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Malaysia claim of Goldman cheating is a bit rich
[HONG KONG] Malaysia's call for a refund from Goldman Sachs is a bit rich. Prime Minister Mahathir Mohamad's administration says the country was cheated and wants back US$600 million of fees and revenue the investment bank generated for arranging US$6.5 billion of bonds for disgraced sovereign fund 1MDB. There is plenty of blame to go around, though.
The scandal occurred while Dr Mahathir's predecessor Najib Razak was in charge. He gave Jho Low, a young financier, enormous influence over the fledgling investment fund. Low stands accused by US authorities of using it to mastermind a giant fraud. A fugitive, he maintains his innocence.
Money was being siphoned out of 1MDB before Goldman started raising debt for it. Billion Dollar Whale, a new book on the saga, details assurances that fund executives provided to early sceptics, suggesting weak oversight at the least.
This also wasn't a case of a duped buyer. One US$3 billion bond came with a so-called "letter of support" from the Malaysian government that would have been validated by other officials. The securities were plain vanilla, not the kind of complex derivatives that have stung other governments. And Malaysia got its money, before it was allegedly misappropriated.
For its part, Goldman's global compliance committee overlooked red flags in its dealings with 1MDB. But the bank says it was deceived by its own employees. One of them, Tim Leissner, a former partner, has pleaded guilty to conspiring to launder money and other charges. Goldman chief executive David Solomon told staff last week that he is "outraged" by employee actions outlined by prosecutors.
If US authorities ultimately impose, and collect, fines from Goldman, they could hand some of the proceeds over to the South-east Asian nation. In September, for example, as part of a foreign corruption settlement with Brazilian oil company Petrobras, the country received 80 per cent of a nearly US$900 million penalty. There also may be some reimbursement from US Department of Justice efforts to recover assets bought by some of the US$4.5 billion it says was misappropriated from the fund.
Malaysia's prime minister no longer also serves as finance minister, a reform that reduces the scope for abuse. Dr Mahathir, though, has admitted there was corruption even during his last turn in power. The 1MDB affair doesn't reflect well on Goldman, but it's also not obvious how much restitution Malaysia deserves.
Malaysia wants to reclaim the money its sovereign fund 1MDB paid Goldman Sachs to arrange bond offerings, as well as losses from paying higher interest than the market rate, the country's minister of finance, Lim Guan Eng, said on Nov 13.
The US investment bank generated about US$600 million in fees and revenue for its work with the Malaysian fund, which included three bond offerings in 2012 and 2013 that raised US$6.5 billion.
"The Malaysian government will want to reclaim all the fees paid, as well as all the losses including the interest rate differential," Lim told reporters. He said the rate Malaysia received was about 100 basis points higher than the market rate.
Prime Minister Mahathir Mohamad told CNBC on Nov 13 that "obviously we have been cheated through the compliance by Goldman Sachs people". The bank denies any wrongdoing.
The US Department of Justice has said about US$4.5 billion was misappropriated from 1MDB between 2009 and 2014.
Earlier in November, US prosecutors filed criminal charges against two former Goldman bankers. One, Tim Leissner, pleaded guilty to conspiracy to launder money and conspiracy to violate the Foreign Corrupt Practices Act, and agreed to forfeit US$43.7 million.