Five Questions about the Goldman 1MDB Settlement

Euromoney, July 27 2020

The agreement between Goldman Sachs and the Malaysian government over the US bank’s work with 1MDB has inspired a number of ‘Goldman settles for $3.9 billion’ headlines. There’s a bit more going on beneath the surface, and not everything is resolved.

1. What’s in a number?

The $3.9 billion number is not what Goldman will be paying. That figure is $2.5 billion. The other $1.4 billion refers to a guarantee that the government of Malaysia will receive that amount in proceeds from 1MDB assets that have been seized around the world.

So where does $2.5 billion come from?

It appears to have been thrashed out as a middle ground between the $4.5 billion the US Department of Justice believes was siphoned out of Malaysia’s public purse through 1MDB, the $7.5 billion the Malaysian government has previously claimed it wants, and a figure below $2 billion that former prime minister Mahathir Mohamad says Goldman had previously offered to settle the matter.

(Lim’s statement did at least explain where Mahathir’s $7.5 billion figure came from: the $6.5 billion Goldman helped 1MDB raise, plus a cool billion dollars in interest).

But the amount is considerably more than Goldman ever made from advising 1MDB. According to the US Department of Justice filings, it made $593 million from its work on three bond sales in 2012 and 2013.

2. How can Goldman guarantee the return of assets?

This is perhaps the most curious part of the announcement. Goldman doesn’t hold the stolen assets, so it’s not at all clear how or why it would be guaranteeing the return of $1.4 billion. This appears to mean that, if various regulators (chiefly the US DoJ) can’t return assets to that figure, Goldman will be on the hook for the shortfall, although apparently not for five years.

The DoJ has been voracious in the recovery of assets, and Goldman appears to be confident the required total will be returned to Malaysia.

“In connection with the guarantee, Goldman Sachs performed valuation analysis on the relevant assets and believes based on that analysis that the guarantee does not present a significant risk exposure to the firm,” Goldman said in a statement on Friday, July 24. Still, a guarantee over something that Goldman can’t control is strange.

3. Why pay?

Up until about a year ago, there was a sense that Goldman might not engage with Malaysia’s claim and would simply not pay, accepting it would never do business in Malaysia again. In cold economics, that course of action would have some merit: it’s hard to imagine a timeframe within which Goldman would make $2.5 billion in fees in Malaysia.

One assumes Goldman wants to settle for reputational reasons – it has been damaged across southeast Asia, not just Malaysia – and because settling this makes resolving Goldman’s outstanding issues with the DoJ easier.

4. Why is the market acting like it’s all over?

On Friday Goldman’s share price went up, at the same time that the broader market was tanking. It was the sort of reaction bank shares tend to show when a big financial overhang has been resolved.

Well, the Malaysian end of the dispute was resolved (including criminal proceedings against the bank and some of its directors), but certainly not the whole thing. As Goldman said the same day: “The agreement in principle does not resolve the other pending governmental and regulatory investigations involving the firm relating to 1MDB.”

This refers chiefly to the US DoJ investigation. There is a lot at stake here and the quantum of the fine is only part of it. It is still not clear if Goldman will need to take a guilty plea to resolve the US investigation.

It is said that the Malaysia settlement makes it easier to conclude the DoJ settlement, which perhaps explains the stock market reaction. But the overhang, reputational and financial, isn’t gone until the DoJ says so.

5. Where is Jho Low?

No idea. Euromoney remains the last media organization to have interviewed him, in 2015.