Goldman Sachs famously avoided liability after the Libyan Investment Authority accused the bank of squandering more than $1.5 billion belonging to the country's sovereign wealth fund after the bank plied employees of the fund with "hookers and five-star hotels" before losing all of their money in complex derivatives trades. But as the DOJ ramps up an investigation into the bank's role in the sprawling 1MDB scandal (the federal government believes Goldman helped now-jailed former Malaysian Prime Minister Najib Razak siphon $4.5 billion from the fund), it's looking like the bank (and possibly its ex-CEO Lloyd Blankfein, whose involvement in the scandal was recently revealed by Bloomberg) may not escape culpability this time.
Yesterday, Goldman shares cemented their largest two-day drop since 2010, crashing to a two-year low after Malaysian Finance Minister Lim Guan Eng demanded a "full refund" of the $600 million in fees that Goldman charged Malaysia for the three 1MDB bond offerings underwritten by the bank. Eng also demanded that Goldman repay the "interest-rate differential" that Malaysia paid, which was 100 basis points over the benchmark rate. Goldman has argued that it demanded such high fees because it took many of the unrated bonds on to its balance sheet, increasing its exposure, because Malaysia said it wanted the money "right away" for "development projects". Of course, Goldman had sold the local currency bonds long before 1MDB defaulted in April 2016.
And on Tuesday, Malaysia turned up the heat when the country's 93-year-old Prime Minister Mahathir Mohamad accused Goldman bankers during an interview with CNBC of "cheating" Malaysia (though he also said the country wanted to "see the results" of the DOJ's investigation).
"There is evidence that Goldman Sachs has done things that are wrong," Mahathir said.
"Obviously we have been cheated through the compliance by Goldman Sachs people," he said, without specifying details.
The bank’s compliance controls "don’t work very well," he added.
A Goldman spokesman in Asia declined to comment on Mahathir's comments.
Meanwhile, Mahathir's appointed successor Datuk Seri Anwar Ibrahim told the Malaysian parliament that it needed to take "more aggressive measures" to reclaim the fees and losses "due to the effects on Malaysia’s image".
Speaking on Tuesday, Lim reiterated that Malaysia wanted to reclaim the fees paid to Goldman Sachs, and added that the country would seek damages as well.
"The Malaysian government will want to reclaim all the fees paid, as well as all the losses including the interest rate differential," he said.
Lim did not say how Malaysia would pursue repayment, other than that he would leave it up to the country's attorney general. Though Reuters reported back in June that the country was considering asking the DOJ to force Goldman to repay Malaysia.
Considering that the DOJ has already seized hundreds of millions of dollars' worth of assets allegedly purchased with stolen money, most of which were purportedly bought by Jho Low, the free-spending Malaysian financier at the center of the scandal, it's very possible that the DOJ might honor this request. But with prosecutors reportedly taking a close look at the role played by the bank's former co-head of investment banking Andrea Vella, per the FT, one thing is clear: This is far from over. And although Goldman has set aside hundreds of millions of dollars in legal reserves, investors will increasingly find themselves asking: Will this be enough?