With its Malaysia deal, Goldman has done it again

Only Goldman Sachs. Last week, after months of public sparring and days of tough in-person negotiations, the Wall Street bank finally reached a deal with Malaysia over allegations that it had helped a former president loot billions of dollars from the state investment fund, 1MDB.

Goldman will fork out $2.5bn, instead of the $7.5bn the finance minster had originally demanded, and the Malaysian government agreed to drop criminal charges against the bank and cease legal proceedings against 17 current and former Goldman directors.

So far, so typical of big bank disciplinary cases. But during the last round of in-person negotiations, Goldman Sachs general counsel Karen Seymour and executive vice-president John Rogers pulled off what can only be described as a miraculous change in atmosphere.

Rather than hostile talks between adversaries, the negotiations ended up so friendly that the group posed for pictures to celebrate the deal signing — complete with Covid-19 protective face masks. The Goldman executives look for all the world like they just helped the country, by listing a state-owned company or floating a big infrastructure bond, rather than paying out billions to settle fraud allegations.

Perhaps it is because the arrangement includes a sleight of hand that will allow Malaysia’s new government, which took office after the scandal toppled prime minister Najib Razak, to claim the deal includes recoveries of nearly $4bn — a lot closer to the $6.5bn in bond proceeds that former Goldman partner Tim Leissner helped 1MDB sell. Goldman agreed to guarantee that Malaysia will receive at least another $1.4bn from selling seized assets acquired with misappropriated funds. These include a yacht, a jet, a Beverly Hills hotel and an Oscar that once belonged to Marlon Brando.

Goldman, being Goldman, made sure this guarantee cost it basically nothing — it said in a statement that it had done a “valuation analysis on the relevant assets and believes . . . that the guarantee does not present a significant risk exposure to the firm”.

In the aftermath of the 2008 financial crisis, Goldman was pilloried for its sales of mortgage-backed securities and derivatives. But, unlike virtually all of its competitors, neither Goldman’s bank holding company nor its subsidiaries ever pleaded guilty to criminal charges. It is now trying to emerge from the 1MDB scandal with that record intact.

With Malaysia out of the way, the last big hurdle is the US Department of Justice. DoJ has already brought criminal charges against Mr Leissner, who has pleaded guilty, Roger Ng, a former Goldmanite who is awaiting trial, and 1MDB promoter Jho Low, who says he is innocent and whose whereabouts are unknown. Goldman has set aside roughly $3bn to cover settlements. Until now it has not taken specific provisions for Malaysia but is expected to do so by the time it files its next quarterly statement with the Securities and Exchange Commission.

The big remaining questions now are the criminal charges and how much credit the DoJ will give Goldman for settling with Malaysia. Consumer groups are already on the warpath about trying to secure a guilty plea. “If the DoJ does less, it will once again show that Wall Street’s biggest, wealthiest, most politically connected banks are still too big to jail, no matter how many crimes they commit, how many laws they break, how many victims there are or how much damage they inflict,” said Dennis Kelleher, president of Better Markets.

The talks come at a critical time. Goldman had a blowout second quarter but has been ordered by the US Federal Reserve to hold more capital against its assets than rivals. That could delay its ability to resume share buybacks. Analysts just want the deal done — most of them reacted positively to the Malaysia settlement, even though it was larger than they had estimated.

“Goldman is paying a premium, but one that makes sense, to eliminate the legal and political tail risk,” says Mike Mayo of Wells Fargo. He had previously expected the bank to pay a total of $3bn-$4bn in connection with the scandal, but now expects closer to $4.5bn. “It absolutely needs to be done. After the [US presidential election] they could become political fodder.”

Evercore’s Glenn Schorr argues that “the only thing that matters is, will this prevent Goldman from doing business in the way they need to do business? I believe it won’t.” If history — and the Malaysian result — is any guide, Mr Schorr is on to something.

brooke.masters@ft.com