Thursday, 23 July 2015

Financial Review Tells the Story of Malaysia, 1MDB, Najib and Goldman Sachs

Firstly, I would like to apologise to the readers who are used to me writing in Bahasa Malaysia. I chose to write this particular piece in English Language as this post is meant to address some points raised in an article by Financial Review on 22 July 2015 on the subject "Goldman in focus as scandal plagues Malaysia's 1MDB and Najib Razak" - Link as follows:

You can read the Financial Review article at the above link. In its entirety, there are many components to it almost like giving an A - Z update about the subject matter. I presume this is done to allow new readers a quick catch up to the story itself. However, this oversimplified cocktail of stories may just be too myopic whereby it does not discuss in detail what arguments have been put forth by relevant parties in clearing up issues. Likewise, it also lack updates on findings by relevant authorities that are doing proper investigations rather than glorifying half baked accusations that are being thrown across the cyberworld by journalists and social media troopers.

I won't be addressing every single sentences in the Financial Review (FR) article but I will cherry pick, if you allow me, crucial points that do make a difference if understood unfairly (by public). Here are my thoughts:

FR quoted/wrote:

  • It was enticing. The 10-year, dollar-denominated bonds offered an interest rate of 4.4 per cent, 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 $US3 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 key words are 10 year, USD Bonds, interest rates 4.4%, A-minus-rated and the entire statement "attractive yield, 1MDB could easily sell....". When I googled this up, I found the below table which suggests that the coupon rate (i.e. interest rate) should be at 4.48% for investment grade (for which A-minus is) 10-year bonds denominated in USD issued by a Government in Asia. I think the 4.4% coupon inherent in 1MDB's bonds is not attractive enough when compared to 4.48% and as such, needed to be sold not via global offering. Of course when done in such a way, there needs to be some sweetener. That sweetener is the Government guarantee.

FR quoted/wrote:

  • 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.

Referring to the above, the readers of FR may not appreciate the chronological order of the whole drama. To paint a fairer scenario of what had happened, FR should also report what 1MDB and the Government (Via Ministry of Finance) had responded to the query. Tun Mahathir kept on asking where is the RM42 billion? And he kept on stressing that it is missing. Later he had also changed the figure from RM42 billion to other amounts until it is now reduced to RM2.6 billion. FR reported that 1MDB denied the claim and said all debts are accounted for where in fact, 1MDB did more than this. They actually provided the breakdown of the RM42 billion in the Parliament, to the relevant investigating authorities as well as to public via diagrams in the social media and the press. I find it amusing that FR failed to express this extension of what had happen especially when the date of FR's article is 22 July 2015 (way, way after all the above). The diagram of the RM42 billion is as printed below:

In addition to all this, we must not forget that a reputable No. 1 ranking international firm of auditors, Deloitte, had audited the balance sheet of 1MDB and had given an unqualified opinion that the valuation of 1MDB's assets are at RM51 billion, well above that RM42 billion. This is evident by the balance sheet below. We must also note that if a question was asked, "How much did the Government pumped in tax payer's money?", any accounting graduate can say, "We have to look at the Share Capital that the Government has injected. To get this, take the Total Asset and less it with Total Liabilities. Total Assets is equivalent to Total Liabilities and Equities (as referred to in the diagram below). So, if you take RM51 billion, less Total Liabilities of RM49 billion per the balance sheet below, you will get RM2 billion - a small portion of the entire business of 1MDB. So, it is not so much about tax payer's money but monies raised via loans in a perfectly normal corporate-business-commercial-industry manner.

 FR quoted/wrote:

  • 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.

Here we can clearly say that FR should have coupled these sentences with latest findings (prior to 22 July 2015) on evidence that the documents being used by Sarawak Report, or even the Edge, have been tampered. They may have mentioned it else where in their article but psychologically, they should have mentioned it here so that readers can have a fair digestion of the matter. This selective writing is of course not a fair portrayal of the matter.

The bit about Economic disappointment is also very contradictory to the recent POSITIVE result that Malaysia has achieved via Fitch Rating as per my earlier blog post [ ] at as well as my write up on how a Malaysian Minister, Dato' Seri Idris Jala, rebutted Bloomberg on Malaysian economy (the former saying positive results on the Malaysian economy versus the latter giving negative points to the same): [ ].

On the bit about "hijacking", it does not really makes sense. If the Federal Government is willing to give guarantee for the country to acquire its power assets, surely it is not hijacking. It is for the sake of the country as whole. The investment scope of TIA has been widened from a mere state economy to the country's economy, hence giving birth to 1MDB when TIA changed its name to 1Malaysia Development Berhad (aka 1MDB).

