Goldman Sachs Fined Billions; Will This Control Greed?

Goldman Sachs Tower

Even in the frenetic run-up to the U.S. election of 2020, the news regarding Goldman Sachs this week was electrifying.  The venerable New York-based firm, one of the largest investment banks and financial services firms in the world, and a prominent market maker and intermediary in the U.S. Treasury securities markets, admitted its Malaysian subsidiarity was at the center of a massive financial fraud involving the theft of billions from 1MDB, a Malaysian sovereign fund.  The riveting 2018 book by Wall Street Journal investigative journalists Tom Wright and Bradley Hope, Billion Dollar Whale, documents the fraud and Goldman’s role.

Goldman, whose alumni (Robert Rubin, Henry Paulson, Steve Mnuchin, and John C. Whitehead) have led U.S. government financial institutions for decades, agreed to pay a $2.9 billion global settlement with regulators from multiple countries for its “institutional failures.”  While trying to pin the blame for facilitating the fraud exclusively on its officers in Asia, the firm also acknowledged that its past and current top management and board had failed miserably to head off and then deal with the misconduct once it learned about it. 

Goldman, in my view, is a prime example of the corporate culture where the big win is key to wealth and power.   When Goldman’s executives in Asia were tapped to aid outgoing Malaysian prime minister Najib Razak in establishing the fund in 2009, it was a windfall for them and Goldman’s leaders.  As evidence accumulated that Razak was transferring hundreds of millions to his personal accounts and later when a Malaysian businessman named Jho Low was moving the fund’s assets rapidly around the world, siphoning off hundreds of millions for himself, Goldman continued to advise and reap big fees without objecting.  Apparently, the temptation to look the other way was simply too great for Goldman in both Asia and New York. 

How do you control massive misconduct born of massive greed?  In the wake of the scandal, Goldman revealed it is clawing back a total of $76 million in bonuses paid to Goldman executives directly involved in the scandal—$67 million from five former senior New York executives, apparently including former leaders of Goldman.  The company will also reduce the 2020 pay of the current leadership team by $31 million.  But this is a small part of these executives’ total compensation and may do little to restrain future behavior; it is too easy to consider this a cost of doing business. 

Only a clear corporate purpose, which commits the company to facilitate honest government and private finance, as well as to make money for Goldman Sachs itself, is adequate.  The company must adopt an unyielding goal of restraining the corruption of government leaders if it wants to restrain the greed of Goldman executives.  Otherwise, the temptation will always be to look the other way.