The near collapse of a state-owned company has rocked the government,
rattled investors, and stirred public outrage
July 22, 2015
In the spring of 2013, Song Dal Sun, head of securities investment at
Seoul-based Hanwha Life Insurance, sat down to a presentation by a Goldman
Sachs banker. The young Goldman salesman, who had flown in from Hong Kong, made
a pitch for bonds to be issued by 1Malaysia Development Bhd., a state-owned
company closely tied to Malaysian Prime Minister Najib Razak.
It was enticing. The 10-year, dollar-denominated bonds offered an
interest rate of 4.4 percent, about 100 basis points higher than other
A-minus-rated bonds were yielding at the time, he recalls. But Song, a veteran
of 25 years in finance, sensed something was amiss. With such an attractive
yield, 1MDB could easily sell the notes directly to institutional investors
through a global offering. Instead, Goldman Sachs was privately selling 1MDB
notes worth $3 billion backed by the Malaysian government. “Does it mean
‘explicit guarantee’?” he recalls asking the Goldman salesman, whom he declined
to name. “I didn’t get a straight answer,” Song says. “I decided not to buy
them.”
The bond sale that Song passed up is part of a scandal that has all but
sunk 1MDB, rattled investors, and set back Malaysia’s quest to become a
developed nation. Najib, who also serves as Malaysia’s finance minister, sits
on 1MDB’s advisory board as chairman. The scandal’s aftershocks have rocked his
office, his government, and the political party he leads, United Malays National Organisation, or UMNO. A state investment company
trumpeted as a cornerstone of Najib’s economic policy after he became prime
minister in April 2009, 1MDB is now mired in debts of at least $11 billion.
Former Prime Minister Mahathir Mohamad, a one-time political mentor who’s
turned on Najib, says “vast amounts of money” have “disappeared” from 1MDB
funds. 1MDB has denied the claim and said all of its debts are accounted
for. The prime minister’s
office declined to comment for this article.
From the moment in 2009 when Najib took over a sovereign wealth fund set
up by the Malaysian state of oil-rich Terengganu and turned it into a
development fund owned by the federal government, 1MDB has been controversial.
Since the beginning of this year—with coverage driven by the Sarawak
Report, a blog, and The Edge, a local business weekly—the scandal has
moved closer and closer to the heart of government, sparking calls for Najib’s
ouster and recalling Malaysia’s long struggle with corruption and economic
disappointment.
Mahathir, who was prime minister from 1981 to 2003, now accuses Najib of
“hijacking” the Terengganu Investment Authority, or the TIA, from the state
government. Not so, 1MDB said in a statement: The state government willingly
“decided to withdraw from the TIA” after the federal government guaranteed the
TIA’s bonds.
That didn’t end the argument. Beginning in March, as public pressure
grew, the country’s auditor general, the parliament’s public accounts
committee, the central bank, and the police have all homed in on 1MDB. The
force of the scandal helped topple the ringgit, the worst-performing currency
in Asia as of July 16, down 8.1 percent against the dollar since the start of
the year. Foreign reserves plunged 20 percent in June from a year earlier.
On July 3, the Wall Street Journal, citing documents from
government probes, reported that investigators believe almost $700 million in
cash moved through state agencies, banks, and companies linked to 1MDB before
eventually finding its way into Najib’s personal accounts. The money reportedly
included two transactions—one worth $620 million; another, $61 million—made in
March 2013, two months before a general election returned Najib to power as
part of the Barisan Nasional, or National Front, coalition.
In a country with no public campaign financing and few strictures on
political donations, the alleged cash flows caused alarm. Before the 2013
election, on March 12, 1MDB Chairman Lodin Wok Kamaruddin and Khadem Al
Qubaisi, then chairman of Abu Dhabi’s Aabar Investments, signed an agreement to
form a joint venture. The following month, 1MDB announced it had raised $3
billion for its share of the partnership. “1MDB opted for a private placement
to ensure the timely completion of this economic initiative,” the company said
in a statement on April 15 of that year.
