When Goldman Sachs partners — past and present — met to celebrate its 150th birthday this month, the mood was subdued. The crowd of 370 included famous Goldman alumni such as former US Treasury secretary Hank Paulson, one-time New Jersey governor Jon Corzine and the ex-Trump adviser Gary Cohn, all of whom turned out to mark the end of Lloyd Blankfein’s 12 years as chief executive of the bank.
But there was a notable absentee. Tim Leissner, once a star banker who brought in tens of millions of dollars in revenue at his peak, was not among the guests as they sipped their drinks in the Conrad hotel near Goldman’s Manhattan headquarters. Once praised by executives as an example to emulate, Mr Leissner has become a pariah inside the bank, after pleading guilty to bribery, conspiracy and money laundering charges in connection with a vast fraud at Malaysia’s state development fund.
He now poses one of the biggest-ever threats to Goldman’s reputation.
Roy Smith, a former partner and now a professor at New York University, says the fraud at 1Malaysia Development Berhad, or 1MDB, ranks among the biggest crises the bank has faced. “It could conceivably have a much larger price tag on it [than other scandals] because these things escalate over time,” he says.
It is not the first time the bank has been embroiled in crisis. In the 1990s, it faced widespread criticism for its role in the collapse of Robert Maxwell’s media empire. And in 2010 it was fined $500m— then a record for Wall Street — for misleading investors over Abacus, a mortgage-backed security that it sold in the run-up to the financial crash.
But as the full scale of the Malaysian scandal has become apparent, Goldman is under increasing scrutiny over its role in underwriting $6.5bn of bond offerings for 1MDB in 2012 and 2013, a service for which it reaped a hefty $600m in fees and trading gains. After the money was raised, $2.7bn was allegedly siphoned off by the Malaysian financier Jho Low, who is accused of masterminding the fraud, to pay for a lavish lifestyle and to bribe Malaysian officials. The cash allegedly ended up in Van Gogh paintings, Beverly Hills mansions and even financed the Wolf of Wall Street movie — itself a tale of financial excess.
Current and former partners express incomprehension that the firm has been plunged into such a huge crisis by three deals in an obscure market. Questions are being asked openly about who knew what about Mr Leissner’s operations and why Goldman’s extensive compliance operation failed to prevent it.
The bank has attempted to distance itself from the alleged fraud, but those efforts were dealt a severe blow in November when as part of his guilty plea Mr Leissner said that concealing things from compliance staff was “very much in line” with the culture of the bank. Mr Leissner and his lawyers did not respond to a request for comment.
His former deputy, Roger Ng, has also been charged in the US, as has Mr Low. Mr Ng, who is fighting a US extradition request, also faces charges in Malaysia which he has denied. Najib Razak, Malaysia’s former prime minister, is accused of receiving $681m of the funds in his bank account and is facing almost 40 separate charges of fraud, corruption, money laundering and “criminal breach of trust”, which he denies.
As the scandal has gathered pace, investors have dumped shares in Goldman, wiping more than $8.5bn off its market value in the past month. The bank is now under investigation by the US Department of Justice and faces a messy lawsuit brought by Abu Dhabi, which was a guarantor of two of the bonds . Malaysia’s attorney-general hasfiled criminal charges against Goldman, Mr Leissner and Mr Ng seeking fines of more than $3bn. The country’s finance minister on Friday said that the bill to Goldman should be closer to $7.5bn .
US federal prosecutors investigating the 1MDB case identified the environment at Goldman’s Asian operation as a factor in the fraud. “[The] business culture . . . was highly focused on consummating deals, at times prioritising this goal ahead of the proper operation of its compliance functions,” the DoJ wrote in criminal charges against Mr Low.
Chris Kotowski, an analyst at the investment bank Oppenheimer, describes the fraud as “shocking in scale and audacity”. But he also asks how it could have happened “between 2012 and 2014, when banks were paying tens of billions of crisis-related penalties and should have been on high alert. It obviously reflects poorly on Goldman . . . reputationally it is a disaster.”
Goldman has insisted it had no knowledge that Mr Leissner was party to the alleged conspiracy to misappropriate 40 per cent of the proceeds from the bond offerings, or that Mr Low was acting as a middle man to grease the wheels of the deal. But those claims have been undermined in recent weeks by the revelation that Mr Blankfein met Mr Low on two occasions in 2009 and 2012.
This was despite a decision by Goldman’s private bank in 2010 to reject Mr Low as a client because they could not “validate the source of his wealth”.
Mr Low, whose whereabouts remain unknown, has maintained his innocence. In a statement responding to the US indictment, a spokesperson said the 1MDB bond offerings were “undertaken openly and lawfully between experienced, well-regulated financial institutions and government entities”.
The bond offerings were always controversial, due to the high amount Goldman earned from the fundraising and the fact that it acted as a sole bookrunner on such a large deal. The long-term damage to Goldman’s franchise is hard to quantify. Executives say that so far it has been limited to Singapore and Malaysia. But the head of a rival investment bank argues that Goldman “won’t be as aggressive and as cute as it used to be . . . it will lose its edge”.
Analysts suggest that if the allegations are proved the bank could face fines of as much as $2.5bn over the scandal. Malaysia had already asked the bank to repay the $600m it earned from the deal even before the attorney-general called for the $3bn fine. The size of any penalty will depend in part on whether the bank’s lawyers can convince prosecutors that Mr Leissner was a rogue employee, rather than the product of an organisation where the deal mattered above all else.
