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Goldman fills the Lehman void

June 16, 2009

Lehman’s collapse left a big whole in the world of structured products–a largely unnecessary investment vehicle that’s been all too popular in Europe and Asia. But it seems Goldman Sachs is rushing in to fill the void.

A week ago, a three-month-old Goldman Sachs subsidiary filed a registration statement with Irish authorities for the future sale of structured notes in the UK and elsewhere–but not in the US. The so-called “base prospectus” filed by Goldman Sachs Financial Solutions PLC is the second structured note offering a Goldman subsidiary has filed this year with Irish regulators.

Up until now, Goldman hasn’t been one of the big players in churning out structured notes, which use derivatives to give investors exposure to a wide range of asset classes. The biggest sellers of structured notes have been UBS, Citigroup, Morgan Stanley and Lehman–that is before it collapsed in bankruptcy last September.

In fact, a former Lehman subsidiary in Amsterdam churned out some $30 billion in structured notes over the past decade. The notes were sold by a slew of banks in the UK, Belgium, Germany, Italy, Switzerland and throughout Asia, and they are all pretty much worthless now. Most of the buyers of these notes, which offered investors exposure to a commodities index or a basket of stocks, were sold to average folks–not particuarly wealthy people.

Structured notes generate fat fees for the banks that issue them and other banks that peddle them to retail investors. In many instances, investors could get the same kind of exposure by simply buying an exchange-traded fund, a index fund, or put together their own basket of stocks, bonds or commodities.

But the biggest knock on structured notes is that many of them are pitched to investors as “principal protected” investments. Investors are told they may not make money on the underlying investment, but they won’t lose their principal either.

But the guarantee on these notes is only as good as the creditworthiness of the issuer. Investors who bought Lehman structured notes have found out that guarantee doesn’t mean in the wake of the firm’s bankruptcy.

In the Goldman offerings, the firm goes out of its way to distinguish the gurantee on a structured note from the kind of gurantee the FDIC has been putting on bank bonds since the financial crisis spun out of control last fall.

The Notes are not bank deposits and are not insured or guaranteed by the United States Federal Deposit Insurance Corporation, the Deposit
Insurance Fund or any other governmental agency. In particular, the Notes are not guaranteed under the FDIC’s Temporary Liquidity Guaranty
Program. The payment obligations of the Issuer in respect of the Notes are guaranteed by The Goldman Sachs Group, Inc. (the “Guarantor”) under
the terms of a guarantee directly in favour of the Trustee. The Guarantee is limited to the amount that would be payable by the Issuer pursuant to
the terms of the Notes and will rank pari passu with all other unsecured and unsubordinated indebtedness of the Guarantor. Notes issued under this
Programme are not subject to the FDIC guarantee described in the Form 10-K, which the Guarantor filed with the SEC on 27 January 2009.

Of course, it’s unlikely Goldman is about to go the way of Lehman. The US government has spent a lot of taxpayers dollars to make sure no other big bank fails and cripples the financial system.

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