The timing was controversial. “1MDB may have been created with one of
the key objectives being to raise a slush fund to finance Barisan Nasional’s
election campaigns,” says MP Tony Pua, of the opposition Democratic Action
Party. A statement from the prime minister’s office dismissed the allegations
in the Wall Street Journal, saying they amounted to “political sabotage”
at the hands of “certain individuals to undermine confidence in our economy,
tarnish the government, and remove a democratically elected prime minister.” In
a statement, 1MDB said it “has never provided any funds to the prime minister.”
Malaysia’s biggest-ever financial scandal has spotlighted a colorful cast of
characters—some connected to 1MDB, some not. A politician since the age of 23,
the mustachioed Najib is the eldest son of the country’s second prime minister
following its independence from Britain in 1957, Abdul Razak Hussein, and a
nephew of the third, Hussein Onn.
Najib’s wife, Rosmah Mansor, is an influential figure in her own right.
A former executive at Island & Peninsular, a real estate company, she’s
often lampooned in the local media for her bouffant hairstyle and penchant for
luxury.
Riza Aziz, Rosmah’s
son from her first marriage, is close to a Kuala Lumpur man about town who’s
been linked to 1MDB named Low Taek Jho. Jho Low, as he’s known, is a whiz-kid
dealmaker who exploded onto the gossip pages in 2009. One photo shows the
moon-faced Low partying with California socialite Paris Hilton and clutching a
bottle of Cristal champagne. The prime minister’s stepson co-founded a Los
Angeles company that produced The Wolf of Wall Street, the 2013 film
about lifestyle excesses and criminal exploits in the world of finance; Low got
a full-screen “special thanks” credit at the end of Wolf. Low helped set up
1MDB’s first joint venture, with PetroSaudi International, according to reports
in The Edge and the Sarawak Report.
An additional touch
of glamour comes from Goldman Sachs executive Tim Leissner, a lanky, blue-eyed
German who’s married to former U.S. fashion model and designer Kimora Lee
Simmons, the ex-wife of Russell Simmons, co-founder of New York hip-hop music
label Def Jam Recordings. In September 2013, when Najib and Rosmah traveled to
San Francisco to open a new office of Khazanah Nasional, Malaysia’s sovereign
wealth fund, Rosmah and Simmons were photographed together. Leissner, now
Goldman’s Southeast Asia chairman, was a fixture in Malaysian dealmaking in the
late 2000s. Goldman helped manage billionaire T. Ananda Krishnan’s 2009 initial
public offering of Maxis, Malaysia’s biggest mobile phone service provider.
Goldman established a
close and profitable relationship with 1MDB. From 2012 to 2013, the bank
arranged three bond sales for the company, totaling $6.5 billion. Fees,
commissions, and expenses for Goldman totaled $593 million—about 9.1 percent of
the money raised—according to a person familiar with the sales. “These
transactions were individually tailored financing solutions, the fee and
commissions for which reflected the underwriting risks assumed by Goldman Sachs
on each series of bonds, as well as other prevailing conditions at the time,
including spreads of credit benchmarks, hedging costs, and general market
conditions,” says Hong Kong–based Goldman spokesman Edward Naylor.
In 2013, Goldman
arranged 1MDB’s $3 billion bond sale, the one passed up by Hanwha Life’s Song.
The note is included in JPMorgan’s benchmark Asian and Emerging-Market Bond
indexes. Goldman’s commissions, fees, and expenses from the sale were $283
million, or 9.4 percent of the amount raised, according to the prospectus. The
person familiar with the transaction says Goldman’s take was high because the
bank bought bonds from 1MDB, assuming the risk, and then resold them to
customers.
In many ways, 1MDB’s
star-crossed existence mirrors the misfortunes of this country of 30 million
people. Najib set up 1MDB at a time when the Malaysian economy was on the mend;
it expanded by 7.4 percent in 2010, becoming one of the fastest growing in
Southeast Asia. The company—supported by the advisory board chaired by Najib
and including high-ranking government officials from China, Saudi Arabia, and
the United Arab Emirates—set out to be a state-owned strategic development company
that would forge global partnerships, draw foreign investment to Malaysia, and
build up the country’s industrial base.
