Economic Crises Case Study

How Goldman Sachs Survived the US Mortgage Crisis

Abstract:
The massive financial cataclysm triggered by the US subprime mortgage lending during the year 2006 forced many leading mortgage lenders in the US to close their operations and file for bankruptcy. It also resulted in the investment banks, engaged in securitising subprime loans into marketable securities, running the risk of insolvency. Hit by the market turbulence, leading global investment banks, including Lehman Brothers, Merrill Lynch, Citigroup, UBS, Bear Stearns and Morgan Stanley, registered a total loss of $136 billion in 2007 for their subprime exposures. However, Goldman Sachs Group Inc., one of the world’s largest investment banks, reported net earnings of $11.6 billion in 2007 despite the credit turmoil. This case facilitates discussion on how meticulously Goldman has averted the crisis and reported revenues amidst the massive mortgage melt- down.

Pedagogical Objectives:

• To trace out the reasons behind the US mortgage crisis
• To analyse the impact of the crisis on Global financial market
• To discuss Goldman Sachs’ pro-active strategies in mitigating the market risks and reporting profits.

Keywords : Goldman Sachs; Investment Banks in the US; Mortgage Crisis; Sub-prime crisis; US housing market; Securitisation; Mortgage-backed securities (MBS); Collateralised Debt Obligation (CDO); Collateralised Mortgage Obligation (CMO); Credit Crunch; Special Purpose Vehicle; Troubled Times Case Studies; Pass-Through-Certificates (PTCs); Poor Credit Rating; Short selling; Credit-default Swaps