The Malaysia Scandal Is Starting to Look Dire for Goldman Sachs
By Matt Taibbi, Rolling Stone
01 January 19
A pioneering twist on third-world corruption might be the biggest scandal
the Vampire Squid has ever faced
Goldman Sachs, which has survived and thrived despite countless scandals
over the years, may have finally stepped in a pile of trouble too deep to
escape.
There's even a Donald Trump angle to this latest great financial mess, but
the outlines of that subplot - in a case that has countless - remains vague.
The bank itself is in the most immediate danger.
The company's stock rallied Thursday to close at 165, stopping a five-day
slide in which the firm lost almost 12 percent of its market value. The
company is down 35 percent for the year, most of that coming in the past
three months as Goldman has been battered by headlines about the infamous
1MDB scandal.
Just before Christmas, Malaysian authorities filed criminal charges against
Goldman, seeking a stunning $7.5 billion in reparations for the bank's role
in the scandal. Singapore authorities also announced they were expanding
their own 1MDB probe to include Goldman.
In the 1MDB scheme, actors tied to former Malaysian Prime Minister Najib
Razak allegedly siphoned mountains of cash out of a state investment fund.
The misrouted money went to lavish parties with celebrity guests like Alicia
Keys, a $35 million jet, works by Monet and Van Gogh, property in New York,
Los Angeles and London, and (ironically) the funding of the movie The Wolf
of Wall Street.
The cash for this mother of all bacchanals originally came from bonds issued
by Goldman, which earned a whopping $600 million from the Malaysians. The
bank charged prices for its bond issuance that analysts believe were
suspiciously high - like a massage price that suggests you're probably
getting more than a massage.
Najib lost re-election in May, ending a 61-year reign for his party.
National anger over 1MDB was a major reason for his downfall. The prime
minister was allegedly central to the scam, which involved luring investors
to national development projects that mostly never took place.
His election loss was a turning point. Until that time, international
authorities had been unable to obtain cooperation from the Malaysian
government, which under Najib insisted no crime had been committed.
Najib was one of the first world leaders to congratulate Donald Trump on his
win in 2016. At least at one time, the two men were pals. They golfed
together once at the Trump National Golf Club in Bedminster, New Jersey.
Najib even claimed he had an autographed photo on his desk from Trump
reading, "To my favorite Prime Minister. Great win!" Trump hosted Najib at
the White House last year, thanking the soon-to-be-ousted leader for "all
the investment you've made in the United States." Najib appeared to stay at
one of Trump's hotels on that trip.
On November 30th of this year, the Justice Department filed a civil
forfeiture suit targeting more than $73 million funneled into the country by
1MDB players. There is email evidence the money may have been intended to
help influence the Trump administration to drop the case.
But Najib's electoral loss changed the picture. With his ouster, the new
Malaysian government was suddenly eager to help outside investigators.
"It completely reversed the situation," says John Pang, a former policy
adviser to the prime minister's office in Malaysia. "Before, you essentially
had the victim saying there was no crime. Now, you had the Justice
Department meeting with a 1MDB task force in Kuala Lumpur."
The change resulted in a string of new indictments, suits and prosecutions
surfacing in the second half of 2018. At year's end, Goldman is known to be
under investigation in the U.S., Singapore and Malaysia, while 1MDB probes
are ongoing in at least 10 countries. Goldman has seen two ex-employees
criminally charged in the U.S. since the summer, one of whom pleaded guilty.
What really set Wall Street afire was a pair of fall revelations. On
November 8th, the Wall Street Journal reported longtime Goldman CEO Lloyd
Blankfein - who stepped down on October 1st to "pursue other interests" -
met on more than one occasion with one of the most infamous figures in the
1MDB scandal, Low Taek Jho, better known as "Jho Low."
In that same week, Bloomberg reported Blankfein was an "unidentified
high-ranking executive" in court filings associated with the case.
This was devastating news. The key question about 1MDB had always been
whether the thefts were the actions of a few "rogue" bankers in a foreign
outpost, or if the scam snaked higher.