The scandal could also raise uncomfortable questions about the oversight by some Goldman executives of its Asia operations. Dan Dees, the bank’s co-head of investment banking globally, was a senior executive in the region and Mr Leissner’s boss when all three 1MDB deals were completed. Stephen Scherr, Goldman’s recently-appointed chief financial officer, was global head of the bank’s financing group in New York from 2008 to 2014.
After trawling through emails and documents the bank found no wrongdoing by any employees beyond Mr Leissner and Mr Ng, according to a person familiar with the internal investigation.
The story of how Goldman ended up at the centre of such an outlandish fraud can be traced back 20 years to when the bank hired Mr Leissner, a new vice-president with a CV that boasted stints at JPMorgan and Lehman Brothers. Colleagues recall a bright, energetic banker, firmly rooted in his middle-class upbringing in Germany, where his father had a senior job at Volkswagen.
As he worked his way up through the ranks, he gravitated towards Malaysia. In 2006, he advised MMC Corporation, a conglomerate, on one of the country’s biggest-ever takeovers, a deal that became his calling card in the region.
But as his reputation grew, other financiers started to question his modus operandi. One rival recalls working with Goldman as a joint bookrunner on the initial public offering of a large Malaysian company. After the orders were placed, Mr Leissner tried to falsely claim credit for business that other banks had won. “I challenged him, but he still swore blind that he’d brought [the order] in,” the rival said.
Former colleagues say they became wary of Mr Leissner after he gained a reputation as a womaniser, despite being married to a Goldman co-worker.
Many took the view that this conduct was a personal matter, but others were unnerved that the relationships often appeared to have a business link. In one instance, Mr Leissner was accused of having an affair with an executive at a Malaysian company the bank was advising. When confronted about the potential conflict of interest he denied the liaison, according to people familiar with the matter.
He also had a brief affair with Anis Jamaludin, the daughter of a powerful Malaysian politician, Tan Sri Jamaluddin Jarjis, who died in a helicopter crash in 2015. Mr Leissner arranged an internship for her at Goldman in 2010, despite unease among some of his colleagues.
Ms Jamaludin has since told friends that she believes Mr Leissner instigated the relationship to curry favour with Malaysia’s political elite. “She feels rotten that the only reason he showed interest was to get close to her father,” says one friend. In 2013, he married Kimora Lee Simmons, the American model and designer, earning the pair appearances in the tabloid press.
Mr Leissner arrived at Goldman Sachs’ Asian unit in 1998, a year that has gone down in company legend after a raucous off-site meeting at the Dusit Thani, a luxury hotel in Phuket, Thailand. After a day of PowerPoint presentations, a group of bankers decamped to the poolside bar. As the night drew on, the merriment tipped into impropriety after some male partners went skinny dipping with junior female colleagues.
A handful of scandalised attendees complained to head office in New York. After Mr Paulson, then a senior Goldman executive, found out about the incident, he was furious, according to people who recalled the episode. The banker who was held responsible was disciplined but kept his job.
It is unclear whether the guest list included Mr Leissner. But several former employees say the episode was illustrative of the freewheeling environment at the bank’s Asian operation.
Some recounted other instances of misconduct. One former banker says that in the late 1990s, a superior handed him a “wad of cash” and told him to give it to reporters in Indonesia to secure positive press coverage for a client. Several others say Mr Leissner and some of his colleagues would entertain clients at disreputable bars, where they would be served by semi-naked waitresses.
After the Phuket incident, a contingent of senior American bankers — known internally as “culture carriers” — were dispatched to instil a more buttoned-up way of doing business in the region. “After that, there were no more parties in exotic locations,” recalls one former employee. “All we got were interminable lectures about money laundering and compliance.”
Mr Leissner rose swiftly at Goldman. By 2002 he was made a managing director in the region and in 2006 he joined the elite group of 500 or so partners. The elevation earned him one of the highest pay packets at the bank, ranging from $5m to $7m a year in his prime. “If you get promoted that fast, as a participating partner the pressure is very high . . . you need to keep performing at that level,” says one contemporary.
Another former colleague recalls how Mr Leissner’s star soared after the 2008 crash. “Post-financial crisis, most of the guys that were considered rainmakers . . . didn’t really exist any more,” he says. “They didn’t have the deep set of client relationships to really make things happen like Tim did.”
This person argues that Mr Leissner’s status as someone who “brought in a lot of business” earned him a “certain amount of latitude” in his dealings with clients, and could have earned him less scrutiny over 1MDB. Two of Mr Leissner’s former managers deny the claim and say he faced the same hurdles to get his deals through as any other banker.
One former partner says he believes Mr Leissner “will [try to] take down as many senior people as he can” because he is embittered at being portrayed as a “rogue banker” when Goldman’s extensive procedures and compliance committees signed off on the transactions.
But a key part of Goldman’s defence against allegations of institutional failure will be that there were no “red flags” to mark the banker out as risky before the 1MDB case was uncovered.
Goldman will insist to the DoJ that its compliance practices were strong, an assertion supported by several rival bankers in Asia at the time. “Sometimes they were overly conservative,” says one, although that begs the question of why the alleged fraud went unnoticed.
Mr Blankfein did not mention the 1MDB scandal to the assembled partners at the Conrad hotel party. But David Solomon , his successor as chief executive, did. He told former partners who had seen almost 34 per cent wiped off the value of their shares this year that one person “who was intent upon it” could do a lot of damage. “We will learn from this experience,” he added.
In an earlier version of this story we said Stephen Scherr was based in Asia at the time of the 1MDB fraud; he was based in New York as global head of Goldman’s financing group.