Student name: Alex Keating Student number: 118359633 Module Code: EC3005 Title: "Has a Financial Intermediary, or Group of Financial Intermediaries, been of benefit to society?" Word count: 908 In 2019 Goldman Sachs generated 36.55 billion USD worldwide and their investment banking alone generated a net revenue of 7.6 billion USD, but how much do they actually contribute to the Irish economy and are they beneficial to society? An investment bank such as Goldman Sachs is not a financial intermediary in the ordinary sense. It does not take in funds and lend them out in a sense like your typical commercial banks such AIB, Bank of Ireland, etc. Their purpose is to help corporations issue securities. They advise large, small and intermediate corporation’s on which type of stock or bonds to issue. They then help sell these securities by purchasing them from the corporation at a predetermined price and resells them in the market for a market driven price (Mishkin, F., 2016. p42). An Example of this is Goldman Sachs recent takeover of Blanchardstown shopping centre. Goldman acquired the declining shopping outlet from owner Blackstone, and plan to inject fresh capital and redevelop the vacated space. Goldman plan to lease out the space and create new jobs when the shopping centre re-opens (Sidders, J. and Doyle, D., 2020). Activity such as this from Goldman have been key contributors to Irelands growing economy over the last few years. However, others would argue that they have been exploitative of the economic situation by using their buying power and taking advantage of the weaker domestic investment demand. This allows us to pose the question, has Goldman been beneficial to our society? For a mixed economy such as Ireland, both the finance and banking industry play pivotal roles in the success of our economy, particularly in recent years. Thus, investment banks such as Goldman play key roles in our society’s wealth creation. A mixed economic system combines elements of the market economy as well as the planned economic system. In a mixed system, both the government and private enterprises rely on investment banks for fundraising to a great extent. In facilitating these deals between buyers and sellers of securities, Goldman help to add liquidity in the market. In a more liquid market, a seller will quickly find a buyer without having to cut the price of the asset to make it attractive (IG. 2019). And conversely a buyer won’t have to pay an increased amount to secure the asset they want. This can attract speculators and investors to the market, which adds to the favourable market conditions and increases the flow of money in the economy. Recently, Irish firm Wright Insurance brokers was acquired by a UK brokerage controlled and facilitated by Goldman, generating further economic activity in Ireland (O'Donovan, D., 2019). Like many investment banks, Goldman work with commercial banks to help determine prevailing market interest rates. These market interest rates determine how lucrative it is to save or invest money. If interest rates are higher people will tend to save more money rather than spend it because they will get a higher return in the future. If interest rates are lower, people will prefer keeping liquid money instead of investing it in a financial instrument or saving it in a bank. The more efficient it is in establishing the interest rates the better the resources can be channelled between the present and future needs. This in turn helps businesses and consumers plan for the future. Goldman’s current underlying market interest rate is 1.35% AER (Marcus: By Goldman Sachs. 2020). At a glance, you may think of course a large investment bank such as Goldman Sachs contribute to our society with margins and benefits as such, however that is not always the case. Goldman was a key contributor to the financial collapse in 2008 due to its selling of subprime, mortgage-backed securities. Goldman helped lenders securitise high risk, poor quality loans, obtain favourable credit ratings for the resulting residential mortgage backed securities, and sell on these securities to investors, creating billions of dollars of risky mortgages. Investors would go on to lose all their stake. This would cause a knock on effect on the Irish economy as the chairman of Goldman at the time, Peter Sutherland, was one of the biggest bondholders of AIB’s debt. Recently Goldman have been labelled ‘America’s riskiest bank’ by the federal reserve. This was derived based on two assessments of Goldman’s, the first being an annual stress test, and the other a sensitivity analysis. The sensitivity analysis was conducted to see how Goldman could fare under the additional strain of the pandemic. More concerningly in the Fed’s assessment of its worst case loan loses from now till March 2022, it stated a loss rate of 25.9% on its mortgage book (Noonan, L., 2020). These figures show similar shades of what occurred in 2008. These are worrying figures for Irish investors when you consider the financial stress that Goldman will be under in the coming years, as result of the ongoing pandemic. This leads us back to ask the question, has Goldman’s contribution to the Irish economy been overshadowed by their wrong doing years ago and by their increasing financial pressure? In recent terms, of course they have been beneficial. Their investment in Irish businesses, maintaining market liquidity and determining low interests rates have all contributed to a growing Irish economy. However Goldman Sachs is representative of the high risk taking, speculative aspects of global finance. Without appropriate regulation and controls recent figures and predictions suggest they are on the way back to a financial epidemic, similar to the one that occurred in 2008, which may again undermine and undo all the good they have done for our society. References https://www.goldmansachs.com/investor-relations/financials/current/annualreports/2019-annual-report/ https://www.independent.ie/business/goldman-sachs-in-talks-to-take-overblanchardstown-shopping-centre-39661964.html https://www.ig.com/en/trading-strategies/what-is-market-liquidity-and-why-is-itimportant--190214 https://www.irishtimes.com/business/financial-services/why-the-fed-thinks-goldman-isamerica-s-riskiest-bank-1.4295445 https://www.belfasttelegraph.co.uk/business/uk-world/uk-group-owned-by-goldmansachs-set-to-buy-irish-insurer-38757404.html https://www.marcus.co.uk/uk/en/public-site/historical-interest-rates The Economics of Money, Banking, and Financial Markets. 11th ed. Harlow, United Kingdom: Pearson Education Limited. p42
