DBRS Morningstar Comments on Goldman Sachs’ DOJ Settlement

DBRS, Inc. (DBRS Morningstar) commented that The Goldman Sachs Group, Inc.’s (GS or the Company) announced settlements with the U.S. Department of Justice (DOJ) and a number of other governmental and regulatory bodies has no impact on the Company’s ratings, including its Long-Term Issuer Rating of A (high) with a Stable trend. We view the settlements, which are related to the Company’s involvement with 1Malaysia Development Berhad (1MDB) and include a $2.6 billion penalty, as within expectations and another important step in resolving the matter. The Company will also enter into a three-year deferred prosecution agreement with the DOJ, in which one count of conspiracy to violate the Foreign Corrupt Practices Act of 1977 (FCPA) will be filed and later dismissed if GS abides by the terms of the agreement.

To date, 1MDB-related settlements totaled approximately $5.1 billion, nearly all of which has been absorbed by previous accruals. For 3Q20, GS expects to increase its provisions for litigation and regulatory proceedings by $250 million, which is modest in the context of the Company’s earnings generation capacity. For context, on October 14, 2020, GS reported $3.6 billion of net income for 3Q20. The Company also announced that it will claw back compensation from some past and present employees, including the current executive leadership team, a precedent not seen with prior major fines at other institutions.

While the aggregate monetary penalty is large, more concerning to DBRS Morningstar were the lapses in risk management, as well as the negative effect this incident could have on GS’s reputation and franchise. We note that GS has implemented a substantial amount of enhancements to its compliance and internal control functions to address the issues raised by the 1MDB transactions. Some of these enhancements include the creation of a Firmwide Reputational Risk Committee, a Compliance Forensics Program and an Insider Threat Program. Moreover, this issue has been considered in the ratings over the past five years and recent strong financial results indicate that this issue has not had an adverse impact on the franchise. The settlement does not appear to have had any significant impact on the Company’s operations to date and GS is working to secure the necessary exemptions and authorizations from regulators to provide its full suite of products and services to clients to operate. We will continue to actively monitor all of these developments, but we view the potential impact of this matter as having been largely resolved.

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