Multinational investment banking giant Goldman Sachs finds itself in the middle of a cross-border scandal stretching back several years. On November 1st, 2018, federal prosecutors in a Brooklyn court indicted numerous members of Goldman’s senior management, most notably Tim Leissner and his associate Robert Ng, on charges of money laundering and bribery. Mr Leissner, the bank’s former chairman for South-East Asia, pleaded guilty to the charges on account of his malpractice with regard to Goldman’s work with Malaysian sovereign wealth fund 1Malaysia Development Berhad (1MDB). The bank was tasked with underwriting three bond offerings worth $6.5bn for 1MDB; fundamentally, securities underwriting is the process by which an underwriter, in this case Goldman, manages the selling of a client corporation’s, i.e. 1MDB’s, bonds and thus absorbs the risks attached to selling said securities. In return, the underwriter earns the difference between the price at which it purchases the client’s newly issued securities and the higher price at which the same is sold to investors. Goldman’s profit, or underwriting spread, from their 1MDB operations was a staggering $600m. Hence the substantial cut drew the attention of investigators, and even that of people inside the firm, although the latter were outweighed and overruled by the approval of senior management.
In light of recent revelations, it is easy to attribute the ongoing scandal to Goldman’s culture of secrecy; Mr Leissner himself blamed the unwritten rules under which the bank operates for his decision to conceal the misappropriation of funds from the compliance team. Goldman Sachs claims they believed that all proceeds from the debt they underwrote would flow into development projects, and that the current situation was the work of rogue bankers; an assertion difficult to maintain given recent reports in The New York Times exposing private meetings between Goldman’s current chairman, Lloyd Blankfein, Jho Low and Najib Razak, the former prime minister of Malaysia. In fact, Jho Low is thought to be in China, but Chinese officials deny his presence given 1MDB’s involvement with Chinese state firms and may give him up only if the new Malaysian government agrees to honour contracts signed by Mr Najib with Chinese companies.
In addition to the dent in their reputation, the investment bank took a hit in the markets too. On November 12th, Goldman Sachs’s share price saw its worst one-day drop since 2011, falling 7.5% amidst the fallout of the 1MDB scandal, soon after the unearthing of Mr Blankfein’s meeting with Mr Low and Mr Najib. Further, on the day, the volume of stock bought and sold was more than triple that of the average daily amount. Goldman’s Wall Street rival, Morgan Stanley, downgraded the former – i.e. reduced the ratings of Goldman’s securities – given the negative impact on the future prospects of said securities amidst the current turmoil and fallout.
Regardless of Goldman Sachs’s legal battle to mitigate the demanded compensation, the bank’s reputation has been tarnished, the recovery of which will plague the Wall Street giant more than the recovery of their share price. The investment bank has lost ground in South-East Asia to its competitors in recent years; a pattern that will only be exacerbated by the consequences of the scandal. To emphasise the impact on Goldman’s prospective deals in the region, a senior Malaysian official stated that there would be no business for Goldman Sachs in Malaysia for a long, long time.