Introduction

German immigrant and businessman Marcus Goldman established the renowned American
worldwide banking, securities, and investment management company Goldman Sachs in 1869.
Marcus Goldman converted this into a partnership firm following the merger of Henry Goldman
and Samuel Sachs. New York's Lower Manhattan is home to Goldman Sachs' headquarters. The
Financial Stability Board regards Goldman Sachs as a systemically significant financial
institution.

Investment banking, securities underwriting, prime brokerage, asset management, wealth

management, and investment management through Goldman Sachs personal financial
management are among the services offered by the company. In addition to offering clearing and
custodian bank services, Goldman Sachs is a market maker for several financial instruments. The
business became the first to employ commercial paper for business owners and listed on the New
York Stock Exchange in 1896. According to opensecrets, in 2022, Goldman Sachs provided 3.3$
millions in national election to various candidates, political parties and 527 groups. In January
2024 Goldman Sachs invested £72 crore for 15 lakh shares in Medi Assist Healthcare in India.
Among the World Economic Forum's more than 100 key partners is Goldman Sachs. The
company has offices in all of the world's major financial hubs.However, New York and London
are the most significant destinations. The board of directors, which answers or directly reports to
the CEO for any matter, is in charge of the company's distinct management committee. Goldman
Sachs was recognised with many accolades for its contributions to investment banking and other
finance-related industries.

Securitization and financial risk:

Securitization, the process of pooling and packaging various assets into financial products,
revolutionized the banking industry by enabling banks to bundle together both safe and risky
debts, selling them as securities to external investors. By altering the conventional banking
paradigm, this technique made it easier for banks to write off riskier debts. However,
securitization was a major factor in the global financial crisis that began in 2007–2008, first
through the production of mortgage-backed securities (MBS) and collateralized debt obligations
(CDOs). By transferring the credit risk associated with loans to investors, banks engaged in the
issuance and securitization of increasingly risky mortgage loans. Compounding the issue, credit
rating agencies often bestowed AAA ratings on these risky securities, originating from larger
banks, in order to safeguard profit margins.

The 2007-2008 Financial Crisis:

The U.S. government abolished the Glass-Steagall Act in 1999, fostering banks to take part in
riskier investments and speculative activities to boost their returns. At the same time, the housing
market bubble began to take shape as the Federal Reserve decreased the federal funds rate from
6.5% in May 2000 to 1% in June 2003. Economic activity weakened after the Dot-com bubble,
the September 11th attacks, and corporate scandals involving Enron and WorldCom. In an effort
to spur economic growth, the Federal Reserve lowered interest rates, resulting in a surge in
housing prices due to reduced mortgage rates. During this period, there was a notable increase in
subprime borrowers—individuals with poor credit histories—presenting significant default risks
on loans extended to them. Banks subsequently transferred these risky loans to Wall Street
banks, who packaged them into seemingly low-risk financial products like mortgage-backed
securities and collateralized debt obligations (CDOs). In October 2004, the SEC eased net capital
requirements for five investment banks, namely Goldman Sachs, Merrill Lynch, Lehman
Brothers, Bear Stearns, and Morgan Stanley, encouraging them to take on more risk. This
allowed for leveraging initial investments by up to 30 or even 40 times, resulting in a reported
$4.1 trillion in debt by 2007.

The Crisis gaining momentum:

Property ownership in the U.S. reached 69.2% in 2004, but property values started falling down
in early 2006. Two years after the Federal Reserve began increasing rates in June 2004, the
Federal Funds Rate reached 5.25% and stayed there until August 2007. This rise in interest rates
initiated a chain of events because financial institutions had issued adjustable-rate loans based on
low rates. Homeowners struggled with notably higher interest payments, leading to a surge in
defaults by mid-2006, which, in turn, caused home prices to fall. By the beginning of 2007,
many subprime lenders went bankrupt, with over 25 collapsing in February and March alone.
Notably, New Century Financial, a specialist in subprime loans, declared bankruptcy and laid off
half its employees in April. By the end of 2007, 2.3 million homes had been foreclosed, signaling
the official beginning of the subprime mortgage crisis.

Global Reaction to the crisis:

When the value of complex financial instruments like collateralized debt obligations (CDOs) and
mortgage-backed securities (MBS) rapidly dropped, investors collectively attempted to sell off
these securities. However, in August 2007, BNP Paribas made a shocking announcement: there
was a significant scarcity of liquidity in the global market for mortgage-backed securities. Other
European banks reiterated this concern. It became clear that securities considered in the past
were safe and awarded AAA ratings essentially worthless. The subprime crisis exposed the
inability of financial markets to resolve the situation, causing widespread uncertainty. As a
result, the interbank market, crucial for global money circulation, stopped functioning. Financial
institutions struggled to determine the value of the trillions of dollars' worth of risky mortgage-
backed securities on their balance sheets.
Fall out from the crisis:

The U.S. economy had entered a severe recession during the 2008 winter. The widespread
presence of toxic assets sparked fear among banks, causing them to stop lending to each other.
Financial institutions struggled to maintain liquidity, leading to the most significant global stock
market decline since the September 11th attacks. By 2009, the stock market had fallen by 50
percent from its 2007 highs. In January 2008, in an attempt to counter the economic downturn,
the Federal Reserve implemented its largest interest rate cut in twenty-five years, reducing its
benchmark rate by three-quarters of a percentage point. In March 2008, Bear Stearns, a
prominent Wall Street institution since 1923, collapsed. Despite being the fifth-largest bank in
America with a notional market value of $13.4 trillion, it was acquired by JP Morgan for just two
dollars per share. Earlier that year, Bear Stearns' shares had been valued at $170 each.

Causes of the crisis:

i. Inflation in asset prices and the housing market.

ii. High levels of leverage among financial institutions and the economy.
iii. Insufficient financial regulations and regulatory mishandling of responsibilities.
iv. Problematic lending practices by profit-driven banks lacking forecasting.
v. Exposure of financial institutions to significant risks through the creation of derivatives and
securities based on subprime mortgages.
vi. Unjust reward systems incentivizing reckless gambling by financial firms through speculation
on securitized financial instruments.

Impacts after the crisis:

i. The financial crisis sent the American economy into a prolonged and intense recession.
ii. It was estimated that almost 8.8 million jobs were shed, and 8 million individuals faced
foreclosure on their homes.
iii. Throughout the recession's duration, the US GDP contracted by 4.3 percent.
iv. By October 2009, unemployment rise to 10% in both the USA and Europe.
v. Between late 2007 and early 2009, American households suffered a collective loss of almost
$16 trillion in net worth.
vi. Stock market downturns from 2008 to 2009 amounted to $7.4 trillion, averaging $66,200 in
losses per family.