It’s been just over a decade since the American taxpayer bailed out the Wall Street banks involved in the near-collapse of the world’s financial system. The intervening decade has shown that those banks have largely continued with business as usual, continuing to get involved in shady deals and ignoring internal controls in return for extensive fees.
Almost two years ago, I wrote about Goldman Sachs’ involvement in an enormous deal for the 1Malaysia Development Berhad (1MDB) that generated significant fees for the bank. 1MDB, however, turned out be just a gigantic embezzlement and money laundering scheme, with around $4.5 billion having been misappropriated by officials of the fund and friends of the Malaysian Prime Minister. It is one of the largest financial frauds in history.
In 2012 and 2013, Goldman Sachs raised around $6 billion for the Malaysian fund, reaping around 10% of the deals, or $600 million, in fees. Not only were those fees unusually high, so was Goldman’s position as both adviser to and financer of the deals, as was the rather skimpy track record of the fund for such an enormous offering.
As the fraud unraveled and it was revealed that a Malaysian financier friend of the Prime Minister named Jho Low had stolen at least $2.7 billion from the fund, it also became apparent that the Goldman Sachs partner overseeing the deal, Timothy Leissner, was not only aware of the potential pitfalls of the deal but himself stole up to $200 million in order to bribe Malaysian officials and ensure the deals closed. Mr. Low had no formal position with the fund but effectively controlled it.
Leissner was forced to resign from Goldman after fraudulently using Goldman stationery to help Mr. Low open a bank account in Luxembourg. In addition, the bank could not confirm the source of Mr. Low’s wealth, but continued to work with him and involve him in the 1MDB deals, some of which are now being investigated by US prosecutors. The Goldman partner who structured the deals, Andrea Vella, is also suspected by prosecutors of being aware of Mr. Leissner’s criminal activity.
The initial deal with 1MDB should have raised red flags at the firm on its own. That proposed deal was a bond offering of $1.75 billion to buy a number of power plants. Mr. Leissner asked Lazard Ltd for an independent evaluation of the deal, but Lazard declined to do the evaluation, stating, however, that they believed that 1MDB was badly overpaying for the plants in a potential corruption scheme. Nevertheless, Goldman persisted and remarkably bought a substantial portion of the bonds itself, declaring its exorbitant $200 million fee as a sort of risk protection. Goldman then sold the bonds to investors it had already lined up and obviating the need for the risk protection the fee was supposed to represent.
After the deal was consummated, 1MDB wrote down the power plants by $400 million, nearly 25% of the deal, and the owner of the plants donated $170 million to the Malaysian Prime Minister’s foundation, which was used as a slush fund for his personal and political use, (in other words, a more well-financed version of the Trump Foundation). Goldman, on the other hand, viewed the deal as an enormous success, so much so that the deal itself won the highest award within the firm for “solving an important client’s problem through outstanding firmwide cooperation”.
Obviously, Goldman attempted to blame Mr. Leissner for the problems with 1MDB, but that has become more difficult over time. It has come out that CEO Lloyd Blankfein attended a meeting with Mr. Low in 2012 as the talks about the deal were just beginning and reportedly met with Mr. Low on at least one other occasion. In addition, Gary Cohn, then president of Goldman, apparently closely tracked and signed off on the 1MDB deals.
Things became more complicated when US prosecutors charged Mr. Leissner and another Goldman banker, Roger Ng, last month and are continuing to investigate the firm. Leissner has pleaded guilty to conspiring to launder money and violate foreign bribery laws and has stated that evading the firm’s compliance and legal controls was part and parcel of Goldman’s culture. Now, the Malaysian government has also filed charges against a number of the firm’s subsidiaries and is demanding $7.5 billion back from Goldman. An Abu Dhabi sovereign wealth fund that was an investment partner with 1MDB has also sued Goldman for playing a “central role” in the corruption scheme by enabling the bribes of the principals.
Goldman has continually downplayed the scandal, blaming it on the rogue employees in Asia. But, as that defense becomes weaker, Goldman may be underestimating just how damaging this scandal could be. While all bank stocks have been battered in the latest market downturn, Goldman has been hurt the most, with its stock down over 30% and downgraded by Morgan Stanley. Both Malaysia and Abu Dhabi have pulled some of their money under management from Goldman and there is at least some fears that other funds in the Middle East and Asia may follow suit. In addition, investors expect the fines for Goldman resulting from the case to exceed $1 billion.
Goldman, of course, will survive this incident. However large the fines are, the company will pay them with little to no significant effect on profits or earnings, just like very other bank. What it will damage even further, however, is the mystique that Goldman is somehow special. It’s just as crooked as the rest of them.
Originally published at thesoundings.com on December 21, 2018.