Goldman Sachs Overpays for 1MDB Assets: Tanjong, Genting, and Putrajaya - Essay Sample

Introduction

Goldman Sachs is an investment bank, and it advises its clients on the acquisition of high-value assets. Goldman acted as the investment banking advisor to 1MDB on the acquisition of three high-value assets. For these three purchases, 1MDB overpaid for them. The purchases are as follows:

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Tanjong Energy Holdings

This was the first acquisition of 1MDB. In March 2012, 1MDB paid Ananda Krishnan RM8.5 billion to but Tanjong Energy Holdings, now known as Powertek Energy Group. The amount paid raised eyebrows because, just two years earlier, Ananda had bought Tanjong Group Company at a value of RM8.8 billion. While the two values are almost the same, it is important to note that Tanjong Group had other assets, for example, in the gaming industry, and other businesses. After privatizing Tanjong Group, Ananda sold the gaming components for RM2.1 billion. Simple math shows that the assets left under Tanjong Group were worth RM6.7 billion or less. This first acquisition shows that 1MDB overpaid by at least RM1.8 billion.

Genting Assets

Just five months after the Tanjong Holdings deal, 1MDB announced that it was acquiring Genting Group power assets for RM2.3 billion. Genting Group was at the time held under Mastika Lagenda Sdn Bhd. Concerns arose over the fact that the power supply concession for the assets 1MDB was acquiring was due to expire by February 2016. In a separate announcement, Genting Group announced that it had gained a profit of approximately RM1.9 billion from the sale of the power assets. The terms for the extension of the power concession were made at a low price for power, which would have reduced the value of Genting power assets to RM1 billion, implying an overpricing of RM1.3 billion (http://www.kinibiz.com/story/issues/206275/how-1mdb-overpaid-for-its-power-assets.html).

Jimah Energy Ventures Power Assets

Almost one year after the acquisition of Genting power assets, 1MDB announced another acquisition of a 75% stake in Jimah Energy Ventures Holding for a buying price of RM1.23 billion(http://www.kinibiz.com/story/issues/206275/how-1mdb-overpaid-for-its-power-assets.html). While most market analysts agree this was a fair market price, the annual reports for 1MDB released in 2013 showed otherwise. In the report for the end of the financial year 2013, which was released in March 2013, 1MDB recorded RM1.2 billion in impairment assessment for goodwill but did not specify to which acquisition. This was the same year that 1MDB acquired Genting and Jimah power assets.

When calculations for all the three acquisitions are done, it emerges that 1MDB overpaid for all three acquisitions by a range of RM3.1 billion to RM3.8 billion, in a case where it should have paid in the range of RM8.2 billion to RM8.9 billion instead of the RM12 billion it paid.

To add salt to injury, on 23 November 2015, 1MDB announced that it was selling all the power assets to a nuclear company in China, China General Nuclear, for a total of RM9.83 billion. The shortfall amounts to more than RM2 billion.

The Exploitation of Its Client and Lack of Honesty

In 2012, Goldman Sachs acted as the underwriter for 1MDB for three bond deals. Each of the bonds had 10- year maturity. The first bond, which closed in May 2012, raised $1.75 billion for 1MDB and yielded a 5.99% commission. The second bond closed in October 2012, yielding 5.75% and raised US$1.75 billion for 1MDB. The last bond yielded 4.4% and raised US$3 billion for 1MDB. For these three bonds, Goldman Sachs walked away with an impressive 9.1% of all the profits gained (https://sevenpillarsinstitute.org/the-case-of-goldman-sachs-and-1mdb/). This percentage was almost four times above the rate for a quasi-sovereign bond at that time. According to a report by SCMP, the commission gained represented a huge commission for fixed-income underwriting. For the March 2013 bond deal, Goldman Sachs earned almost $300 million, which was equal to a 10% service charge. These high commissions and service fees show that Goldman Sachs exploited its client and ignore the virtue of honesty in dealing with its client.

Goldman also showed a lack of honesty when dealing with its client in that; it allowed its client to sell its bonds at prices that were well above market prices. The first and second bonds, which yielded 5.99% and 5.75%, were almost 400 basis points above Treasuries and 250 basis points above the rate on Malaysia's sovereign Islamic dollar debt, which was due July 2021.

Also, the fact that the cheapest bond dealing was 100 basis points higher than any other bond at that time shows exploitation on the part of Goldman Sachs. If Goldman Sachs were honest with its client, it would have advised 1MDB to sell the bonds directly to investors through a global offer, rather than use Goldman as the middle man.

The Prime Minister's Involvement and Conduct

Mr Najib's involvement with the 1MDB scandal started on 16 September 2008, when he announced the start of a campaign called 1Malaysia, in which he called for the government, the cabinet, agencies, and civil servants to practice national unity, ethnic harmony and good governance (http://www.bernama.com/bernama/v3/news_lite.php?id=418020).

When 1MDB was formed, it was a state-owned, and Najib was the chairman. Six years since it started, 1MDB had incurred debts of up to 11.1 billion dollars. On 2 July 2015, an expose by The Wall Street Journal showed that about 700 million dollars had been channelled into Najib's bank accounts from 1MDB's account. These allegations stirred uproar, with widespread calls for his resignation. The Wall Street Journal, on 7 July 2015, released redacted documents that showed how the US$700 million was channelled from 1MDB's accounts into Najib's personal accounts (http://www.themalaymailonline.com/malaysia/article/wsj-releases-redacted-documents-online-to-back-up-its-1mdb-najib-money-trai#sthash.Gw29CoFR.dpuf). These documents were proof that indeed Najib was involved in the corruption scandal. The documents' dates show that the transactions were done in March 2013, December 2014, and February 2015.

