Overestimating rewards + Underestimating risks = Financial disaster


After reading OPM by William R. Gruver, my question is how come the people who were for the decision to go public so blind to the consequent change in the firm’s risk tolerance? Goldman Sachs is a highly prestigious company and you would think that it would be run by highly competent employees and management who should have been intelligent enough to foresee this problem before it occurred. Could it have been that they were so consumed with the benefits of offering shares to the public, which would supply them with a larger capital base in order to better compete globally with domestic and international banks? Furthermore, if the people who were for the move could not foresee it, then the people against it should have spotted it without a doubt. In general, I know that when you strongly oppose something, you try everything in your will to dig up every possible detail about why something should not happen in order to confirm your position. If Goldman Sachs would have continued to undergo operations as it did when its partners faced unlimited personal liability, it would have continued to be highly successful. After all, just because you the access to more capital and leverage does not mean you should use it.

Consequently, I believe Goldman Sachs could have gradually expanded into using more leverage and taking more risks under its new limited liability to better ensure its well being, and its shareholders’ value. The bottom line is for companies that are private and looking forward to jump into the public realm of business should continue to be responsible with their business decisions, never underestimating any of the risk involved with indulging in operations using shareholders’ money.

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2 Responses to Overestimating rewards + Underestimating risks = Financial disaster

  1. MDHarbin says:

    “After reading OPM by William R. Gruver, my question is how come the people who were for the decision to go public so blind to the consequent change in the firm’s risk tolerance?” – With the two instances of Goldman Sachs public offerings, it had to be nearly impossible to not see the writing on the wall. Afterall, the circumstances for the increases in leverage and public participation were basically identical except for the scale involved. Maybe the firm thought it was worth the gamble?

    “Could it have been that they were so consumed with the benefits of offering shares to the public, which would supply them with a larger capital base in order to better compete globally with domestic and international banks?” – Although Goldman Sachs made a questionable decision to switch the structure of the company, the firm should not have taken on more risk, especially with OPM. Risk management is essential to banking and underestimating the power of the markets can be deadly. If only regaining the once held prestige and trust was as easy as changing the capital allocations of investment portfolios comprised of OPM…

  2. Alyssa Haglund says:

    Has anyone thought that the increasingly risky business produced by Goldman Sachs doesn’t have to do with the transition into a public company, but the industry in general? Goldman has always been at the forefront of the industry and is able to stay this way by continuing to be innovative. Chances are that if we looked around the industry, other companies would be involved in equally risky business and if we looked into history, this problem/concern has probably risen a handful of times.

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