Commentary: Shock of shocks for the mighty Goldman

Chris Blackhurst
18.09.08

Of all the investment banks, one is the most imperious, the mightiest of them all.

The very idea that Goldman Sachs could even be caught up in the current crisis, for many in the City is the biggest shock in a time of unprecedented shocks. Every major deal, every daring large market play, every startling innovation and Goldman was there - or so it seemed.

Publicly quoted but run as a partnership, its offices contain the highest number of multi-millionaires in any building on earth. And when they leave, Goldman alumni go on to run things in high-level jobs - they don't just disappear.

In the seeds of its success, however, lies Goldman's weakness. Even Goldman has not been immune from the downturn, this week reporting its worst quarterly earnings since 2005. The majority of its shares are owned by the partners and employees. Faced with a liquidity crisis and needing to strengthen its capital base, it cannot turn to them for help - they may be rich but they are not that rich.

Short-sellers, sensing Goldman's vulnerability, have moved in. The bank's shares have been falling. It was the same with Lehman. It too had a substantial proportion of staff shareholders. When Lehman got into difficulty, its avenues for escape were limited. The preferred route, asking investors to stump up more cash, was effectively closed.

That's the same dilemma that could confront Goldman. At stake is its cherished independence which brings with it a unique way of doing things. The bank's plight, if it was to continue without an external investor stepping in or a partner being found, would of course not be lost on Hank Paulson, the US Treasury secretary. Until recently, he headed Goldman. He couldn't let his alma mater go the way of Lehman - could he?

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