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Goldman Sachs as Social Entrepreneur

Goldman Sachs’ CEO Lloyd Blankfein and his largest investor, The Wizard of Omaha, Warren Buffett , descended from the mystical heights of Valhalla with some startling news.  They were bearing a new mythical golden ring.  As they held the ring aloft they made a bold proclamation.  They would embark on one of the grandest social entrepreneurial programs of all time by offering some of the rings precious power, about $500 million worth, to capital starved small and mid-size enterprises (SMEs).  The 10,000 Small Businesses Initiative will distribute $100 million per year over the next five years to SMEs through Community Development Financial Institutions.

These lords of commerce have heard the cries from endangered SMEs.  In their infinite wisdom Blankfein and Buffet understand that the real economy needs to resuscitate and incubate the critical SME segment as an absolute prerequisite to a vibrant economic recovery.    The buzz about this news in the marketplace ranged from cynical suspicion at one extreme to puzzled bemusement and  ecstatic aplomb at the other.

What motivated Goldman to announce this initiative is an interesting question.  Was it guilt, greed or a sense of corporate social responsibility?  Some suggest it is a master PR move to counter a growing public perception that Goldman Sachs,  the poster child of government favoritism and bailout largess,  has leveraged its unfair advantage to achieve historic levels of profitability.  Thus enabling management to pay obscene bonuses to company employees.  But capital has no psyche,  and half a billion dollars is a tall bill to underwrite absolution for some phantom form of guilt.  True to its nature, capital always  seeks a place where it will find its greatest return.  Goldman and Buffett are casting some major bread on the receding waters of a distressed economy.  As its foretold in the Good Book , doing God’s work will produce a tenfold return.  If the Bible’s math is correct, thats a lot of manna that will rain down from heaven for the shareholders of Goldman Sachs and Berkshire Hathaway.  Looks like our modern day version of Moses and Aaron have done it again.  Leading their investors across the dangerous waters of the global economy to live in the promised land of happy shareholders.

As one of the world’s preeminent investment banks and purveyor of capitalist virtues,  company shareholders must be questioning how Goldman’s managers will realize a return on this investment?  Has management examined the potential corporate and societal moral hazards surrounding the program?  Surely shareholders have asked when they expect to be compensated for this significant outlay of capital.   The desire to realize gain is a more plausible motivator and makes more sense for an enterprise like Goldman and the storied investment Wizard from Omaha.

Its wise to ascribe the best intentions and virtuous motivations to actions that we may not fully understand.  This program should be viewed as a seminal event in the history of corporate social responsibility and social entrepreneurship.  Its important to understand that institutions that practice corporate social responsibility do not engage it solely as a philanthropic  endeavor.  Indeed, the benefits of good corporate citizenship pays multidimensional dividends.  All ultimately accrue to the benefit of company shareholders and the larger community of corporate stakeholders.

Goldman’s  move to walk the point of a capital formation initiative for SMEs seeks to mitigate macroeconomic risk factors that are prolonging the recession and pressuring Goldman’s business.   Goldman needs a vibrant US economy if it is to sustain its profitability,  long term growth and global competitiveness.  Goldman needs a strong regional and local banking sector to support its securitization, investment banking and corporate finance business units.   Healthy SMEs are a critical component to a healthy commercial banking sector.  Goldman recent chartering as an FDIC bank holding company may also be a factor to consider.  This SME lending initiative will provide interesting insights into the dynamics of a market space and potential lines of business that are relatively new to Goldman Sachs.  This initiative might presage a community banking acquisition program by Goldman.  At the very least the community banking sector is plagued with over capacity is in dire need of rationalization.  Goldman’s crack team of corporate finance and M&A professionals expertise would be put to good use here.

Goldman’s action to finance SMEs will also serve to incubate a new class of High Net Worth (HNW) investors.  Flush with cash from successful entrepreneurial endeavors, the nouveau riche will be eager to deploy excess capital into equities and bonds, hedge funds and private equity partnerships.  Healthy equity markets and a growing Alternative Investment Management  market is key to a healthy Goldman business franchise.

Community banks, principal lenders to SMEs are  still reeling from the credit crisis are concerned about troubled assets on their balance sheets.  Bankers can’t afford more write downs on non-performing loans and remain highly risk adverse to credit default exposures.  Local banks have responded by drastically reducing credit risk to SMEs by curtailing new lending activity.  The strain of a two-year recession and limited credit access has taking its toll on SMEs.  The recession has hurt sales growth across all market segments causing SMEs to layoff employees or shut down driving unemployment rates ever higher.  Access to this sector would boost Goldman’s securitization and restructuring advisory businesses positioning it to deepen its participation in the PPIP and TALF programs.