Early on, 1MDB formed
joint ventures with Saudi and Abu Dhabi companies. On a visit to Malaysia in
July 2013, Japanese Prime Minister Shinzo Abe attended a signing ceremony that
was meant to initiate discussions on 1MDB’s plan to issue Samurai bonds
guaranteed by the Japan Bank for International Cooperation. None of these plans
panned out as they were supposed to. Over time, to its growing number of
detractors, 1MDB looked more and more like a giant black box, its inner
workings echoing the mysteries suggested by the wayang kulit, traditional
shadow puppets, that frolic on the office walls of the Kuala Lumpur–based
company.
1MDB, which has
announced plans to wind itself down, is reducing its debt, according to
President Arul Kanda. “1MDB has undertaken various initiatives to reduce the
company’s debt levels and ensure that maximum value is generated for its 100
percent shareholder, the Ministry of Finance,” Kanda said in a statement to
Bloomberg Markets on July 16. As part of the plan, 1MDB has repaid a $975
million loan, while more than 40 potential investors have shown interest in one
of its property developments, Bandar Malaysia. He said the company also intends
to sell its power plants. “We are focused and are making good progress,” he
said.
The 1MDB story begins
in 2008. In December of that year, Terengganu, a sultanate
located across the Malay Peninsula from Kuala Lumpur, got federal government
approval to set up its sovereign wealth fund, the TIA. Goldman Sachs and Boston
Consulting Group advised the TIA in its early days. Jho Low advised the TIA
from January to mid-May, according to a statement released on his behalf to
local media in May 2014.
In May 2009, the TIA
raised 5 billion ringgit ($1.3 billion) through the sale of 30-year Islamic
bonds. Guaranteed by the federal government, they were offered at an interest
rate of 5.75 percent. In fact, according to Mahathir, the bonds were sold at a
discounted price that effectively yielded bondholders 7 percent. “Who approved
such terrible terms for a loan to a government-owned company?” the former prime
minister asked on his blog. 1MDB said in response that the effective yield was
actually 6.15 percent and was reasonable considering that these were Malaysia’s
first 30-year notes.
Two months later, the
Najib government quietly took over the TIA and renamed it 1MDB. As the new
company was getting up and running, the well-connected Low laid the groundwork
for 1MDB’s dealings with the Saudis, according to reports in The Edge and the Sarawak Report. The son of
a wealthy Malaysian businessman, Larry Low, Jho studied at Harrow, an elite
London boarding school. While there, he met Najib’s stepson, Riza Aziz, who was
studying at the London School of Economics and Political Science, and came to
know Riza’s mother, Rosmah, when she visited London, according to a New York
Times report in February. Later, at the Wharton School at the University of
Pennsylvania, he took a semester off to start a company called Wynton Group,
managing $25 million pooled mostly from his friends’ families, according to an
interview he gave to Malaysia’s Star newspaper in 2010.
In a similar vein,
Low’s role at 1MDB involved “OPM”—other people’s money, says a former business
associate in Kuala Lumpur. By now, Low had assembled an impressive array of
connections. On Sept. 7, 2009, Low met Patrick Mahony, an executive of
PetroSaudi International, in New York, according to a report in The Edge. Tarek Obaid, a
co-founder of PetroSaudi, had introduced them to each other via e-mail on Aug.
28, the report said. It didn’t take long for 1MDB and PetroSaudi to cobble
together a $2.5 billion joint venture. Mahony didn’t respond to e-mailed questions.
Obaid couldn’t be reached for comment.
As it got off the
ground, 1MDB worked with more than a dozen financial institutions, but it
forged especially close ties with Goldman. A helping hand came from Roger Ng,
Goldman’s head of Southeast Asia sales and fixed-income trading, a Malaysian
national well-known for his connections to politicians and tycoons, according
to two people who know him. Leissner, then based in Singapore as Goldman’s
co-president for Southeast Asia, played a key role in expanding the bank’s
business in Malaysia. He declined to comment for this article. Ng, who left
Goldman last year, didn’t respond to phone calls or a text message.
In December 2009,
Goldman won a license from Malaysia’s Securities Commission to set up fund
management and corporate finance advisory operations in the country. “The
future outlook for Malaysia’s capital markets and its asset management industry
is very positive,” Leissner said in a statement released by the commission at
the time. “Through our local presence, we look forward to playing a larger role
in their development.”
