Goldman Malaysia Fund headache could cost a 'year of earnings': Company execs

Goldman Sachs executives say 1MDB scandal may cost ‘a year of earnings’: Charlie Gasparino

FBN’s Charlie Gasparino discusses how Goldman Sachs is beginning to calculate the cost of the 1MDB scandal.

Goldman Sachs Group senior executives privately concede that the burgeoning scandal over the misuse of money at a Malaysian government investment fund could now cost the firm “a year of earnings,” or roughly $10 billion, FOX Business has learned.

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The firm’s chief executive officer David Solomon and other senior officials have yet to publicly comment on the size of the firm’s potential liability stemming from its work as an underwriter of the scandal-tarred fund, known as 1Malaysia Development Berhad fund, or 1MDB.

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But people with knowledge of the thinking of these senior executives say internally Goldman believes the liability could be much larger than the roughly $2 billion originally estimated and could cost about $10 billion, essentially wiping out a year's worth of earnings. In November of 2018, Goldman said in a filing with the Securities and Exchange Commission that it will need $1.8 billion more in reserves to meet legal costs. In 2018, Goldman earned $10.46 billion on revenues of $36.62 billion, in what was seen as a slow year for the firm because of lower profits from its trading unit.

“The senior people at Goldman believe a year of earnings could be on the line because of this scandal,” said one senior Wall Street executive with ties to senior Goldman executives.

It isn’t exactly clear how Goldman is coming up with this potential liability. But in an interview with Bloomberg TV on Wednesday, Anwar Ibrahim, a prominent Malaysian political leader, said Goldman owes the fund at least $7.5 billion. That potential liability, combined with U.S. regulatory and civil fines, could make Goldman’s ultimate payout exceed $10 billion, some legal experts say.

A Goldman spokesman declined to comment.

Goldman’s reputation as the world’s premier investment bank has faced such severe damage for its work with the fund that Solomon made a rare appearance on the firm’s fourth quarter earnings conference call in January, as first reported by FOX Business. “It's very clear that the people of Malaysia were defrauded by many individuals, including the highest members of the prior government,” said Solomon, who in October took over as CEO for Lloyd Blankfein. “Tim Leissner was a partner at our firm, by his own admission, was one of those people. For Leissner's role in that fraud, we apologize to the Malaysian people.”

Federal prosecutors have charged Leissner with fraud in connection with an alleged multi-billion looting of the fund allegedly carried out by bankers and associates of the country’s prime minister. Leissner has plead guilty and is awaiting sentencing.

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Another Goldman banker, Roger Ng, has been charged by federal prosecutors and is being held by Malaysian authorities awaiting extradition to the U.S. A third individual, a Malaysian banker named Low Taek Jho has been charged by U.S. and Malaysian authorities as part of the scandal. He has maintained his innocence and he is believed to be out of the country.

But now the firm itself is facing serious scrutiny as U.S. and foreign prosecutors investigate whether others at Goldman either participated or ignored the signs of fraud as the investment bank sold bonds to investors.

As of now, no member of Goldman’s current management team has been charged in the various probes, but there are some signs that Goldman believes the scandal could at least touch some of its top officials.  Recently, Goldman announced that it is prepared to “claw-back” pay of senior executives including Solomon and the man he replaced, Blankfein, as well as others depending on the outcome of the investigation and the potential liability it presents.

People with knowledge of the matter tell FOX Business that the announced potential claw-back was in response to growing anxiety inside Goldman over the possible monetary liability the scandal might produce. In 2018, Solomon earned $23 million and Blankfein earned $20.5 million, according to company filings.

The possible “year of earnings” estimate inside the senior ranks of Goldman comes as firm executives tally up the sheer number of investigations Goldman faces in the matter. Insiders concede the firm faces investigations in six different countries that are both civil and criminal in nature, as well as likely civil lawsuits from bondholders.

Goldman Sachs underwrote three bond deals in 2012 and 2013 for the fund totaling $6.5 billion. The firm earned $600 million in fees, an abnormally high percentage for bond underwriting. Other firms turned down the opportunity to work with 1MDB because of concerns over the improper use of the funds, political payouts, and money laundering.