Goldman Sachs image stained again with damning 1MDB investment settlements

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

Goldman’s costs from the scandal hurtled beyond $5 billion Thursday while a subsidiary pleaded guilty to a U.S. 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, on top of all that, 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 emails and conversations. In its deal with the U.S. Justice Department, the bank admitted executives and other staff conspired to pay more than $1.6 billion in bribes to win business in Malaysia. That settlement includes the highest penalty ever under the Foreign Corrupt Practices Act.

Not since 2010 has Goldman been in the spotlight over such damning behavior -- in that case claims it misleadingly sold mortgage-linked investments that fueled investor losses in the 2008 credit crisis. The new 1MDB settlements with authorities on three continents threaten to concentrate 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 fund formally known as 1Malaysia Development Bhd. Goldman’s investment-banking group, led at the time by Solomon, collected $600 million from the bond sales. The bank reached an initial accord with Malaysia in July that included a payment of $2.5 billion.

In a 36-page deferred-prosecution agreement and accompanying statement of facts, U.S. prosecutors go further in describing what transpired than was previously known, including behind-the-scenes exchanges that may become fodder for critics, from progressive activists to lawmakers.

Prosecutors highlighted, for example, a call in which a “participating managing director,” or partner, discussed with a senior executive problems the bank was having in securing an investment from an Abu Dhabi investment fund related to 1MDB. The partner said it was clear a government official in Abu Dhabi was “trying to get something on the side in his pocket” from the deal. “I think it’s quite disturbing to have come across this piece of information,” he added.

In a 36-page deferred-prosecution agreement and accompanying statement of facts, U.S. prosecutors go further in describing what transpired than was previously known.

“What’s disturbing about that?” the senior executive replied, according to the filing, which didn’t identify the individuals. “It’s nothing new, is it?”

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 $250 million in the third quarter to cover the cost beyond previous reserves. Investors nudged the stock up 1.2% 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.”

Lifting Cloud
 

The accords lift a legal cloud that formed during Blankfein’s tenure and remained through the handoff to Solomon two years ago. 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 on Thursday. “We have to acknowledge where our firm fell short.”

The misconduct described in the settlements is landing at a moment when polls suggest Democrats might take control of both chambers of Congress and the White House in November’s election. That may make it a smart time for a company to settle with an administration whose players and priorities it knows.

But it’s an awkward time to be known as the bank at the center of an international conspiracy that poured ill-gotten public funds into high-end art, a super yacht and even the Hollywood movie “The Wolf of Wall Street.”