Lessons from Goldman Sachs Turnaround

Goldman Sachs Tower in Chicago

Here is a writeup I 'borrowed' from the latest edition of Newsweek (August 10 & 17th 2009) which is applicable for any business in my opinion. Tited "How come Goldman is Making Billions and I'm still Broke ?"

In the months that followed the meltdown of the US economy and the failures of Lehman Brothers, near failure of Citigroup and AIG in late 2008 and subsequently Chrysler and General Motors this year, it is a coup that Goldman Sachs, a 100+ years old company focussing on 3 core areas :

Investment management (ie. Hedge funds)
Sercurities Services
Investment Banking

managed to post a record US$ 3.44 billion profits in the Quarter from April to June 2009. HUH ? Americans have been outraged because just less than 6 months ago they applied for the TARP (emergency Government funds for banks and institutions with toxic assests) and got US$ 10 billion all in additional taxes, from the US Governmenr paid by the American public. So how come they did this turnaround and so quickly ? Follow these steps :

1. BE RUTHLESS - They helped create the market for subprime mortgages during the Boom and then BET AGAINST it as it crashed. So they did not believe in their own 'baby' they created and bet AGAINST it making big bucks while the competitors, Merril Lynch,Bear Stearns and Lehman Brothers all kaputted because they all bet FOR it.Imagine spending billions on developing a product (of course in this case it is a monetary product) and then gamble that it will FAIL when the rest of the market starts to believe in it !

2. TAKE BIG RISKS - They borrowed $28 for every $ 1 they owned in capital. The risk of making big bucks or losing everything and more is key to this strategy.

3. DON'T BE PROUD - They got US$ 10 billion from US Government, US$ 5 billion from Warren Buffet and another US$ 12.9 billion from AIG becuase they were AIG's biggest shareholder and the Government bailed THEM out.

4. PAY YOUR DEBTS - They repaid their debts with 23 percent interest, and scored valuable PR points. If you repay your debts, you will continue to get funding.

5. WORK UNCLE SAM - They managed to lobby the Obama Government, spending US$ 3.3 billion to fend off regulation on caps on their top executives pay etc. etc.So the top executives still made US$ 3 - 10 million EACH. By the way, Henry Paulson is the former Treasury Secretary (or Finance Minister).

6. GAMBLE WITH OTHER PEOPLE'S MONEY - Sitting on billions from taxpayers, they bet and won from trading equities (shares in Dow Jones). So revenue from equities jumped 100 percent just in the 2nd quarter, amounting for much of that US 3.44 billion.

Class, Lesson for Today has ended. Keep this in mind, especially the HEADLINES.