By P. Gunasegaram
US investment powerhouse Goldman Sachs is intimately involved with 1Malaysia Development Bhd’s major bonds issues totalling some RM15 billion, three quarters of the RM20 billion bond issues the national strategic investment company has made so far. Not just that, some RM5 billion worth of bonds for the Sarawak government were also solely managed by Goldman Sachs. Fees are fat – as much as RM400 million. In the fourth article of our second series on 1MDB, we look at why the US investment firm is so intimately connected with 1MDB and the Sarawak government?
In Malaysian politics, it is common to invoke the term “Jewish Conspiracy” for a whole host of ailments, real or imagined that affect the country – from the 1998 financial crisis to the way the West sees us in our daily behaviour.
Mahathir Mohamad
Former Prime Minister Dr Mahathir Mohamad blamed international financier and hedge fund owner George Soros for engineering the 1998 Asian financial crisis by selling down Asian stocks and currencies in a conspiracy to derail the economies of the region.
Yes, speculation may be part of the reason for the 1998 meltdown of Asian markets and currencies but to call it a Jewish conspiracy would be too much even if it is an easy way to get people riled up and it makes good copy in the next day’s newspapers to see our leader chastising a well-known figure in the world’s financial circles.
Likewise it became fashionable for politicians to blame the Jews for the bad publicity that the nation gets in the overseas press such as the Wall Street Journal, New York Times and Bloomberg even if oftentimes we deserved this because of our own dubious actions and reactions.
While our “strategic development company” 1Malaysia Development Bhd or 1MDB, has taken the fashionable way out by blaming political conspiracy for the slew of reports here and in other publications decrying its many moves, one thing it has not been able to do it to attribute it to a Jewish conspiracy.
That’s for good reason because two of its three questionable bonds, involving a total US$4.75 billion or almost RM15 billion, were handled by one of the major Jewish financial firms in the world, and one that played a prominent role in the near collapse of the US banking and financial system in 2008/9, Goldman Sachs.
Goldman Sachs, on whom a slew of unfavourable articles have been written over the years, was the sole arranger of the two loans of US$3 billion and US$1.75 billion and earned very fat fees of an estimated over RM300 million (see table) when the more usual fees for such placements should have been in single digits with six zeroes after them.
Not only does Goldman Sachs earn a special place in 1MDB’s strategically inclined heart, it also endears itself to the Sarawak government which has used it solely in two US$800 million bond issues before with total fees coming up to over RM70 million.
The surprising thing is that all the four bonds listed in the table have been rated A- by rating agency Standard and Poors which is the same as Malaysia’s sovereign ratings. And since the yields at which these bonds have been priced are so attractive, what is so difficult about getting buyers? Why does it have to be Goldman Sachs all the time to place the bonds privately?
Three of the four bonds in the table have been substantially mispriced. For all the three, the placements have been shrouded in much secrecy. For the latest US$3 billion bond, potential bidders had to sign nondisclosure agreements and the terms still seem to be very much under wraps.
While indications are that one of the US$800 million Sarawak bonds was substantially mispriced, the quantum of mispricing for the other may not have been that high.
Goldman Sachs’ involvement, bankers say, may stem from two reasons. One, there may be strong links between those who make decisions for 1MDB and some people in Goldman Sachs. Two, to translate the bond mispricing into cash gains, you need a veil of secrecy to be thrown over the deal so no one knows who is buying and selling and for how much.
A willing intermediary can play such a role, but of course for much higher fees. But even for such dubious and questionable capabilities, it is doubtful that Goldman Sachs has the sole capability – its probably an issue of relationship, convenience and who you can trust as most such deals are.
Goldman Sachs’ particular strength may have been to be able to arrange bond buyers who would be prepared to keep quiet about their purchases from the primary purchasers of the mispriced bonds to whom the bonds would have been directly allocated.
Private placements such as these are useful for these purposes and by having it done offshore many of details of the deal are less likely to eventually get into the public domain. That way no one knows who made the profits on the mispricing and how much.
Recall that 1MDB’s first major bond for RM5 billion in 2009 when it was the Terengganu Investment Authority was considerably mispriced too by as much as RM1 billion but it was arranged by a local investment bank.
Analysts are not sure what would Goldman Sachs liability be if the loans are mispriced and if 1MDB or the Sarawak government can take action against them for not acting in their best interests. But it is likely that Goldman Sachs would have taken steps to mitigate any such risks.
In the US, and internationally, Goldman Sachs has got away with many major conflict of interest situations, for instance selling subprime mortgages for its own account while marketing it in a big way to its clients.
In Greece, it was accused of helping the Greek government mask its deficit using derivatives that circumvented the EU deficit rules. They secretly arranged extra credit for Greece, helping the country on into financial excess, according to reports.
IFR Asia’ Senior Credit Analyst Jonathan Rogers had this to say about Goldman Sachs in Malaysia in an article in June last year: “Goldman Sachs famously was described by Rolling Stone magazine as “a giant vampire squid wrapped around the face of humanity” and whether or not you decide that’s hyperbolic there can be little doubt that when it comes to Malaysia the US house’s putative tentacles are rather extensively and firmly engaged. In this case, with the Malaysian government, at both central and state level.”
Najib Razak
“…Plenty of them (bankers) have been cheesed off with the cosy relationship Goldman enjoys with the Malaysian government. In the case of 1MDB they are galled that the US house’s involvement in the investment company’s metamorphosis from the Terengganu sovereign wealth fund into a plank of Prime Minister Najib Razak’s New Economic Policy (targeting investments in energy, real estate, tourism and agribusiness) has generated what appears to be a fee printing machine.”
Really, is there such a pressing need to use Goldman Sachs in Malaysia? What does it offer that is so special? Why can’t our own investment bankers do these deals if they are all halal and above board?
Tomorrow: More questions for 1MDB
Yesterday: A new name emerges – SRC
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