SINGAPORE (Dec 24): When Goldman Sachs was selling bonds issued by 1Malaysia Development Bhd (1MDB) in 2012, a fund manager friend of mine remembers its salespeople emphasising that the securities were a Malaysian “sovereign credit risk”. Yet, the coupons on these bonds were higher than the yields on Malaysian sovereign bonds. My fund manager friend asked to see an explicit statement that the bonds were guaranteed by the Malaysian government. The Goldman Sachs salespeople never got back to him.

See: Singapore said to expand 1MDB criminal probe to include Goldman

By 2015, the 1MDB scandal was making international headlines, and Goldman Sachs was reportedly attracting law enforcement scrutiny for its role in the whole affair. In particular, the US$600 million in fees and commissions the bank earned from its 1MDB-related activities seemed to be a red flag. Goldman Sachs arranged and underwrote three bond issues for units of 1MDB in 2012 and 2013, worth a total of US$6.5 billion. The US$600 million of fees it earned was equivalent to more than 9% of the bond proceeds, which seems excessive.

Goldman Sachs has maintained that the income it earned from 1MDB reflected the underwriting risks it assumed. But that seems to be at odds with what its salespeople had told investors. If the risk profile of the bonds was similar to Malaysian sovereign bonds, what risk did Goldman Sachs see as an arranger and underwriter? Did it not seem strange to Goldman Sachs that the issuer was being so generous? Or, that other banks were not beating down 1MDB’s door for the business?

It has since become widely known that a significant portion of the proceeds of those bond issues were misappropriated. In particular, the first two bond issues — which raised US$1.75 billion each and had coupons of 5.99% and 5.75% — were co-guaranteed by 1MDB and a unit of Abu Dhabi’s International Petroleum Investment Company called Aabar Investment PJS. As part of the deal, 1MDB was to have paid Aabar a security deposit of US$1.37 billion as well as other payments. But these payments actually went to a British Virgin Islands-registered company with a similar name that IPIC later insisted it did not own.

Now, the law is catching up with everyone involved in the heist. On Nov 1, the US authorities announced that Tim Leissner, a former Goldman Sachs partner in Asia, had pleaded guilty to conspiring to launder money and pay bribes to officials in Malaysia and Abu Dhabi. Leissner has been ordered to forfeit US$43.7 million ($60 million) as a result of his crimes. Another former Goldman Sachs employee named Roger Ng has also been charged in the US.

In Malaysia, criminal charges were filed against units of Goldman Sachs this past week. “The charges arise from the commission and abetment of false or misleading statements by all the accused in order to dishonestly misappropriate US$2.7 billion from the proceeds of three bonds issued by subsidiaries of 1MDB, which were arranged and underwritten by Goldman Sachs,” said Malaysian Attorney General Tommy Thomas in a statement on Dec 17.

Thomas went on to say that Leissner and Ng had conspired with the alleged 1MDB mastermind Low Taek Jho, better known as Jho Low, and former 1MDB general counsel Jasmine Loo as well as others to bribe Malaysian officials in order to procure the involvement of Goldman Sachs in the bond issues. “In addition to personally receiving part of the misappropriated bond proceeds, those employees and directors of Goldman Sachs received large bonuses and enhanced career prospects at Goldman Sachs and in the investment banking industry generally,” Thomas said in the statement.

Responding to the statement, Goldman Sachs said that the Malaysian government and 1MDB had lied to it. “1MDB, whose CEO and board reported directly to the prime minister at the time, also provided written assurances to Goldman Sachs for each transaction that no intermediaries were involved,” the bank said.

Meanwhile, The Straits Times reported this past week that Goldman Sachs proceeded with at least one of the US$1.75 billion bond issues without the approval from the board of IPIC, despite IPIC being a guarantor of the bond. “The firm relied on documents provided by IPIC executives and legal opinions of outside counsel evidencing IPIC’s authority to enter into the guarantee,” Goldman Sachs said in a written response to The Straits Times.

The bond guarantees eventually led to a row between IPIC and 1MDB in 2017. The case went to arbitration and ultimately led to Malaysia paying off Abu Dhabi and assuming responsibility for 1MDB’s bonds. The new Pakatan Harapan government, which was elected in May, said two months ago that it is challenging the consent award by an arbitration tribunal in London last year for 1MDB to pay US$5.78 billion to IPIC and the bond trustee over a five-year period. The Malaysian government also wants to recover the more than US$1.46 billion that has already been paid.

As for Goldman Sachs, Malaysia is seeking to have criminal fines imposed on the Wall Street bank that are “well in excess of the US$2.7 billion misappropriated from the bond proceeds and US$600 million in fees received,” according to the statement by Thomas. Prosecutors will also seek custodial sentences for each of the individuals accused, the maximum term of imprisonment being 10 years. “Their fraud goes to the heart of our capital markets, and if no criminal proceedings are instituted against the accused, their undermining of our financial system and market integrity will go unpunished.” Thomas said.

The only group involved in the 1MDB scandal that the Malaysian government does not seem likely to pursue are the holders of the 1MDB bonds. Malaysia’s Finance Minister Lim Guan Eng has plainly stated that the government will honour all debt obligations linked to 1MDB, as failing to do so could have an adverse impact on the country’s credit ratings.

I guess those salespeople from Goldman Sachs who approached my fund manager friend were right after all. Despite their relatively high coupons, those 1MDB bonds really have turned out to be a Malaysian sovereign credit risk.

This story appears in The Edge Singapore (Issue 862, week of Dec 24) which is on sale now. Subscribe here