FR quoted/wrote:

  • 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 per cent against the dollar since the start of the year. Foreign reserves plunged 20 per cent in June from a year earlier.

The Ringgit weakened as a result of many factors. I raised the question to a Senior Executive in an international bank operating in Kuala Lumpur, "What caused the significant weakening of Ringgit?" The banker replied, "Well, no doubt that the political turmoil made it worse but the fundamental factor was actually the significant concentration of Malaysia income from petroleum related exports. When the oil prices fell significantly, revenues were badly affected. Over supply of oil dampens the export from Malaysia."

Based on this, we should really consider empirical evidence from economic statistics rather than mere qualitative narrative that is biased towards psychologically putting significant blame on the political landscape. Even if we are to put the blame on the political turmoil, the Ruling Government alone should not be the only party to be blamed as the opposition played a significant role in unleashing propagandas that have not yet, until now, revealed any credible evidence to be used against the Ruling Government. Foreign Reserves stood at RM422 billion, enough to cover 9 months worth of retained imports, that is way, way higher than the global benchmark of 6 months - enough said on the matter.

FR quoted/wrote:

  • On July 3, the Wall Street Journal, citing documents from government probes, reported that investigators believe almost $US700 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 $US620 million; another, $US61 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.

Based on recent on-going investigations done by 6 authorities, namely, Bank Negara Malaysia (the Malaysian reserve bank), Attorney General, Auditor General, Public Accounts Committee (a bi-partisan appointees from the Parliament), the Royal Malaysian Police and the Malaysian Anti Corruption Commission; all these are not yet confirmed. We cannot conclude that Dato' Seri Najib (Prime Minister of Malaysia) is guilty. We will have to responsibly wait for the result of the investigations done by the 6 authorities. Premature conclusion or even mere accusations have a very strong perception and psychological game that definitely approaches faul play - what more when the General Election is due in a couple of years time.

FR quoted/wrote:

  • 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."

Tony Pua is a character,... a character with conflict of interest. He is in a bi-partisan committee, the Public Accounts Committee (PAC) appointed by the Parliament. For him to come out with that statement, he must resign from PAC. Otherwise, he is tainted. He is with conflict of interest. He has lost his independence and objectivity. The latest news is that he is accused of being involved in discussions with the editors of Sarawak Report in using tampered documents to shoot the Government. Whilst he did not admit to the document tampering or the strategic discussions, he DID admit meeting the editor of Sarawak Report, Clare Brown, on numerous occasions. He only admitted this now after this more than a year 1MDB saga? Wow! I cannot even give him benefit of the doubt if you ask me. Let alone take his statements with such tainted credibility.

FR quoted/wrote:

  • Goldman established a close and profitable relationship with 1MDB. From 2012 to 2013, the bank arranged three bond sales for the company, totaling $US6.5 billion. Fees, commissions, and expenses for Goldman totalled $US593 million – about 9.1 per cent 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 $US3 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 $US283 million, or 9.4 per cent 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.

Well, the entire paragraph sort of explained why Goldman Sachs earn premium fees. What do you expect? You want quality financial advisor (and underwriter!!), you will have to pay for it. After all, this is a global billion dollar deal.

FR quoted/wrote:

  • 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 per cent in 2010, becoming one of the fastest growing in Southeast Asia. 

Malaysia is still having strong economic fundamentals. We closed at 6% economic growth for 2014 and targets to close at 5.5% for 2015. This is far, far better than Europe who are at 1.5% only. In my earlier article [ ], I wrote about what Malaysia had achieved in the near past and what it expects to achieve in the next 5 years until 2020 as backed by Government policies under the 11th Malaysian Plan. This should suffice in addressing the economic outlook.

FR quoted/wrote:

  • In May 2009, the TIA raised 5 billion ringgit ($US1.3 billion) through the sale of 30-year Islamic bonds. Guaranteed by the federal government, they were offered at an interest rate of 5.75 per cent. In fact, according to Mahathir, the bonds were sold at a discounted price that effectively yielded bondholders 7 per cent. "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 per cent and was reasonable considering that these were Malaysia's first 30-year notes.

