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Solomon’s fines

22 October 2020 By John Foley

For Goldman Sachs, paying less than $3 billion to the U.S. Department of Justice to draw a line under its failings in the long-running 1MDB bribery scandal would be a trifle. That’s the settlement coming any day now, according to news reports. But years of bad behavior – not limited to Goldman’s work for the infamous Malaysian sovereign wealth fund – have drained away shareholder value equivalent to many times that sum.

Since 2012, the firm now run by David Solomon has put aside just under $12 billion to cover litigation and regulatory charges. Most of that pertained to 1MDB – which also brought a $350 million fine from the Hong Kong regulator on Thursday – and a 2016 rap for mis-selling mortgage securities. But other allegations of turpitude have played their part, like failing to prevent analysts passing on illegal stock tips, undisclosed political contributions, leaking confidential regulatory information, and manipulating foreign-exchange markets.

The cost of provisions for all these works out at around $1.4 billion a year. That’s substantially more than the average of $840 million a year Goldman spent on office rent over the same period, or the $900 million it disbursed for communications and technology.

Think of what Goldman could have done without fines and the like. For example, the firm would have added around 1 percentage point to its return on equity each year. That would have benefited Solomon too. His rewards are partly calibrated to that metric, and he may lose part of his 2018 bonus because of 1MDB.

Or Goldman could have made acquisitions, like rival Morgan Stanley, whose boss James Gorman this year set out to buy both brokerage E*Trade and asset manager Eaton Vance. It’s unlikely regulators would have allowed Solomon to do anything similar. Goldman and Morgan Stanley started 2020 with roughly equal market capitalizations. Now Gorman’s firm is larger by over $20 billion.

Goldman is one of the few banks that discloses clearly how much it is setting aside to meet legal penalties. So just as investors could see the sums mount, they should now see them shrink again. And five years since the scandal broke, shareholders may be comforted to finally get closure on 1MDB. But the cost of bad behavior won’t go to zero. 1MDB is a particularly egregious example. But for Goldman’s rivals, too, setting aside money for fines and lawsuits has literally become another cost of doing business.


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