Berkshire adds to BofA stake; global banks conform to new Hong Kong reality

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Settled

Goldman Sachs has agreed to pay the Malaysian government $3.9 billion to cover losses the country suffered from the 1MDB investment fund scandal, the Financial Times reports Friday. “The settlement includes a cash payment of $2.5 billion to the Malaysian government as well as a Goldman guarantee that Kuala Lumpur will receive at least $1.4 billion in assets acquired with proceeds misappropriated from 1MDB.”

“A person familiar with the matter said that as part of the settlement, Malaysia would drop criminal charges against three Goldman units accused of helping ‘dishonestly misappropriate’ $2.7 billion from the 1MDB bonds issued in 2012 and 2013. Kuala Lumpur would also end legal proceedings against 17 former and current Goldman directors accused of misleading 1MDB bond investors. Legal proceedings against two former Goldman bankers accused of taking part in the fraud would continue.” Financial Times, Wall Street Journal

Goldman Sachs “is pointing to blowout second-quarter trading results as part of its bid to convince the Federal Reserve it has demanded the bank hold too much capital for an economic downturn. The bank was told to widen its capital buffer last month after a stress test that assumed significant trading losses, but Goldman is arguing its actual performance proved the business was ‘countercyclical,’ according to a person familiar with its position.”

Receiving Wide Coverage ...

The plot thickens

Ernst & Young gave Wirecard a passing grade in early June, just weeks before the company went bust “in one of Europe's biggest accounting frauds,” the Financial Times reported Thursday. “The draft opinion rejected allegations made by whistleblowers as well as serious concerns raised by a KPMG special audit into Wirecard’s accounting which was published in late April. KPMG’s report, which Wirecard commissioned last year to allay concerns over its accounting, had stunned investors after the firm was unable to verify the existence of half of the payment group’s business and €1 billion of cash.”

In its June 2 draft opinion 2, EY said that “based on the findings of our audit, the attached annual financial statements comply in all material respects with German commercial law applicable to corporations and give a true and fair view of the net assets and financial position of the company.”

But EY may have been duped, according to the Wall Street Journal. “Philippine investigators say they have identified dozens of people and entities of interest in their probe into Wirecard and are focusing on two bank employees who may have facilitated a multinational accounting scandal at the insolvent German payments company. Wirecard had claimed some $2.1 billion in cash on its balance sheet had been transferred to accounts at two Philippine banks. Both banks—Banco de Oro and Bank of the Philippine Islands—denied the accounts existed, and officials say the money never entered the country’s financial system.”

But Mel Georgie Racela, executive director of the Philippines’ Anti-Money Laundering Council, said his investigators are focusing on two “rogue bank employees”—one from each of the two banks—who might have “forged the documents that Wirecard used to mislead auditor Ernst & Young about the existence and location of the missing funds. Mr. Racela said 55 other individuals and entities are among those the AMLC is seeking information on.”

Renowned short seller Jim Chanos told the FT that his firm made almost $100 million shorting Wirecard stock. “If you’re a fundamental short seller, the Wirecard story was a classic,” he said. “The buzzwords, the numbers that didn’t make sense, the business model that seemingly didn’t make sense.”

Wall Street Journal

Bending to reality

“Western banks appear to be bending to the new reality” in Hong Kong, where China is tightening its grip following imposition of a new national security law. “They have been careful not to say anything critical of Chinese policy or the national-security law, which is designed to curb dissent and rolls back the autonomy of Hong Kong’s governance that was in place since the 1997 handover of the city from British rule.”

“They have a lot at stake. Many U.S. and European banks that hire thousands of people in Hong Kong are trying to establish a bigger presence in mainland China. Goldman Sachs, JPMorgan Chase and Morgan Stanley recently received approval from Chinese authorities to own the majority of their securities units on the mainland, giving them better access to a giant market they have long coveted. Beijing is betting the former British colony will grow into a bigger and more lucrative capital-raising hub for Chinese businesses.”

Financial Times

Bargain hunting

“In a sign of confidence for the beaten-down U.S. banking sector, Warren Buffett’s Berkshire Hathaway increased its stake in Bank of America by more than $800 million this week. Berkshire’s purchase of 34 million shares represents a 4% increase in its holding, which is now worth some $24.1 billion,” or an 11.3% stake in the bank.

“Both BofA’s shares and the KBW Bank index have fallen about 30% since coronavirus first shook markets in February. The purchase of more BofA shares comes after Berkshire sold off the vast majority of its stake in Goldman Sachs earlier this year and trimmed its position in JPMorgan Chase. It also slightly reduced its exposure to U.S. Bancorp and Bank of New York Mellon in the first quarter.”