The mere mention of Blankfein's name in conjunction with a 1MDB court filing
sent Goldman's share price into freefall.
The closing price of Goldman stock on November 8th was $231.65. By November
12th, after investors had a weekend to digest the WSJ and Bloomberg
articles, it had fallen to $206.05, reaching a low of $151.70 before
bouncing back up a bit this week.
Goldman has been forceful in addressing the charges that Blankfein met with
Low. Reached for comment this week, the bank said it has identified three
meetings at which Low might have been present, but has only been able to
confirm Low's presence at one.
"Mr. Blankfein had an introductory, high-level meeting in December 2012 with
the CEO of Aabar, which was an existing client of the firm," says company
spokesman Michael DuVally. "At Aabar's request, Mr. Low accompanied the CEO
to that meeting."
Duvally insists, however, that the firm has no evidence of any contact more
extensive than that.
"Mr. Blankfein does not recall any one-on-one meeting with Mr. Low, nor have
we seen any record to suggest such a meeting occurred."
In December, outside analysts predicted the bank might need to set aside $1
billion or more for penalties. The company is having ongoing conversations
with the Justice Department, but has not discussed numbers yet.
In addition to the Malaysian action seeking $7.5 billion, the company is
facing two more class-action lawsuits filed by investors, and a significant
amount of negative press.
For all that, the scandal is still not well understood. 1MDB was a twist on
third-world kleptocracy, one that exposed a new flaw in the global financial
system.
Dictators have always plundered national riches. But they could only steal
assets that existed. For instance, in former Zaire, now the Democratic
Republic of Congo, Mobutu Sese Seko shifted profits of mineral sales to
private accounts. In the Philippines, Ferdinand and Imelda Marcos swiped
proceeds of sales of sugar, tobacco, bananas, coconuts and everything else
they could get their hands on. Saddam Hussein stole oil revenues.
Malaysia is rich in copper, timber and oil. But Najib and his cohorts didn't
have to steal any of those resources.
"He didn't steal diamonds or bananas. He stole debt," says Pang. "This is
something completely new. And he couldn't have done it without a bank the
size of Goldman."
The Stanford-educated Pang was inadvertently thrust into the 2016 campaign
news cycle when a memo he wrote to White House officials questioning Barack
Obama's support of Najib was outed by Wikileaks. His memo is in the Podesta
emails.
He's now living in the U.S. for fear of his safety after speaking out
against 1MDB, around which, on top of everything else, there has been
considerable violence.
Pang believes the public still hasn't grasped the significance of 1MDB. The
scandal showed that all it takes is a corrupt official and a morally
flexible bank office to generate billions in public losses.
"All [Najib] needed was a signature and a couple of Goldman bankers," he
says.
1MDB was a sovereign wealth fund, "owned and controlled by the Malaysian
government, through its Ministry of Finance," as our Justice Department put
it in one of its court filings.
This fund was ostensibly created for development projects on behalf of the
Malaysian people, in areas like "energy, real estate, tourism and
agribusiness."
Over the course of three major bond issues, 1MDB raised about $6.5 billion
from investors around the world. According to the U.S. government, about
$2.7 billion of that money was misappropriated and "distributed, in part, as
bribes and kickbacks" to help keep the scheme going.
Other monies reportedly ended up in the hands of a small group of corrupt
insiders close to Najib, who then laundered the cash via one of the great
spending sprees of our time.
The key figure was Jho Low, who is currently an international fugitive and
allegedly spent awesome sums ripped from the 1MDB pot. The chubby-cheeked
Low, tabbed the "Billion Dollar Whale" in a book about the scandal by Tom
Wright and Bradley Hope, is said to have used 1MDB funds to become an
instant "Asian Great Gatsby," traveling the planet and hurling cash in all
directions, including parties in Vegas and London. The book claims he spent
up to $500,000 on single parties that featured performances by the likes of
Lady Gaga and Dr. Dre. Low was basically the Malaysian version of Jeff
Spicoli hiring Van Halen to play his birthday party.
