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Goldman Sachs (GS) released better than expected Q4 and FY2018 results on January 16th.

GS is currently undervalued but the Malaysian 1MDB corruption scandal in which GS is being sued for $7.5B by the Malaysian government is something investors should consider before investing in GS.

Despite this overhang I am of the opinion GS is a worthwhile long-term investment and am encouraged that Berkshire Hathaway increased its GS exposure by in excess of 7 million shares in the first 9 months of 2018.

 

Summary

  • GS is currently attractively valued but there is the $7.5B overhang the Malaysian government is seeking to recover from GS.
  • Priorities are to focus on investments for growth, improve operating efficiency, and to enhance the durability of revenues and earnings.
  • GS continues to shift its funding mix from unsecured long-term debt to deposits. The benefits of this shift are increased funding diversification, lower financing costs, and a capacity to increase business in GS’s bank subsidiaries.

Introduction

My experience as a very new Goldman Sachs (GS) shareholder (GS’s share price has certainly been volatile subsequent to me taking a position in November) reinforces my opinion that investing in high quality companies for the long-term is the appropriate route to follow.

In my November 18th article I indicated that based on my analysis I would be initiating a position in GS within the next 72 hours. In keeping with my full disclosure I acquired 150 shares on November 21st for the ‘side accounts’ within the FFJ Portfolio.

Following this purchase what did GS’s share price proceed to do? It got caught up in the December market swoon and dipped as low as ~$151 by mid-December; the share price has subsequently recovered to the current ~$199 level.

In my previous GS article I touched upon the extent to which Berkshire Hathaway (BRK.a and BRK.b) had increased its exposure to GS; the September 30, 2018 Form 13F is the most current available.

In hindsight I should have acquired more GS shares in December but I chose to deploy funds in other high quality companies; articles regarding investments I made in other companies can be found here.

Malaysia's 1MDB corruption scandal

In my November 18th article I touched upon this well publicized scandal.

There is no denying that the Malaysian 1MDB corruption scandal (the government of Malaysia is seeking $7.5B from GS) is a dark cloud overhanging GS which explains why GS is so attractively valued.

Further high level information can be found here and a CNN interview with Malaysia’s Finance Minister can be found here.

On the January 16th GS earnings call GS provided additional information on this matter.

GS is cooperating with the Department of Justice and other regulators but since this is still an open investigation GS must be careful with what information it disseminates.

GS acknowledges that the people of Malaysia were defrauded by many individuals, including the highest members of the prior government. In addition, one of GS’s former partners has, by his own admission, admitted guilt.

GS continues to investigate whether there is anything that GS could have done better even though before each transaction a considerable level of due diligence is conducted. In the case of the Malaysian transaction, GS inquired whether any intermediaries were involved and GS’s former partner said no intermediaries were involved in the transaction. As detailed in the government's charging documents, GS’s former partner purposely concealed from GS his scheme with Malaysian government officials, IPIC officials, 1MDB and Jho Low.

As part of GS’s due diligence efforts at the time, it sought and received written assurances from both 1MDB and IPIC that no intermediaries were involved in the first 2 transactions. In the final offering, the government of Malaysia itself and 1MDB represented that no intermediaries were involved in the offering. All these representations to GS have proven to be false. Also during this period, 1MDB's outside auditors with access to the books and records issued clean audit opinions.

With respect to Jho Low, GS declined Jho Low's request to open a private wealth account in 2010 because it could not verify the source of his wealth. Out of prudence, it also declined to advise or represent Low on other opportunities he presented to GS in 2011 - 2014.

While the Malaysian government is seeking $7.5B from GS, I strongly suspect this case will be tied up in the legal system for a few years. I am also of the opinion that the both parties will settle for an amount far less than $7.5B.

I strongly suspect GS may be at fault to some extent on this transaction but I think the Malaysian government bears some of the responsibility given that its Prime Minister placed his trust in this Jho Low individual who had just graduated from college. Clearly, GS is not solely responsible for the disappearance of several billion dollars!

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I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to charles@financialfreedomisajourney.com.

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long GS.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.