Other People’s Money: Masters of the Universe or Servants of the People?

The fees and commissions paid to New York-based investment firm Goldman Sachs Group Inc to raise funds through three bonds for debt-laden 1Malaysia Development Berhad's (1MDB) subsidiaries was "appropriate"says Najib

Finance Minister Datuk Seri Najib Razak said the amount paid for the bonds were suitable in accordance to their size, tenure and liquidity.

"The bonds were valued according to the discount price in the bonds issued, taking into account credit risks," Najib told Tony Pua (DAP-Petaling Jaya Utara) in a written reply yesterday.

However, he said that any difference between the bonds issued and the nett yield do not only consist of fees for services, but also "effectiveness, discount, and the remaining tenure of the bonds."

The bonds were for 1MDB Global Investment, 1MDB Energy and 1MDB Energy (Langat) Limited.

Najib, who is also prime minister, however did not specify the exact amount paid to Goldman Sachs in these transactions.

Putrajaya had been subjected to allegations that commissions paid to Goldman Sachs were above the market rate.

In another written reply yesterday, Najib had dismissed as "baseless" claims that 1MDB paid high interest rates to the American investment bank to manage its RM5 billion Islamic bonds.

“Goldman Sachs was chosen to manage the RM5 billion Islamic bonds because the company is one of the very few banks in the United States that has the capacity to monitor such a sizeable bond issuance with large amounts,” he had said in a written reply to Raub MP Datuk Mohd Ariff Sabri Abdul Aziz.

“Concerns on the 5.75% interest rate charged for the Islamic bonds (issued) back in 2009, with the perception that the interest rates are particularly high, are baseless merely because the Islamic bonds were the first Islamic bonds issued in Malaysia that had a 30-year tenure,” Najib had said.

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From “Other People’s Money: Masters of the Universe or Servants of the People?”

First is with regard to guarantees (whether letter of guarantee or letter of support) purportedly provided by the government of Malaysia.

The second issue is why 1MDB has issued the bonds at a discount (which I gathered from 1MDB’s press statement recently).

The third issue is why the money raised from 1MDB bonds was parked at Cayman to earn “income”?

And fourth, why was 1MDB so eager and quick to acquire energy assets (the IPPs) when most of the concessions were about to expire?

Lawyer Tommy Thomas has provided a very good comment on what constitutes guarantees from the legal point of view.

Government guarantees are worth a lot of money. Once a sovereign government has provided the guarantee to any entity issuing the bonds, the risk of default is technically reduced to the “sovereign level”.

In this case for example, why should 1MDB bonds incur a higher interest rate than long-term Malaysian Government Securities (MGS) when the risk associated with the bonds has been reduced by the government guarantee?

Returns should commensurate with risks. This is the principle applied all over the world. Have we found out how much higher an interest rate 1MDB bonds are paying when compared with long term MGS? Was the rate fair and in line with what others were paying? It seems to me that government guarantees are worth nothing even though they have substantially reduced the risks of the bonds.

The second point centres on why 1MDB issued the bonds at “discount”? This was the answer given by 1MDB when concerns were raised over the high professional fees and commissions paid. I agree bonds can be issued at discounts or premiums but this must be linked to prevailing market interest rates. Why did 1MBD issue the bonds at discount? Was it because the coupon rate of 1MDB bonds was lower than the market interest rate of equivalent risks?

It does not matter whether the bonds were issued at discount or premium. Ultimately we are all only interested in knowing the effective rate of 1MDB bonds.

1MDB must disclose the effective rate after taking into consideration the coupon rate, the discount given and the professional fees charged. This is the only way we would know the total cost of borrowing. This is the only way we would know whether or not 1MDB is paying a higher rate than others of equivalent risks.

The third point is putting money in Cayman. Why did 1MDB borrow excessively but only to put the money in Cayman? What is the logic here? If 1MDB thinks it could earn higher income than borrowing cost incurred, why didn’t 1MDB bond investors put their money in Cayman directly instead of buying 1MDB bonds? I hope some hotshot financial wizard in Goldman Sachs and 1MDB could explain this to me.

The fourth point is about 1MDB going on an asset buying spree and the allegations of overpaying for some of these assets.

One of the points raised by many is why the need to acquire IPPs at a premium price when many of the concessions are about to expire. I am sure the IPPs have worked out their returns of investment which includes “residual” value when concessions expire. I believe 1MDB should be in a position of strength when negotiating to buy these assets.

I hope the issues raised by various quarters can be answered satisfactorily by 1MDB and the Treasury.

DAP's Tony Pua has urged Putrajaya to lodge a report against investment firm Goldman Sachs International for allegedly forging a "Letter of Support" when raising US$3 billion (RM9.6 billion) of bonds for 1Malaysia Development Berhad (1MDB). This is following a denial by Deputy Finance Minister ‎Datuk Ahmad Maslan in Parliament last week that such a letter existed and that the government had only provided a guarantee of RM5.8 billion. "There is a three-page 'letter of support' purportedly signed by the Minister of Finance, on behalf of the Malaysian government," Pua said in a press conference at the Parliament lobby

"With the official denial by the Malaysian government of the existence of such a letter within the august house of Parliament, this purported letter of support published by GSI must be a forgery and the bond-raising exercise fraudulent. ‎"The claim by the government of Malaysia will not only rock just Malaysians but scandalise the international financial markets," Pua, the Petaling Jaya Utara MP said. The Letter of Support, which was published in this week's edition of The Edge Weekly, showed that the action could be taken against the Malaysian government in the Court of England if it failed to make payments. "This is certainly no small matter because investors all around the world would have invested in the 1MDB bonds on the basis that the government had issued the letter," Pua said. "The parties who had perpetrated this massive multi-billion dollar fraud against the Malaysian government must be punished." Last Thursday, Ahmad Maslan had said in Parliament that the government only provided a guarantee of RM5.8 billion of 1MDB's debts which totalled RM36.25 billion and denied the existence of a letter of support when Pua had claimed otherwise. However, in a press statement on Saturday, the deputy minister backtracked on his earlier statement, saying that there was one letter that the government had released as the sole owner of 1MDB shares but maintained that the guarantee was only for RM5.8 billion. He had said that according to the terms of the letter, if 1MDB could not pay their debt on the bonds, any claims made against the government would only be limited to the terms in the letter, which, he added, was not a guarantee letter. In a press conference later, PKR's Rafizi Ramli also addressed the matter, but said that the opposition was planning to refer Ahmad Maslan to the Parliament's Rights and Privileges Committee for misleading the House about the said letter. "I look at the statement he made in trying to hide behind semantics, saying it was not a support letter but a letter of guarantee, after I threatened to refer him to the committee for lying to the House." "I am still in the opinion that the deputy minister had tried to confuse the Dewan Rakyat with his statement and will file a motion to refer him to the committee and I am also planning to file a substantive motion which cannot be thrown out by the House," he added.