The idea that a figure as prominent as Blankfein might have granted a
meeting to so incautious a figure as Low - who reportedly once used
stationary from the Sultan of Brunei to procure seats at the London
nightclub Chinawhite - is part of what has Wall Street so shaken. It's a
little like hearing the Pope was taking selfies at the Adult Video awards.
"It explodes the myth of the solemnity of these guys," is how Pang puts it.
Until recently, conventional wisdom held 1MDB was a scheme cooked up by the
two Goldman bankers on the ground: Malaysian-born Roger Ng and German-born
Tim Leissner, the husband of "hip hop's original first lady," Kimora Lee
Simmons.
Ng has already agreed to return about $29 million. Leissner has already
pleaded guilty and agreed to return $43.7 million, while also admitting that
upwards of $200 million flowed from 1MDB to accounts that he and a relative
of his controlled.
As the Times put it in November, Goldman has tried to cast Leissner as a
"rogue" employee. But it's now apparent the story is far more complex.
According to Wright and Hope's book Billion Dollar Whale, for instance,
Goldman's Asia President, David Ryan, was suspicious of some of the deals in
the third bond issue. Ryan was troubled by the news the deal had reportedly
been sealed by just a conversation.
After all, a $3 billion bond issue would normally involve banks fighting
tooth and nail with detailed written proposals. But senior Goldman
officials, including then-bank president and former senior Trump economic
adviser Gary Cohn, reportedly overrode Ryan's objections and supported the
deal.
What was in it for the bank? About $600 million in fees. Goldman may have
made some of that money on gains while it held the bonds, i.e. not all of
that widely quoted sum was a pure fee. Also, the deal was unusual in that
the bank purportedly held all the risk on the bonds for a long time, as much
as a year in the third transaction.
Still, Goldman charged Malaysia what by all accounts was a beyond-exorbitant
price. The Billion Dollar Whale authors asserted the bank earned "two
hundred times the typical fee."
Clare Brown of the Sarawak Report, who broke many of the early stories about
1MDB, was writing about Goldman's pricing a long time ago. In one story in
2013, she noted that when the bank earned $196 million in one transaction,
that represented "around 8.8% of the issue's total nominal value rather than
the normal rates, which might be expected to amount to around 0.25%,
according to traders."
Reached by email this week, Brown said recent events only bring what was
obvious some time ago into greater focus. "Basically, anyone with any
knowledge of the markets and banking could see this deal was fishy as hell,"
she says, adding, "What is absolutely clear is there is no way the bosses of
the bank could have failed to see what a mere onlooker like myself was
calling out back in 2013. They ALL HAD TO KNOW."
"Should have set alarm bells off around the globe," is how market analyst
Eric Salzman, who writes the humorous MonkeyBusinessBlog, puts it.
Goldman has survived many scandals in recent years. The bank paid $550
million to settle the infamous "Abacus" affair, in which Goldman helped
hedge fund investors create a born-to-lose mortgage investment product to
bet against.
Then they agreed to pay another $5 billion to settle claims of improper
"packaging, securitization, marketing, sale and issuance of residential
mortgage-backed securities" between 2005 and 2007.
But 1MDB is both a financial and existential threat to the bank. In its most
recent quarterly filing, Goldman said it expected to face "significant
fines, penalties, and other sanctions," as individuals and nations alike
will be scrambling to recover pilfered funds.
The larger damage may be to the bank's name. The apparent inability of
Goldman's internal control mechanisms to question the source of a
mysteriously lucrative $600 million bond deal sent a powerful signal to
investors.
"Were those fees worth the reputational damage?" asked Bloomberg.
"People are cynical, of course, and think they'll still get away with a
fine," says Pang. "But this is as serious a situation as they've faced."
What's kept the financial system together since 2008 is a widespread belief
that even if bankers at places like Goldman are greedy or amoral, they're at
least sharp in a self-interested way, "the smartest guys in the room." We're
now finding out that even that last part might not be so true. Greedy,
amoral and not too bright: Welcome to the modern financial system.
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