Goldman recast as villain of Wall Street with damning 1MDB pact

New York

GOLDMAN Sachs Group, pilloried after the 2008 financial crisis, just saw a decade of image repair undone as prosecutors and regulators around the world unleashed accusations and punishments against the bank after a year's probe into the plundering of Malaysia's 1MDB investment fund.

Goldman's costs from the scandal hurtled beyond US$5 billion while a subsidiary pleaded guilty to a US criminal charge for the first time in the firm's history. The parent company entered a deal to spare itself a conviction that could cripple business, by promising to behave.

In a rare rebuke, Goldman will also force chief executive officer David Solomon and predecessor Lloyd Blankfein to give up pay, attaching personal accountability to two of the industry's most visible leaders for a scandal spanning the globe.

But, perhaps worst for the bank, the settlements provide another gritty look at the mechanics of a costly financial scheme involving the Wall Street giant - with court documents quoting from internal e-mails and conversations.

In its deal with the US Justice Department, the bank admitted executives and other staff conspired to pay more than US$1.6 billion in bribes to win business in Malaysia. The settlement includes the highest penalty ever under the Foreign Corrupt Practices Act.

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Not since 2010 has Goldman been in the spotlight over such damning behaviour - that case claims it misleadingly sold mortgage-linked investments that fuelled investor losses in the 2008 credit crisis.

The new 1MDB settlements with authorities on three continents could focus critics' attention on the firm in an era of mounting frustration with Wall Street's success during an economic slump and widening income disparity.

"I wouldn't underestimate the impact of that backdrop," said Peter Atwater, an adjunct lecturer at William & Mary. "Goldman is very fortunate to settle this today. If the social mood were to deteriorate, the financial cost and the legal ramifications would be much more dire."

The case focuses on the firm's fundraising work in 2012 and 2013 for the state-owned Malaysian fund. Goldman's investment-banking group, led at the time by Mr Solomon, collected US$600 million from the bond sales.

The bank reached an initial accord with Malaysia in July that included a payment of US$2.5 billion.

From Wall Street's perspective, the latest raft of settlements was long-anticipated and the magnitude of the penalties in line with expectations. The bank said it would book an additional US$250 million in the third quarter to cover the cost beyond previous reserves.

Investors nudged the stock up 1.2 per cent in New York. "It's an enormous price," Glenn Schorr, an analyst at Evercore ISI, said of the settlement payments. But "it's the price they had to pay to, I would say, have the flexibility to fully run their company and focus on growing and moving the company forward."

The accords lift a legal cloud that formed during Mr Blankfein's tenure and remained through the handoff to Mr Solomon two years ago.

Mr Solomon has since faced public heat over his decision to order two Gulfstream private jets to carry executives, his acceptance of a raise at the onset of the pandemic and his appearance as a DJ at a Hamptons concert where some attendees eschewed social distancing guidelines.

Those faux pas seem quaint compared to DOJ documents describing Goldman executives dismissing signs of corruption.

"This has been a long process and we are pleased to be putting these matters behind us. But, we are not putting the lessons learned from this experience behind us," he wrote in a memo to staff. "We have to acknowledge where our firm fell short."

The 36-page deferred-prosecution agreement the bank reached with US prosecutors is loaded with new behind-the-scenes details that will become fodder for critics, from progressive activists to lawmakers. BLOOMBERG