1MDB probe raises questions for Goldman

IFR 2092 18 July to 24 July 2015
5 min read

A LITTLE OVER two years ago, I asked in this column whether a bond issue could ever decide the outcome of a national election. I was referring, of course, to a US$3bn private placement from Malaysian government investment vehicle 1MDB in the weeks leading up to Malaysia’s general election.

In May 2013, the vote went in favour of Najib Razak and the incumbent Barisan Nasional coalition, and the controversy surrounding the under-the-radar debt deal – and the money Goldman Sachs made from it – died down.

But the outcry over the state of 1MDB’s finances has now reached such a level that the Prime Minister’s position may now be at stake. The Public Accounts Committee and others are investigating, and I wonder to what extent the Goldman financings will be the subject of those inquiries.

Full transparency is the only course of action, and 1MDB has yet to fully explain why it felt the need to offer such exorbitant returns on debt that ranks pari passu with Malaysia’s other sovereign bonds. Perhaps our friends at Goldman can provide some answers.

GOLDMAN HELPED ESTABLISH 1MDB as an enterprise in 2009, eyeing power projects, real estate development and tourism.

While the story of how a company with such a short history came to be encumbered with a raft of debt – estimated at US$11bn-equivalent – has been a field day for Malaysia’s opposition politicians, Goldman has largely been left out of the headlines.

Charging what were rumoured to be exorbitant fees and placing debt at off-market pricing is hardly likely to raise the ire of the man in the street, whether in downtown Kuala Lumpur or on the boardwalk in Kota Kinabalu.

Goldman’s star Malaysia coverage banker Roger Ng left in 2014, to “do his own thing,” according to various media reports published at the time, but not before helping the US bank rack up fees on privately placed bonds and loans on which apparently astronomical commissions were paid. The total wallet for Goldman from 1MDB is likely to have run into the hundreds of millions of dollars.

The 1MDB transaction that really raised eyebrows, the US$3bn private placement at the end of March 2013, handed the US bank – according to my calculations at the time – a return of anything up to US$700m in fees and secondary market capital appreciation.

Were my calculations on the nail? I expect we will never know for sure, but much political capital was made by the opposition in the run-up to the 2013 general election concerning that trade. More recently, former prime minister Mahathir Mohamad has mentioned it in his criticisms of 1MDB.

As it presides over the 1MDB enquiry, the PAC has the right to summon individuals to testify before it. Who will they invite, and what questions will they ask? The answers to any questions raised before the PAC will be in the public domain, and one hopes that the interrogators will acquit themselves with aplomb in the eyes of the Malaysian electorate.

Perhaps the PAC will decide to look more closely at that March 2013 deal and in the process will establish the veracity of my call. To do this, it will need to summon Goldman bankers to appear.

THE COMMITTEE SHOULD ask Goldman to provide documentation setting out Goldman’s fees on the deal and any other pertinent covenants such as options clauses, carve-outs and its liability in the event of debt restructuring.

In relation to the private placement, it might want to ask to see sales tickets, time-stamped with relevant Euroclear or Cedel account numbers and the name of the counterparty which bought the paper. It could also ask for voice recordings relating to the transaction, something every bulge-bracket investment bank keeps as a matter of compliance.

This is not to impugn Goldman Sachs. It is to make the point that if the Malaysian government, the opposition and concerned parties are seeking to draw a line under the 1MDB “issue”, they should muster every conceivable means at their disposal to put the Malaysian public’s mind at rest once and for all.

Goldman should also welcome the chance to set the record straight, so it can get back to business as usual. Hiring the US bank is, for the time being at least, off the menu in Malaysia.

The PAC is expected to continue to call witnesses for the rest of the summer and may not make a ruling on the case until the autumn. Whatever the outcome, however, it’s clear that 1MDB’s financings have become more political than ever.

Jonathan Rogers