The financial condition of commercial and regional banks are expected to remain stressed for the foreseeable future.  Community banks have large credit exposures to SME and local commercial real estate.  Consumer credit woes and high unemployment rates will generate continued losses from credit cards and auto loans.  Losses from commercial real estate loans due to high vacancy rates are expected to create significant losses for the sector.

Reduced revenue, protracted softness in the business cycle and closed credit channels are creating perfect storm conditions for SME’s. Bank’s reluctance to lend and the high cost of capital from other alternative credit channels coupled with weak cash flows from declining sales are creating liquidity problems for many SMEs.   Its a growing contagion of financial distress.  This contagion could infect Goldman and would have a profound impact on the company’s financial health.

The 10,000 Businesses  initiative will strengthen the free flow of investment capital to finance national economic development and empower SMEs.  It strengthens free market capitalism and has the potential to pool, unleash and focus investment capital into a strategic market segment that has no access to public equity and curtailed lines of traditional bank credit. The 10,000 Businesses initiative  will encourage wider participation by banking and private equity funds.  In the aggregate, this will help to achieve strategic objectives, build wealth and realize broader goals to assure sustainable growth and global competitiveness.  All to the benefit of Goldman Sachs’ shareholders and it global investment banking franchise.

Goldman Sach’s has always been a market leader.  We salute Goldman Sachs’ initiative and welcome its success.

In  September of 2008,  Sum2 announced The Hamilton Plan calling for the founding of an SME Development Bank (SDB).  The SDB would serve as an aggregator of capital from numerous stakeholders to focus capital investment for SME manufactures.   More on the Hamilton Plan can be read here: SME Development Bank.

Risk:  SME, bank, recession, unemployment, credit, private equity

You Tube Music: 10,000 Manaics, Natalie Merchant: Dust Bowl

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November 19, 2009 - Posted by | banking, credit, economics, FDIC, private equity | , , , , , , , , , , , , , , , , , , , , , , , , , ,

2 Comments »

  1. […] This post was mentioned on Twitter by Sum2, LLC, riskrapper. riskrapper said: Goldman Sachs and Social Entrepreneurship https://sum2llc.wordpress.com/2009/11/19/goldman-sachs-the-social-entreprenuer/ […]

    Pingback by Tweets that mention Goldman Sachs the Social Entrepreneur « sum2llc -- Topsy.com | November 19, 2009 | Reply

  2. Business Model:
    As the need to put the unemployed back to work in an effort to be able to provide for themselves and their families. I am proposing the following:
    1) A)I have formed a company Consumer Utility Services LLC – which primary function is to negotiate and secure contracts for gas & electric enrollment programs in deregulated states and place those programs with call centers throughout the state of Florida and abroad which are experiencing a declining sales force due to economic times – reason being Florida has become a focal point for customer service and tele- sales throughout America an at this time most products being marketed require either an upfront obligation through credit card or account information and a monthly commitment , with raising credit card cost most consumers are at this time less likely to agree to this type of obligation or due to the charges placed on those cards are having their credit cards either cut off or penalized. Under the model which I am proposing the consumer would be offered the opportunity to save money on their utility bill ( gas or electric ) of anywhere from 10% to 20% by simply verifying the information provided on the bill itself and going through a recorded verification to insure processing through the respective utility company. These programs are monitored by the Public Utility Commissions in deregulated states so unlike phone deregulation consumers remain valued customers of the utility but are allowed to choose an authorized suppler to the utility company to save money on their utility bills .
    b) To also negotiate with suppliers of those consumers, incentive programs to further assist the consumer (example)1. as a valued customer of Connecticut Light & Power and for choosing XYZ Energy as your supplier in the Energy Choice Program we would also like to offer you our Price Protection Plan which would help in the event of you getting a shut off or Disconnect notice for simply enrolling a staying a current member you will be covered for 2 months of service once per year.
    2. For enrolling in the Energy Choice Program you will also receive a $50 credit toward your next utility bill to be applied after your next meter reading.

    2) Form a non-profit organization (Americans Back to Work Union )- which primary function would be offering displaced workers, training ,management, and job placement in call centers to help all cultures with having the opportunity to earn income beneficial for both English and bi-lingual speaking persons A) to negotiate, secure, and manage private, state, and government funds and grants received to help teach and place workers…
    b) to set aside funds to help expand call centers and develop programs with work in tandem with the benefits of deregulation…
    c) to develop and promote opportunities for college and high school graduates to explore the energy markets vast potential for career options , such as renewable energy production, marketing and procurement options with advanced IT computer programs(example) more efficient ways to improve the grids and distribution of electricity and other energy related products
    REACH MR AT EMAIL: slindseyenergy@gmail.com

    Comment by solmon lindsey | November 28, 2009 | Reply


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