A COLOURFUL CASE of financial shenanigans is unfolding in Hong Kong. Although relatively small in absolute terms, the collapse of a local money lender is notable in that a lot of the cash which has gone missing was stumped up by the city’s investment banking community.
I have a tangential relationship to it in that I know some of the people involved, having drunk with them over a decade ago during what might well be described as the halcyon days of the Asian markets, where bonuses and expense accounts were unconstrained, the characters larger-than-life and – as this story seems to show – more than a little bit Wild West.
Global Merchant Funding began life as a factoring business set up to provide short-term cash advances to companies in Hong Kong against future credit card receipts. It also later set up a subsidiary providing peer-to-peer mortgage lending.
I recall hearing the pitch swirling around whatever was the favourite financiers’ bar of the time in Lan Kwai Fong – I can’t recall which one.
Plenty of big hitters from the DCM and equity sectors of Hong Kong’s investment banking community invested in GMF, so the pitch must have been convincing. I scratched my head, however, when I learned last week those investors were lured by something as simple as loan notes with coupons ranging from 8%-14% in the early days of GMF’s establishment back in 2008.
Perhaps those kind of returns were approximately parallel to the coupons which could be booked in Asia’s high-yield bond market before the bubble burst eight years ago, although the returns at the top end enter the realm of the ridiculous. Indeed it seems back in 2014, the company was looking to issue three-year loan notes with 16% coupons, a return which screams “too good to be true”.
Some 65 investors placed a total of US$48m in the GMF notes, while another US$10m was invested by 55 investors in notes issued by the company’s mortgage lender, GMF Finance. All US$58m seems to have gone missing, while the company’s directors are similarly unaccounted for, their whereabouts unknown since the start of the year. The liquidators are in charge, and the Hong Kong police are investigating.
IT’S INTERESTING HOW cases of this kind tend to emerge under the shadow of financial crises. When I look to the show-stopper currently on display in the Singapore courts - that of Malaysian government-owned investment company 1MDB - it seems to me that had the Global Financial Crisis not happened in 2008, there probably would have been no 1MDB. Crisis allows opportunists to take on the mantle of calm when all else is disintegrating. Providing cash advances against a backdrop of panic is one such example.
In the case of 1MDB, it’s about being seen to be doing something for the national good in the face of global chaos. “To drive sustainable economic development by forging strategic global partnerships and promoting FDI.” That’s 1MDB’s mission statement, published on its website.
The company was founded in 2009. I wonder if it would have emerged had it not been for the crisis which kicked off the year before. After all, crisis equals opportunity.
As for the latest on 1MDB, the first criminal trial linked to the investment company is ongoing in Singapore, involving Yeo Jiawei, who is accused of perverting the course of justice by tampering with witnesses involved in the management of accounts at BSI bank in the city state, where he was a star private banker. A separate trial involving charges of money laundering is scheduled for Yeo next April.
This might have been thought to provide embarrassment to the government of prime minister Najib Razak, particularly since Jho Low, who is widely seen as the mastermind of the 1MDB farrago, has been mentioned in the Singapore court proceedings.
He has also had Singapore bank accounts linked to 1MDB frozen and has been cited in a US Department of Justice civil case which seeks to reclaim US$1bn of assets allegedly siphoned from 1MDB and laundered in the US, a case that Low’s family is contesting.
BUT IT SEEMS it’s business as usual for Mr Najib, who spent last week on a visit to China to drum up investment in Malaysia during a speech in which he warned former imperial powers against lecturing their ex-colonies. He didn’t refer directly to 1MDB, but it doesn’t take a genius to read between the lines.
China has offered Malaysia soft loans for infrastructure projects during Najib’s visit, which handily have a seven-year interest holiday.
And it’s hardly a stretch to imagine that China could figure in resolving the service and redemption of 1MDB’s massive debt pile in return for a first look at lucrative business deals in Malaysia and the chance to consolidate its growing power in the region. Crisis does indeed equal opportunity.
