VI. INVESTMENT BANK ABUSES:
CASE STUDY OF GOLDMAN SACHS AND DEUTSCHE BANK
C. Failing to Manage Conflicts of Interest: Case Study of Goldman Sachs
The Goldman Sachs case study shows how one investment bank profited from the collapse of
the mortgage market and engaged in troubling and sometimes abusive practices that raise
multiple conflict of interest concerns. The first part of this case study shows how Goldman
used structured finance products, including CDO, CDS, and ABX instruments, to take a
proprietary net short position against the subprime mortgage market. Reaching its peak at
$13.9 billion, Goldman's net short investments realized record gains for the Structured
Products Group in 2007 of over $3.7 billion which, when combined with other mortgage
losses, resulted in overall net revenues for Goldman's Mortgage Department of $1.2 billion.
The second half of the case study shows how Goldman engaged in securitization practices that
magnified risk in the market by selling high risk, poor quality mortgage products to investors
around the world. The Hudson, Anderson, Timberwolf, and Abacus CDOs show how
Goldman used these financial instruments to transfer risk associated with its high risk assets,
assist a favored client make a $1 billion gain, and profit at the direct expense of the clients that
invested in the Goldman CDOs. In addition, the case study shows how conflicts of interest
related to proprietary investments led Goldman to conceal its adverse financial interests from
potential investors, sell investors poor quality investments, and place its financial interests
before those of its clients.