Earlier we had established that the coupon rate for 1MDB bonds are at 4.4%. If benchmarked with other Asian bonds, it should be around 4.48%. That is only the interest portion. However, bonds are normally issued at a premium or discount. Any merchant banker can vouch for this. When the market is favourable towards the issuer of bonds, they will go for premium. When the market is not favourable to the issuer, then it'll be at discount. Again, as established earlier, much was needed to attract buyers of the bonds as evident by the 4.4% that is lower than 4.48% as well as the need for the Government guarantee as the sweetener. This is an indicator that the market is not on the issuer's side.

Generally, bond instruments give a lower return than share market because it carries lower risk than ordinary equity shares. However, when times are tough, bond issuers may increase the return to be closer to that of equity instruments. Therefore, an investor who had the choice between investing in equities (shares) or bonds will choose the better yielding instrument. In this case, that 4.4% needed to be increased to a level strong enough to persuade investors to take up the bonds rather than investing in shares in the stock market. This is done by issuing the bonds at discount, i.e. Investors pay less than the redemption value (aka nominal value) or face value) of the bonds, resulting in that discount being spread over the life of the bond which increases the 4.4% to a higher rate.

The paragraph in FR above said 7% as mentioned by Tun Mahathir and 6.15% as mentioned by 1MDB. Guess what? I did my own research per the below table. First of all, the table below lists the top 10 yielding bonds issued by Malaysian corporates. In order to benchmark fairly, we must choose a company that is the closest to 1MDB. 1MDB is heavily involved in 2 industries, namely, power and realty/construction. Naturally, any financial analyst would choose YTL as the best fitting benchmark. YTL's shares are giving dividend yield of 7.5%. That is higher but pretty close to 1MDB's 7%. It does sound fair, doesn't it?

FR quoted/wrote:

  • The government, without giving any details, has tried to discredit the emails as reported by the Sarawak Report, saying the communications may have been tampered with. Then on July 19, the Malaysian Communications and Multimedia Commission (MCMC) said it had blocked the Sarawak Report's website in Malaysia for publishing content that could "destabilise the country". Clare Rewcastle Brown (Editor of Sarawak Report) said she won't be impeded by the government's action, describing it as the "latest blow to media freedom".

FR missed a very significant event, that is, the result of investigation by the Thailand police that revealed that the source documents used by Sarawak Report were STOLEN and TAMPERED documents used for blackmailing PetroSaudi (Joint Venture partner to 1MDB). How can FR state "without giving details, (and Government) has tried to discredit"? The fact that a foreign country's authority has done their own independent investigation is enough to add more credibility to go against Sarawak Report. In addition, an expert was also used to determine whether the documents have been tampered or not. Free Malaysia Today, in their website, reported the below on 30 June 2015:

  • An international cyber-security firm, Protection Group International (PGI), was subsequently hired to conduct an in-depth investigation into the source of the data published on the Internet, as well as verify its authenticity. These investigations revealed clear evidence of the systematic theft of confidential company data by Justo prior to his departure from PetroSaudi. Furthermore, the analysis also showed that the data was tampered with after it was stolen from PetroSaudi. It was believed that much of this tampered data subsequently appeared on Sarawak Report and served as the backbone of the blog’s claims of impropriety against 1MDB. An expert from PGI said: “Our investigation is still ongoing, but it is clear that we are looking at a case of large-scale data theft, and our analysis substantiates that Justo is the source of the data published on Sarawak Report.

FR further reinforced their biased journalism by adding MCMC's blockage of the website that was described by Sarawak Report editor as "blow to media freedom". This is a game we all know. Media Freedom is a load of crap. Freedom has its limit. If not, freedom can be abused. In this case, if the Thailand police's investigation result is true, then indeed that very freedom has been abused. Oh by the way, did I just forget a more sensational findings against the credibility of Sarawak Report? Yes I did, didn't I,... Lester Melanyi, a former worker of Sarawak Report had reported his confessions to the police on how Sarawak Report had tampered with the said documents. The police is still investigating this but if Sarawak Report can simply throw accusations to others, others can also do the same to Sarawak Report.

FR also had a section that talks about the lavish lifestyle of Prime Minister Dato' Seri Najib, his wife, Datin Seri Rosmah, Rosmah's son (Riza) as well as a young Malaysian tycoon Jho Low. This is clearly character assassination. What has that got to do with 1MDB? Go check what other Prime Ministers or Presidents (and their wives) have been spending on. I am sure they too live (lived) a lavish life. I shall not comment on Jho Low because we know very little about him. I trust that we should let the authorities investigate him. In fact, he is due to meet the PAC soon. So let us wait for the authorities to do their job, shall we?


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