the fiscal year of 2007, the operations produced very promising results, amassing over 11 million dollars worth of net income. As a result of the financial crisis in 2008, net income plummeted to around 2.3 million dollars, as general income decreased by around $15 million. Fortunately, the company was able to recover last year and have a very positive net income, and even saw an increase compared to 2007. While the income statement showed promising signs of recovery, the balance sheet demonstrates the opposite.

The table above displays the amount of total assets Goldman Sachs possessed at the end of each fiscal year. Ever since November 30, 2007, Goldman Sachss total asset has decreased from over $1 billion to less then $0.85 billion. Among all the minor categories, long-term investments and Net receivables have decreased the most. This poor performance can be attributed to the defaulting and bankruptcy of major clients, which eventually caused long-term investors to lose confidence in the company. This is a rather negative sign for the company because it is shrinking in its total assets, as well as its market share. It is also important to compare the performances of Goldman Sachs to its competitors in the financial advisory industry.

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Clement Sin Paper 3 - Company Analysis Brian Burns

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The above graph illustrates the changes in stock prices of 6 investment banks for the past 5 years: Deutsche Bank in purple, UBS in blue, Citi Bank in green, JP Morgan in Orange, Morgan Stanley in blue and Goldman Sachs in red. Of all Goldman Sachs competitors, only JP Morgan was able to return to a similar level compared to 4 years ago. Comparatively, Goldman Sachs was able to acquire a positive, and is the only major financial institution to obtain positive gain. The fact that the total asset decreased but net income was able to maintain at a positive position implies the efficiency of the company has increased. In fact,

The last fiscal year saw a dramatic increase in both returns of assets and return of equity. The fiscal year of 2008 was clearly affected by the financial crisis as the company recorded negative returns, yet in 2009, GS recorded a 1.35% return on assets. Return of assets was able to return to the pre-crisis level, and return on equities has slowly recovered to a 19.74% level. While this is still only 2/3 of the pre-crisis level, this is a rather promising signal for investors. Recommendations Given the above detailed analysis, we advise investors to delay immediate investing in this company. However, investors are advised to pay close attention to the performance of Goldman Sachs Group for the rest of year, and especially keep close notice to the annual report that should be released at the end of this quarter. The financial analysis mentioned that the performance of Goldman Sachs is closely related to the general American economy. The finance industry reacted rather

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Clement Sin Paper 3 - Company Analysis Brian Burns

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negatively to the financial reform, which explains the decline in stock prices in mid May. However, Wall Street has slowly conformed to this new regulation and has responded positively as seen in competitors performances. Recent ratios and financial statements have shown decent improvements and recovery from the financial crisis for Goldman Sachs, yet there are clear signs of decreased market capitalization and influence. Furthermore, investors should be cautious upon the decline of assets. Furthermore, given the recent allegations, Goldman Sachs has a relative negative reputation on Wall Street. The current reputation of Goldman Sachs will no doubt linger the productivity and market capitalization. Not only so, many investors should consider whether the business standards of Goldman Sachs suit the moral benchmark. Investors should only pay close observation to the company but involve no further.

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