Experts will tell you that a good negotiation leaves both sides feeling a bit bruised. I doubt that Goldman is feeling bruised over yesterdays’s multi-regulator settlement in the 1MDB scandal. Mr. Market certainly thought so; Goldman’s stock held its price on the announcement of the multi-regulator settlements yesterday that included $2.9 billion in fines and disgorgements.

Among other things, the estimated $4.5 billion looting of sovereign wealth fund 1MDB between 2009 and 2014 led to the imprisonment of Malaysia’s former Prime Minister Najib Razak, who also happens to have established 1MDB in 2009.

Goldman has admitted to criminal wrongdoing under the Foreign Corrupt Practices Act by its Malaysian subsidiary and agreed to pay $2.3 billion in fines and $600 million in disgorgement to the Department of Justice, the Federal Reserve Board of Governors, the SEC, the New York Department of Financial Services, and UK, Hong Kong, and Singapore financial regulators. This settlement follows Goldman agreeing to pay up to $3.9 billion to settle all claims by the Malaysian government. The two settlements together represent over 80% of Goldman’s 2019 profits.

Goldman is also clawing back $174 million in compensation from former CEO Lloyd Blankfein, and then head of investment banking, now CEO David Solomon. Solomon and other executives will have their 2020 pay reduced by $31 million. Goldman is also seeking to recoup $76 million from three former executives.

Many observers will be unhappy over the lack of additional indictments of Goldman executives beyond the 2018 US indictments of Tim Leissner, Goldman’s former Southeast Asia Chairman, and Roger Ng. Leissner has pleaded guilty; Ng’s trial is set for March 2021.1

I’m not close enough to the strength of the evidence against particular individuals to judge whether the authorities wimped out on this front. I’ll discuss shortly why prosecutions would be far from a slam dunk. By contrast, regulators could easily have forced more institutional changes on Goldman and failed to do so.

We’ll give a short background on 1MDB and then turn to the inadequate settlement.

1MDB: A Goldman Cash Machine

Goldman underwrote three bond issuances for 1MDB in 2012 and 2013 that raised roughly $6.5 billion. Goldman executives knew at the time that the amounts raised were vastly in excess of what was needed for the projects they were billed as financing. Goldman also used unnecessarily complex structures, and charged far more than would have applied had 1MDB sold straightforward sovereign bonds. The underwriting fees were grotesque: 11%, 6.3%, and 9.3%, levels unheard of in bond-land. Including some subsequent trading profits, Goldman earned $567 million on these deals and admitted in its settlement to having paid $1.6 billion in bribes. A total of $2.7 billion was misappropriated out of the proceeds, meaning that over and above the bribes, Malaysian financier Low Taek Jho (“Jho Low,” also indicted by the DoJ but still on the lam), Leissner, Ng, and other co-conspirators also kept a big chunk of the looted funds.

See here for more detail:

Goldman Sachs Charged in Foreign Bribery Case and Agrees to Pay Over $2.9 Billion Department of Justice

United States of American against Goldman Sachs Group, DEFERRED PROSECUTION AGREEMENT Department of Justice

SEC Charges Goldman Sachs With FCPA Violations Securities and Exchange Commission

Consent Order Under New York Banking Law §§39 and 44 New York State Department of Financial Services

Final Notice Financial Conduct Authority

The Department of Justice document has nitty gritty detail about the scheme; the New York State Department of Financial Services document and the DoJ press release provide higher-level summaries.

Why the Settlement Looks Inadequate

Criminal charges against a subsidiary have become the favored way of sanctioning Really Bad Stuff at too big to fail banks. Recall, for instance, that Citigroup has pleaded guilty to criminal charges of foreign exchange manipulation at its Citicorp subsidiary and money-laundering abuses at Banamex.

As much as it’s frustrating not to see parent company indictments, the counter-argument is that merely filing criminal charges against a financial services firm is a death sentence. Many counterparties and clients would have to cease doing business with them immediately. That is why some members of the press depicted Eliot Spitzer publicly threatening AIG with prosecution and using that to force the resignation of CEO Hank Greenberg was a prosecutorial abuse; this method was tantamount to denying the accused the opportunity to defend themselves in court.

The Department of Justice Deferred Prosecution Agreement describes how Goldman was given a 10% discount from the minimum fine (by formula) because it cooperated. Huh? Goldman was also not required to install an independent compliance monitor due to Goldman’s “remediation, the state of its compliance program” and that it plans to report in regularly to various officials.

