Malaysia mess puts Gold­man Sachs in the hot seat

The Pak Banker - - OPINION - Una Galani

An un­fold­ing po­lit­i­cal scan­dal in Malaysia is start­ing to re­ver­ber­ate far from Kuala Lumpur to the down­town New York head­quar­ters of Gold­man Sachs. State fund 1Malaysia De­vel­op­ment Ber­had (1MDB) is at the cen­tre of al­le­ga­tions of graft and mis­man­age­ment. The furore has prompted re­newed scru­tiny of hefty fees the Wall Street bank led by Lloyd Blank­fein earned selling bonds for 1MDB. The af­fair threat­ens to ex­pose a blind spot in Gold­man's pro­cesses for vet­ting sen­si­tive deals.

The latest up­roar was trig­gered by re­ports that al­most $700 mil­lion landed in the per­sonal ac­counts of Na­jib Razak, Malaysia's Prime Min­is­ter. Na­jib de­nies tak­ing any money from 1MDB for per­sonal gain. The coun­try's anti-cor­rup­tion com­mis­sion says the funds came from an un­named donor.

Even so, the in­ves­ti­ga­tions into the source of Na­jib's mys­tery money have in­ten­si­fied ques­tions about the man­age­ment of the fund, which bor­rowed heav­ily to buy power as­sets and fi­nance in­vest­ments in re­cent years, but is now ef­fec­tively be­ing wound down.

Gold­man helped 1MDB raise a to­tal of $6.5 bil­lion from three bond is­sues in 2012 and 2013. Even at the time, the deals were con­tro­ver­sial be­cause they were so lu­cra­tive for the bank. Gold­man earned roughly $590 mil­lion in fees, com­mis­sions and ex­penses from un­der­writ­ing the bonds, ac­cord­ing to a per­son fa­mil­iar with the sit­u­a­tion - a mas­sive 9.1 per­cent of the to­tal raised. That was al­most four times the typ­i­cal rate for a qua­sisovereign bond at the time. It ex­ceeds what Wall Street firms can charge in what has tra­di­tion­ally been their most lu­cra­tive work: tak­ing com­pa­nies public in the United States.

Gold­man was able to book hefty fees be­cause it put its bal­ance sheet at risk for 1MDB, which did not yet have a credit rat­ing. And it wanted to raise a large amount of money very quickly. Yet the bo­nanza has left the bank ex­posed to its client's woes. Malaysian op­po­si­tion politi­cian Tony Pua said ear­lier this year that 1MDB had been "roy­ally screwed" by the deals.

This is pre­cisely the type of sit­u­a­tion Gold­man had hoped to avoid when it over­hauled its pro­cesses for ap­prov­ing trans­ac­tions in 2011. Bruised by post- cri­sis rev­e­la­tions about struc­tured prod­ucts that blew up and a $ 550 mil­lion fine from the U. S. Se­cu­ri­ties and Ex­change Com­mis­sion, the bank's Busi­ness Stan­dards Com­mit­tee in­tro­duced sys­tems for weigh­ing rep­u­ta­tional risks along­side purely fi­nan­cial ones. Busi­ness with gov­ern­ments is sub­ject to a more com­pre­hen­sive re­view.

The fact that Gold­man's as­sign­ments for 1MDB cleared those in­ter­nal hur­dles im­plies they are far from fool­proof. There's no sug­ges­tion that the bank knew of any funny busi­ness at 1MDB. Even so, that a gov­ern­ment-linked ve­hi­cle was so ea­ger to en­gage in in­ex­pli­ca­bly ex­pen­sive fundrais­ing should have sounded alarm bells. In hind­sight, Gold­man must surely re­gret go­ing ahead with the hur­ried trades. Now it needs to pon­der why its vaunted new con­trols failed to weed them out.

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