For 1MDB, Goldman
played multiple roles. In 2012, it advised the firm on its acquisition of
Tanjong Energy Holdings from Malaysian billionaire Krishnan and domestic power
plants from Genting, a conglomerate. The following year, the bank helped 1MDB
purchase the Jimah Energy Ventures power plant in Selangor, Malaysia, a deal
that was completed in 2014.
The true extent of
the trouble at 1MDB didn’t become apparent until late last year. Scandal aside,
2014 was a difficult year for Najib and his government. First came the
disappearance of Malaysia Airlines Flight 370 and all 239 people on board in
March. Then, in July, Flight 17, also operated by the state-owned airline,
crashed near Donetsk in strife-torn eastern Ukraine, possibly after being hit
by a surface-to-air missile; all 298 passengers and crew died. It was around
that time that the Sarawak
Report and The
Edge, under longtime editor Ho Kay Tat, began their exposés of
1MDB, adding to Najib’s woes.
The Sarawak Report was founded
by Clare Rewcastle Brown, who was born in Sarawak, a state on the island of
Borneo, of British parents and now runs the site out of London. (Her husband,
Andrew Brown, who recently retired as the head of media relations at EDF
Energy, is the brother of former U.K. Prime Minister Gordon Brown.) Earlier
this year, the website claimed to have obtained e-mails and other documentation
showing how Jho Low and several business associates siphoned $700 million from
1MDB’s venture with PetroSaudi Holdings, which was registered in the Cayman
Islands in the Caribbean. Low, who has denied playing any role in 1MDB after
the work he did for the TIA, didn’t respond to requests for an interview or to
e-mailed questions. The government, without giving any details, has tried to
discredit the e-mails as reported by the Sarawak
Report, saying the communications may have been tampered with. Then
on July 19, the Malaysian Communications and Multimedia Commission said it had
blocked the Sarawak Report’s
website in Malaysia for publishing content that could “destabilize the
country.” Rewcastle Brown said she won’t be impeded by the government’s action,
describing it as the “latest blow to media freedom.”
In an unprecedented
crackdown, Malaysian authorities this year have arrested more than 150
journalists, activists, opposition politicians, and lawyers on sedition charges
or under a peaceful assembly act that strictly regulates public protests. One
of Malaysia’s best-known political cartoonists, who goes by the name Zunar, has
been charged with nine counts of sedition and faces up to 43 years in prison.
On June 22, Thai
Police arrested a tattooed Swiss national named Xavier Justo, a former
executive at 1MDB investment partner PetroSaudi International, on the resort
island of Koh Samui. Police said they suspected Justo of trying to extort money
from PetroSaudi and leaking e-mails about the oil company’s dealings with 1MDB.
Justo denied the allegations, the Bangkok Post reported.
Adding to a climate
of fear and tension, the Malaysian police launched an investigation into
whether government officials, including central bank personnel, were behind the
leaking of documents that allegedly showed 1MDB money turning up in Najib’s
accounts. The central bank on July 12 denied any impropriety.
As allegations swirl
around him, the stakes for Najib are high. Not only is he prime
minister and finance minister; he’s also president of a political machine,
UMNO, that has been in power since Malaysia’s independence. What’s more, he’s
chairman of the Khazanah Nasional sovereign wealth fund, which had $29 billion
under management at the end of 2014. “Power is too concentrated to one person,”
says Zaid Ibrahim, a former law minister who built the country’s largest law
firm. He says the total lack of checks and balances in Malaysia has led to
abuse of power.
In the early days of
Najib’s rule, Malaysians had more cause for optimism than now, says Danny Quah,
an economics professor at the LSE. Like many successful Malaysians overseas,
Quah has maintained ties with his native country. He served on Malaysia’s
National Economic Advisory Council from 2009 to 2011, and he still vividly
recalls a day—March 30, 2010—when Najib stood in front of global investors and
promised a “1Malaysia” where all Malaysians of different races would work
together toward one goal—turning Malaysia into a developed nation by 2020. At
the time, Najib had enough popular support to aim high. “Right then, it was a
golden opportunity,” Quah says. “It’s a moment that passed.”
This story appears in
the September issue of Bloomberg Markets magazine. With assistance from Ye Xie
in New York