It’s not hard to guess that the story that Goldman sold and the regulators bought was that Leissner was a senior enough executive that when he lied to compliance officials and more senior officers, no one saw fit to challenge him. This doesn’t square with the public disclosure, for instance, with the Department of Justice filing stating that compliance officials complained of a double standard, how Leissner and his client Low were subject to minimal checks when much smaller clients and deals got much more scrutiny.

The problem with this spin is that the profits on the 1MDB transactions were way too rich to be true. At best, Goldman top brass would have to believe that 1MDB was the biggest, dumbest muppet they’d ever stumbled across. If nothing else, taking a client that egregiously breaks the old Goldman “long term greedy” rule. The level of fee gouging was so great Goldman was on track to have an eventual reputational blow-up, of the “Goldman raped third world government investor” sort. The various filings mention that an even more lucrative deal was in the pipeline!

So if the excuse was “Leissner was such a big producer that he was given a lot of rope,” it doesn’t square with common sense. Any time a banker or trader is generating outsized profits from his clients or his markets, the fraud bells should start ringing. And the documents show that there’s evidence of some higher ups knowing that bribes were being paid. But Goldmanites are very well indoctrinated, so those remarks are coded.

What Should Be Done?

As much as it would be gratifying to see more executives prosecuted, this isn’t as easy as it sounds, particularly given Goldman’s very strong acculturation of staff at all level to take care with what they say and write. Criminal prosecutions much meet the “beyond a reasonable doubt” standard. It does look like Leissner was actively misleading compliance staffers and more senior executives. That then puts the “You saw warning signs, why was nothing done?” too readily into the “bad managerial judgement” category, as opposed to criminal misconduct or criminal negligence.

Similarly, confused juries do not indict. With all the financial complexity of 1MDB it would not be hard to confuse a jury.

However, Goldman is being allowed to function as it did before. This is absolutely the wrong message. Merely making rich executives disgorge some pay, as much as that’s a welcome departure from normal wrist-slaps, isn’t enough given the egregious scale of this fraud.

I would much prefer an independent monitor, selected and retained by a bloody-minded regulator (sadly the New York Department of Financial services and the UK regulators are more of the take-no-prisoners school than the Fed or the SEC) whose bills are reimbursed by Goldman. But it would also be difficult to find a firm that would be competent to the job (most monitors are in the business of babysitting their charges). So the DoJ isn’t all wet not to go this route, since it typically winds up being compliance theater.

The biggest way to send a tougher signal is to force changes in staffing. As the Eliot Spitzer example shows, and as Benjamin Lawsky later confirmed at the New York Department of Financial Services, regulators can force resignations. Indeed, the most dramatic example was in the Salomon Brothers Treasury bond trading scandal in 1992. Salomon failed to rein in a rouge trader, failed to tell the Fed for five months that they knew he’d found a new way to cheat, and then when the Fed found out, tried to argue that Salomon should keep his ill-begotten trading profits! The day after that Fed meeting, the CEO (the famed John Gutfreund), the vice chairman, general counsel, and head of government bond trading resigned.

In other words, Salomon, then the most important bond trading firm, and arguably Too Big to Fail, was not cut any slack. The forced departures so destabilized Salomon that Warren Buffett came in to rescue the firm, and it was later sold to Citigroup.

Every board member who dates back to 2012-2013 should be forced to resign. So should the General Counsel if she was in charge or in a position to have interceded. Ditto the heads of any other compliance units involved in overseeing Leissner and Ng.

The tough question is what to do with David Solomon, the chairman and CEO. He’s sufficiently involved to be subject to a clawback and have his 2020 pay docked too. With the de facto admission that Solomon was or should have been responsible, money penalties seem inadequate. It would help in calibrating what seems appropriate to know more about what he knew or should have known, but the documents are predictably silent on this key issue.

Since governance experts take a dim view of having the same person be chairman and CEO, it’s a no-brainer to have required Solomon to give up his chairmanship.

To send a real message, Solomon should go. The DoJ and other regulators justify keeping him (and others) on with the “Oh Goldman isn’t such a bad actor,” which sadly is sort of true when you compare them to JP Morgan. In other words, being not that rough on Goldman is simply proportionate to financial regulators engaging in wet-noodle-lashing-level punishments.

So while it would be nice to see Goldman taking a financial hit as a reasonable measure of justice, the harder you look at the sanctions, the more it’s clear that Goldman got the better of this deal.


1 Ng will almost certainly try to present everything he did as having the authorization and support of Goldman top brass above Leissner. If he can make that stick, it would raise questions about the adequacy of this settlement. However, the flip side is Leissner will presumably testify against Ng, and Leissner would be in a ton of hot water if he presented new facts.

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