Goldman Sachs shrugs off Morgan Stanley downgrade, 1MDB suit

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NEW YORK: Goldman Sachs Group Inc shares rebounded as much as 1.3% in early trading on Wednesday after pre-market declines that followed a downgrade by Morgan Stanley analyst Betsy Graseck, who cut her recommendation on the stock to equal-weight as the rival firm faces rippling risk from a multibillion-dollar Malaysian fraud scandal.

Separately, the Wall Street Journal earlier reported that an Abu Dhabi fund sued Goldman over the scandal.

Goldman’s shares closed Tuesday at the lowest since November 2016, bringing its year-to-date drop to 25%. That compares with a 6.4% decline for the S&P 500 financials index.

Graseck in a note writes that it’s unclear how long the 1MDB investigation will take, how much in fines and penalties may be imposed, what costs Goldman will incur to satisfy regulatory demands – and that there may be additional lawsuits, probes and internal reviews yet to come. She doesn’t see the bank’s shares rallying until these concerns are answered.

She expects Goldman will pay estimated fines of US$1.2 billion and return US$600 million in fees; she also forecasts Goldman will halt buybacks for two quarters to recoup the capital impact.

She prefers Bank of America, Citigroup and JPMorgan as ways to play upcoming catalysts that may drive big bank stocks higher, including “a less demanding 2019 stress test, recalibration of the Volcker rule, and a solid trading environment”.

Earlier this month, Goldman’s shares tumbled the most in seven years when Finance Minister Lim Guan Eng said he’d seek a full refund of all the fees it paid for 1MDB deals. The bank’s stock has suffered since prosecutors implicated a trio of Goldman Sachs bankers in the scandal.

Tim Leissner, the bank’s former chairman of Southeast Asia, admitted in a plea that he bribed officials to get the bond deals and said a culture of secrecy at the investment bank led him to conceal wrongdoing from compliance staff.

The firm’s then-CEO Lloyd Blankfein helped forge ties with the country and 1MDB years before Goldman Sachs ever arranged the bond deals at the heart of the probes.