Goldman's 1MDB settlement is worth the price

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(July 27): Goldman Sachs Group Inc finally has a Malaysia deal it can be proud of. The US$3.9 billion settlement the New York-based bank reached over its role in raising money for troubled sovereign wealth fund 1MDB didn’t come cheap. It’s nevertheless likely to prove a shrewd piece of business.

Timing was critical for Goldman, a fact that Malaysian negotiators may have exploited to their advantage. Under the settlement, the bank will make a US$2.5 billion payment and guarantee that at least another US$1.4 billion will come from assets of 1MDB seized by authorities around the world. In exchange, Malaysia will drop all criminal and regulatory proceedings against the bank, which has consistently denied wrongdoing.

The resolution clears the way for Goldman to conclude a settlement with the US Department of Justice and draw a final line under a scandal that constituted the biggest legal threat to the bank since the global financial crisis. In 2012 and 2013, Goldman helped the Malaysian government raise US$6.5 billion for 1MDB, part of which prosecutors allege was subsequently stolen. Money looted from the fund — known formally as 1Malaysia Development Bhd — flowed into assets from jewelry and a super-yacht to production of the Hollywood movie “The Wolf of Wall Street.”

Goldman collected an unusually high US$600 million from the bond sales. Its former Southeast Asia Chairman Tim Leissner pleaded guilty to bribing officials and former Goldman banker Roger Ng was extradited from Malaysia to face similar charges.

Malaysia’s fragile political balance made concluding a deal a matter of urgency. Goldman was negotiating with a government with a razor-thin majority; Prime Minister Tan Sri Muhyiddin Yassin came to power in March. His predecessor, Tun Dr Mahathir Mohamad, had sought as much as US$7.5 billion from Goldman, though Malaysian negotiators privately cited figures of US$2 billion to US$3 billion.

Granted, Muhyiddin also had reason to want a deal. He leads an unstable coalition, and extracting a fat payment from Goldman will bolster his hopes of enhancing his majority through a possible early election. Muhyiddin’s allies in the United Malays National Organization will also be happy to see 1MDB put to bed. Umno is the party of former Prime Minister Datuk Seri Najib Razak, who faces multiple charges related to the fund. Najib says he is innocent; a verdict in one of those trials is due Tuesday. The government and the Wall Street firm will be content to have reached a deal before then.

For Goldman, the clock is also ticking in the US. The bank has been nearing a resolution with the Justice Department and has appealed to its highest ranks, with Attorney General William Barr overseeing the case, Bloomberg News reported at the end of last month. Failure to reach a settlement before November’s presidential election would risk Goldman having to start again with a new administration that may be less friendly to Wall Street.

Political hostility could also be fanned by the bumper results that Goldman reported this month, providing another incentive to conclude an early settlement. A surge in trading revenue helped the company report second-quarter net income of US$2.42 billion, after setting aside almost US$1 billion for litigation and regulatory proceedings.

One quarter of profit is a small price to pay to move on from a debacle of this magnitude. It’s money well spent.