Office workers walk past an information board in Goldman Sachs offices in Tokyo. (Photographer: Andy Rain/Bloomberg)

Rogue Bankers Don't Explain Goldman's 1MDB Mess

(Bloomberg Opinion) -- Whether or not you believe that Goldman Sachs Group Inc. deserved those high fees for its work with a scandal-ridden Malaysian investment fund, or that rogue bankers got it in this hot mess, one thing’s for sure: The bank’s internal checks just weren’t good enough.

The sheer amount of fees should have been the first red flag: $600 million for underwriting  $6.5 billion in bond sales between 2012 and 2013 for 1MDB. Let’s put that in perspective. The amount Goldman raked in from the investment fund alone is nearly equivalent to the $694 million in revenue from its  entire global bond underwriting business in the first quarter of 2013. 

Those fees, between 7 percent and 9 percent, also compare with half a percentage point for underwriting a typical Malaysian investment-grade bond deal, one percentage point for high-yield and mere basis points for government debt.

Goldman is now on the hook in Malaysia, which is alleging the New York-based bank knew that funds from its bond sales were being misappropriated. On Friday, Singapore announced it was expanding its criminal probe of the fund to include the U.S. firm. Goldman bankers on the deal, and Malaysian financier and central figure of the scandal Jho Low, already have been charged with money laundering and bribery in the U.S.

No one disagrees that billions of dollars of those proceeds were siphoned off to fund luxury purchases of yachts, artwork and real estate, among other things. The first two bond sales raised $3.5 billion, meant to go toward acquiring power plants sold by Malaysian billionaire Ananda Krishnan and conglomerate Genting Bhd. The third, also solely underwritten by Goldman, raised $3 billion for “new strategic economic initiatives” with Abu Dhabi,  including a financial center in Kuala Lumpur. 

Rogue Bankers Don't Explain Goldman's 1MDB Mess

The culpability of the key Goldman banker on the deal isn’t in doubt. Last month in the U.S., former Goldman partner and Southeast Asia head Tim Leissner pleaded guilty to conspiring to launder money and bribery. 

Goldman’s defense is that these bankers had gone rogue. It didn’t realize until January 2016 that Leissner had ties with Low, at which point the partner was suspended. (He quit shortly thereafter.) Low previously had been denied a private wealth account at the firm because the origins of his money were unclear.

But given the bond deals made so much money for the bank, there should have been more scrutiny.

Goldman says its fees were well-deserved because it got the deals done fast: 1MDB wanted the money urgently. The bank also says it agreed to take on the risk of underwriting bonds for an unknown credit with shaky guarantees, which necessitated buying the entire issue before selling it on to investors. Such “hard underwriting” is highly unusual in the aftermath of the financial crisis, as banks are careful about meeting capital requirements. 

Still, the fact remains that 1MDB was a quasi-sovereign, with two of the bonds backed by an Abu Dhabi sovereign wealth fund. Underwriting its bonds shouldn’t have involved the rocket-science-type structuring for which Goldman is known. It’s also well-known that Asian governments are loath to pay fees. (In India, banks routinely complain of zero fees on government bond and stock sales.)

All this should have triggered a wringer of committee approvals, especially because bank capital – so precious after the financial crisis – was at risk.

Rogue Bankers Don't Explain Goldman's 1MDB Mess

Now, its Goldman’s shareholders who are most at risk, with its stock down more than 30 percent this year. Were those fees worth the reputational damage? For an institution whose partnership structure gives its bankers long leash, it will be difficult to restore that kind of trust. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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