The task force investigating the allegations reported that on 10 July 2015, Najib's accounts at AmBank Islamic had been closed before The Wall Street Journal reported the transfers of the large sums of money into Najib's accounts. This corruption scandal was widely criticized by the then Deputy Prime Minister, Muhyiddin Yassin. Mr Najib, in response to this criticism, fired Mr Muhyiddin and other ministers who had criticized his leadership (http://www.abc.net.au/news/2015-07-29/malaysia-pm-razak-sacks-deputy-as-corruption-allegations-mount/6655342). The reason for these sackings, Mr Najib said, was to create a more "unified team".

Mr Najib also received criticism for a London-based whistleblower site called the Sarawak Report, which was founded by Clare Rewcastle-Brown, a journalist. In response to this criticism, Mr Najib, in an address to UMNO delegates, made a reference to the site, demanding that "white people" should stay out of his country's affairs and insisted that he valued loyalty above all.

The Malaysian Anti-Corruption Commission, on 3 August 2015, made a statement that the funds that had been channelled into Najib's account, amounting to RM 2.6 billion had come from donors but did not state the name of the donors or the reasons for the transfer of the funds, or why the explanation had come late, because the allegations had been made on 2 July 2015. Later, Wan Adnan Wan Mamat, chief of the UMNO Kuantan division, claimed that Saudi Arabia had donated the money as gratitude for participating in the fight against ISIS (https://web.archive.org/web/20150817121608/http://www.themalaysianinsider.com/malaysia/article/najibs-rm2.6-billion-is-from-saudi-arabia-as-thanks-for-fighting-isis-claim).

On 21 September 2015, U.S. investigators started investigating Mr Najib on the properties bought in previous years by companies owned by Najib's stepson, Riza Aziz, as well as a $681 million payment that had been paid to Najib's account.

On 26 January 2016, Mohammed Apandi Ali, Malaysia's Attorney General, announced that the investigation into the $681 million payment to Najib's account had been closed, and the Anti-Corruption Commission that had been investigating the gift concluded that the gift did not amount to corruption. Apandi had been appointed Attorney General in August 2015, after Najib dismissed the previous A.G., with many speculating that it was due to the 1MDB graft investigation. Apandi then said that the payment was a donation from the Saudi Royal Family (https://www.nytimes.com/2015/07/29/world/asia/amid-1mdb-scandal-najib-razak-dismisses-deputy-prime-minister-and-attorney-general.html).

On 30 March 2016, there were reports from various news agencies, including the Wall Street Journal that Najib and his wife, Rosmah Mansor, had spent over $15 million on extravagant travel expenses and various luxury goods (http://time.com/4277324/1mdb-najib-razak-spending-corruption/).

In July 2016, a lawsuit launched by the U.S. Department of Justice sought to seize assets worth over US$ 1 billion bought by misappropriated 1MDB funds (https://www.reuters.com/article/us-malaysia-scandal-usa/u-s-lawsuits-link-malaysian-leader-to-stolen-money-from-1mdb-fund-idUSKCN10009X). In the lawsuit, "Malaysian Official 1", who was later confirmed to be Najib by Datuk Abdul Rahman Dahlan, had received US$ 681 million stolen from 1MDB, from Falcon Bank (https://www.bbc.com/news/business-37234717). To follow up on the lawsuit, on 15 June 2017, the U.S. Department of Justice issued a civil action in rem to seize assets that were traceable to a conspiracy that aimed to launder money illegally acquired from Investment Company 1MDB. The assets that the Department of Justice sought to seize were located in the U.S., U.K., and Switzerland (https://www.nytimes.com/interactive/2017/06/16/world/asia/1mdb-malaysia-complaint.html).

In response to the June 2017 writ, authorities in Indonesia seized the luxury yacht linked to the 1MDB corruption investigation, acting on behalf of the FBI. Additionally, the producers of "Wolf of Wall Street" agreed to pay $60m to settle claims made the Justice Department that the movie had been financed from funds siphoned from 1MDB.

In July 2018, Najib was arrested at his home in Kuala Lumpur by the Malaysian Anti-Corruption Commission and was later charged with criminal breach of trust, abuse of power, and several counts of money laundering (https://www.channelnewsasia.com/news/asia/najib-razak-charged-in-court-1mdb-corruption-10497402).

The Effect of the Scandal on the Public

The 1MDB had a lot of adverse effects on the public in Malaysia, particularly the economic sector. The scandal is far from over, and it is likely to affect the economy negatively and induce a ratings downgrade (https://www.cnbc.com/2016/01/28/malaysias-1mdb-scandal-denting-growth-oxford-economics.html). Malaysia, which is already suffering from a shift in the price of commodities, which is one of the primary sources of revenue for the government, received this as devastating news.

The 1MDB scandal caused a fall in the value of the Ringgit, which is the national currency of Malaysia. In 2016, the Malaysian currency lost 3% against the greenback in one week, the most significant decline in five days since September 2015. The Ringgit also weakened against the Singapore dollar, with a case where one Singapore dollar could buy RM3. Khoo Shao Xi, a dealer at Phillip Futures, predicted that the Ringgit would weaken against the Singapore dollar by the end of 2016, with one Singapore dollar going for RM 3.10. The decrease in the value of currency also caused a slide in oil prices. In 2016, Benchmark Brent Crude Oil...