Goldman Sachs downgraded by Morgan Stanley until Malaysian 1MDB scandal is 'resolved'

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Goldman Sachs’s stock won’t see meaningful gains until the Malaysian government investment fund scandal is resolved, according to Morgan Stanley, which downgraded its rival investment bank on Wednesday.

“It is unclear how long the issue will take to resolve, what the fines and penalties could be, and what costs Goldman Sachs will subsequently incur to satisfy any demands from regulators,” wrote Morgan Stanley analyst Betsy Graseck. “These risks, coupled with potential headline risks in the coming months (additional lawsuits, additional regulatory probes, internal reviews), drive our Equal-weight rating.”

Shares of Goldman Sachs fell 0.2 percent in premarket trading following the Morgan Stanley note.

The company’s shares are down more than 14 percent since it was first reported that a former Goldman partner pleaded guilty and another former Goldman employee was charged with helping steal money from a Malaysian government investment fund known as 1MDB.

Most of the decline in the stock, however, came after it was reported that then-CEO Lloyd Blankfein attended a 2009 introductory meeting with the Malaysian financier later accused of plundering billions from the fund. The U.S. Justice Department unsealed an indictment earlier this month accusing Low Taek Jho with laundering and embezzlement.

Known as “Jho Low,” the financier attend the 2009 meeting between Blankfein and recently-elected Prime Minister of Malaysia Najib Razak.

The bank arranged three bond deals in 2012 and 2013 to fund 1MDB, raising $6.5 billion to supposedly attract foreign investments. However, U.S. authorities accused a Malaysian financier of siphoning billions of dollars from the fund and leveraging the cash to pay bribes.

Though former Goldman banker Tim Leissner has pleaded guilty, the bank has said that Leissner and others duped the firm and sidestepped internal protocols. The Malaysian government is seeking the return of the entire $600 million in fees Goldman generated in helping set up the debt offerings.

“There is a wide range of outcomes on what the fines and penalties could be for Goldman Sachs,” Graseck added. “The ultimate outcome is far from certain. Goldman Sachs could obtain a reduction in penalties based on cooperation and the strength of its compliance program, or face additional fines and penalties for potential violations of other provisions of the FCPA or potential violations of other statutes, including antimoney laundering laws.”

Morgan Stanley has a $226 price target on shares of Goldman Sachs, representing 18 percent upside from Tuesday’s close.

— CNBC’s Hugh Son contributed reporting.

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