Goldman Sachs and the 1MDB Scandal

The 1MDB scandal is a scandal of epic proportions that was uncovered in Malaysia almost five years ago. This scandal has led to a lot of consequences in Malaysia. For instance, this was the main reason behind the sudden downfall of the previous Malaysian Prime Minister Najib Razak’s government. The main accused, Jho Low, who is supposedly an accomplice of Najib Razak, is also on the run.

However, till about last month, the people of the United States did not have the remotest idea about the 1MDB scandal. All of a sudden, this scandal has gained prominence as it threatens to bring down Goldman Sachs, one of the stalwarts of the American banking industry.

In this article, we will have a closer look at what the 1MDB scandal is and how it has affected Goldman Sachs.

What is the 1MDB Scandal?

1 Malaysia Development Bhd was a fund that was created by the Malaysian government under the leadership of Najib Razak. The main purpose of this fund was to build better infrastructure in Malaysia and thereby improve its economy. The Malaysian government had raised close to $6.5 billion from various investors for this purpose.

However, vast sums of money were embezzled from this fund. The fund ended up making some questionable investments which include producing movies like The Wolf of Wall Street. The fund also brought strange assets like paintings. However, the scandal really isn’t about the nature of the assets that were brought using the proceeds of the fund. The real issue is that about $3.5 billion, i.e. close to 50% of the fund has been embezzled. As a result, the Malaysian government now finds itself liable to make payments on debt whose proceeds were swindled away.

Obviously, this is a big loss to the government as well as to the people of Malaysia. This is the reason why the new Malaysian government is taking every measure possible to recover the debts. These strict measures include the prosecution of Goldman Sachs.

Why is Goldman Sachs Being Held Responsible for the Scandal?

Goldman Sachs has been an enabler to the 1MDB scam in many ways.

  • First and foremost, Goldman Sachs was in charge of the three bond issues which were used to raise $6.5 billion. It has been reported that Goldman Sachs charged about $600 million in fees, which works out to about 9%. This commission of 9% I astronomically high and work out to about double the market rate that was prevalent when the deal took place. The Malaysian government alleges that Goldman Sachs was fully aware of the wrongdoing and hence charged additional hush money as insurance. This is the reason why the fees are very high compared to its peers.
  • Secondly, regulators all over the world, including the United States of America have complained that Goldman Sachs has very low compliance standards. The pressure to crack a deal is so high that procedure and compliance and not really paid attention to. As a result, the Malaysian government alleges that it was Goldman Sachs’ negligent policies that enabled large scale corruption
  • Goldman Sachs has been actively co-operating with the law enforcement agencies. It has also admitted to wrongdoing on its part. However, it has been portraying this scandal as being the work of a few rogue executives. The Malaysian government alleges that this was not the case and the higher ups including Lloyd Blankfein knew about the dubious nature of these transactions but still chose to remain quiet.

How does the 1MDB Scandal Affect Goldman Sachs?

The 1MDB scandal has had a huge impact on the financial position of Goldman Sachs. Some points have been listed below:

  • The 1MDB scandal and the ensuing drama have caused Goldman Sachs to lose between 20% and 30% of its market capitalization. The iconic American Bank is under financial duress and is reportedly in discussions with the Federal Reserve to arrange for a credit line which will allow it to prevent insolvency.
  • The Federal Reserve and other American regulators are also planning to file charges against Goldman Sachs once the issue with the Malaysian government is settled
  • Goldman Sachs has proposed to pay a mammoth fine of $7.5 billion if the Malaysian government agrees to drop charges. This is surprising given the fact that Goldman has been a party to many scandals before this. However, it has never agreed to pay such a huge fine. The fact that Goldman has agreed to make a payment of this magnitude is making many people curious about the nature of wrongdoing that Goldman has participated in
  • The scandal has decimated the Goldman Sachs brand in the Asia and the Middle East region. Industry analysts have observed that companies and governments are now sceptical about being associated with Goldman Sachs given the legal troubles that the company is embroiled in. This is the reason why Citigroup and Morgan Stanley, which are considered to be the prime competitors of Goldman Sachs, have reported a sudden increase in their market share in this region

To sum it up, a big scandal in a small country has brought the goliath of the finance world to its knees. Hopefully, this scandal and the consequences will prevent Goldman Sachs from engaging in unethical behaviour in the future.


❮   Previous  Article Next  Article   ❯

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


Corporate Finance