What is Going On with Goldman Sachs

With all of the discussion surrounding Goldman Sachs lately, we thought we would try to simplify the situation so everybody can understand it.

Unless you have had the news completely turned off for the last few days, you have heard something about the controversy with Goldman Sachs. But many people may not know the situation or even what Goldman Sachs does. We would like to provide a simplified look at the company and the controversy that has been taking place recently so you can be “in the know.”

The Goldman Sachs Group, Inc. is a global company that deals with investment banking. It is also a securities firm with services mostly institutional clients. The company has been around since 1869 and currently provides financial services like underwriting, securities, advice on acquisitions and mergers, asset management and more. Most of the clients of Goldman Sachs include world governments, large corporations and high-profile individuals.

So where does the controversy come in?

Last week, the SEC, or Securities and Exchange Commission, announced its lawsuit against Fabrice Tourre, an employee of Goldman Sachs. The lawsuit also includes Goldman Sachs. This lawsuit stems from the SEC’s allegations that the mega-company intentionally left out facts that it was supposed to disclose regarding one of its products, specifically the Abacus 2007-AC1. The company received about $15 million for its part in the deal but it may have misrepresented the product to investors. Goldman Sachs also told investors that Paulson & Co. was going to invest in the deal. However, the truth is that Paulson was betting against the deal.

In laymen’s terms, Goldman Sachs is being sued for fraudulent dealings and representations of products concerning subprime mortgages. I heard one radio interview in which a guy described the situation like this, and I’m paraphrasing: It’s like saying the Mets are going to play the Yankees, but the coach for the Mets gets to choose the players that are going to play for the Yankees. The Mets coach then bets against the Yankees. In a way, that’s exactly what has happened in this financial debacle.

As a result of the lawsuit’s announcement, the market value of Goldman Sachs plunged by about $12 billion over the weekend. That’s more than 10 times the amount of losses that are being alleged in the lawsuit. Other banks and institutions have suffered as a result, too. Morgan Stanley, Bank of America and Citigroup all reported a five percent loss over the weekend as well. Goldman Sachs did more than 20 deals under this pretense and reports claim that there was more than a trillion dollars involved which Goldman could also be sued for.

To be fair, Goldman Sachs has denied the charges. A spokesperson for the company said these charges are “unfounded” and argues that the investors knew there was a higher risk in exchange for better returns on their money. We’ll keep an eye on this situation and see where it goes from here.

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