Goldman Sachs (NYSE:GS) has been the worst-performing of America’s big banks in 2018, losing nearly one-third of its value, and was due to fall even further Monday because of a financial scandal in Malaysia.
The 1MDB Scandal has been roiling Malaysian politics for three years and led to the election of Mahathir Mohammad, 93, earlier this year on a promise to get to the bottom of it. Goldman Sachs stock has been pummeled for a month by the scandal, and now two former employees, Tim Leissner and Roger Ng, are facing U.S. criminal charges under the Foreign Corrupt Practices Act.
Charges in Malaysia have been laid directly against the bank, which denies all wrongdoing, seeking over $2.7 billion in fines, claiming that’s the amount that was stolen in three bond issues underwritten by Goldman Sachs.
Goldman denies all wrongdoing.
The 1MDB Scandal
Goldman said it advised the fund on its acquisition of Tanjong Energy Holdings in 2012, on initiatives with Abu Dhabi, and on the creation of a financial center in the capital of Kuala Lumpur, underwriting and selling 1MDB bonds.
Liessner, formerly Goldman’s chairman of Southeast Asia, pled guilty last month to bribing officials for the bond deals, saying over $200 million in proceeds from the sales flowed into accounts controlled by him and a relative.
The 1MDB fund was created by former Prime Minister Najib Razak in 2009 to drive investment into Malaysia and boost its assets. Malaysian officials now believe up to $4.5 billion of the $8 billion it raised was stolen, with the laundered funds used for yachts, hotels, a jet, condos and to produce the film The Wolf of Wall Street.
Prime Minister Mohammad now wants to recover Goldman’s fees, which he says came to as much as 7.7% of the underwritings, over $616 million. Goldman says it was deceived by Liessner and didn’t know the money would be diverted.
What Happens Next?
Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS) have already downgraded Goldman stock, with BAC giving it a $225 per share price target. The shares were due to open Dec. 17 at under $170 per share.
Goldman itself has turned negative on global growth, predicting U.S. growth of under 2%, and this has accelerated the whole market’s move down, especially after non-farm payrolls for November grew by just 155,000, against the 200,000 expected.
For the first three quarters of 2018, however, Goldman reported net income of nearly $8 billion. The rest of its business, absent the scandal, has been blowing past analyst earnings estimates over the last four quarters, and the company held $71.45 billion in net tangible assets at the end of September.
Goldman opened for trade with a market cap of about $64 billion, and almost 1.2% of the shares were being sold short. The valuation of the stock, 12.2 times earnings, remains reasonable for a big bank, but investors are expecting a huge write-off at some point once the scandal settles.
Bottom Line on GS Stock
While analysts are looking for a bottom in the shares, no one is yet saying the bank itself is threatened. What may be subject to scrutiny, outside the bank, are the network of offshore tax havens and shell corporate headquarters used by the conspirators, as officials in Abu Dhabi, Switzerland, Luxembourg and the British Virgin Islands have all become involved.
If that happens, there could yet be a silver lining to this old-time international banking scandal.
Dana Blankenhorn is a financial and technology journalist. He is the author of a new mystery thriller, The Reluctant Detective Finds Her Family, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing, he owned no shares in companies mentioned in this article.