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Goldman scam: Lesson for YOU

Apr 19, 2010

Much has already been written about how the US financial giant Goldman Sachs committed a scam that duped investors of millions of dollars of their savings. So we will not talk about this again. However, we would like to discuss a bit about how you can also get duped by companies that 'promise the sky' and then deliver mud. Here, what we mean by 'promise the sky' is contained in a company's statement of business principles. Even Goldman had one. And a long one at that! If you are to look through the website of the companies you have invested in (or are looking to invest in), you will read about the principles they follow to do business. But whether such principles are only practiced in writing and never in spirit is another question.

Here's what Goldman has mentioned as the first of its business principles.

"Our clients' interests always come first. Our assets are our people, capital and reputation. If any of these is ever diminished, the last is the most difficult to restore. Our goal is to provide superior returns to our shareholders." All plain lies!

Another principle reads - "We stress creativity and imagination in everything we do." We now know how this creativity and imagination was used...to dupe investors!

Then, another principle reads - "We consider our size an asset that we try hard to preserve." No doubt, the firm knows the importance of the 'too big to fail' advantage it has!

And then - "We regularly receive confidential information as part of our normal client relationships." We now know how the firm used such confidential information to its own advantage and its clients' horror!

Finally - "Integrity and honesty are at the heart of our business. We expect our people to maintain high ethical standards in everything they do, both in their work for the firm and in their personal lives." Do we say anything more on this?

What we are trying to get to is that companies generally used flowery language to define what they stand for. Even if they act in their own interest against these very principles! This is more prominent in case of companies that are growing fast and need to justify all their actions, even if these seem against shareholders' well-being. The more flowery the language, one can know that the more fake it is!

So the next time, you come across a company's annual report or a website that seems to promise the moon, you must cross check these promises against the company's actual past performance. The management credibility is also important to assess. 'Ethics', 'culture', 'creativity', 'imagination', and 'reputation' are all words that companies might use to cover their wrongdoings.

As Mr. N. R. Narayana Murthy of Infosys said after the Satyam scam, "You need principles. You need culture. That's why I say corporate governance is not just filling up check list. It is about culture. It is about mindset. It is about who you are. It is about the honesty and the willingness of the management and the shareholders at large."

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3 Responses to "Goldman scam: Lesson for YOU"

Raghuram Daroji

Apr 21, 2010

wat ever can be stated wid fancy words rather than implementation itself.......being worlds big leader,much more was expected from GS during 2007-08 recession....to change the world......being investment bankers studied frm top universities of world ,wat are these people for.....???/are these people really FRAUD MAKERS?/TRUST COMES FROM INFLUENTIALS ....AND IF THEY DO THIS,,,,,,,WAT R NORMAL CITIZENS FOR??

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venky

Apr 19, 2010

Readers must read the book 1929- Great Crash by JK Galbirth.

The chapter "In Goldman Sachs - We Trust " exactly provides details on what Goldman Sachs is all about.

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Anand S

Apr 19, 2010

I like the perspective, but it is easy to do retrospective analysis when things go wrong. Since you stand for the small investors like me, can you highlight some indicators to look out for? I agree that it cannot be comprehensive, but some indicators will help us be more proactive.

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