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Markets anticipate regulatory reckoning for Goldman Sachs

Chris Hamblin Editor London 22 November 2018

Markets anticipate regulatory reckoning for Goldman Sachs

A Morgan Stanley analyst in the US has pointed to forthcoming regulatory action as her reason for downgrading the stock of Goldman Sachs, expressly stating that its involvement in the 1MDB scandal prompted her firm to demote its stock from 'overweight' to 'equal weight' and to drop the price target from $291 to $226.

This is a perfect example of reputational and regulatory risk coming together to affect a financial firm's fortunes, even before any regulatory pronouncement. 1MDB is an abbreviation for 1Malaysia Development Berhad.

The trade press has quoted analyst Betsy Graseck as saying: "It is unclear how long the issue will take to resolve, what the fines and penalties could be, and what costs Goldman Sachs will subsequently incur to satisfy any demands from regulators. These risks, coupled with potential headline risks in the coming months (additional lawsuits, additional regulatory probes, internal reviews), drive our equal-weight rating."

An 'overweight' rating applies to a stock that accounts for a larger space in a fund manager's portfolio than it does in the benchmark index. The term is likewise used when an investment analyst believes that that stock offers better value for money than most others of its kind, i.e. higher than its benchmark. The opposite of an overweight rating is 'underweight' or 'sell.' A price target is an investment analyst's prediction of the price of a financial security in future and represents an evaluation of future activity.

Lloyd Blankfein, who ceased to be Goldman's CEO last month, was reported recently by the Wall Street Journal to have met Jho Low, the fugitive financier at the heart of the corruption scandal, on two occasions (in 2009 and in 2013) despite the compliance department's attempt at one point to warn him off.

The US Department of Justice, which indicted Jho Low in absentia this month, says that two bankers who worked for Goldman Sachs helped Low by taking part in the looting of the Malaysian sovereign wealth fund, although they apparently did so without the knowledge of their superiors in New York.

A spokesman for Goldman Sachs reportedly told the journal that Blankfein was scheduled on each occasion to meet the now-arrested premier of Malaysia, Najib Razak, to take part in discussions that included the future of 1MDB.

Tim Leissner, one of the two disgraced bankers, used to be the Southeast Asia chairman at Goldman Sachs and a partner at the firm. He pled guilty to conspiracy to launder money and conspiracy to break the Foreign Corrupt Practices Act 1977 in August. In his plea, which was unsealed in a federal court in Brooklyn this month, he reportedly said that it was "very much in line of its culture of Goldman Sachs to conceal facts from certain compliance and legal employees."

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