The outsize profits of Goldman Sachs have been a political hot potato in the United States ever since the financial crisis. But now the firm known to its detractors as the “vampire squid” has landed right in the middle of Sunday’s bitterly close Malaysian election.
Malaysian opposition candidates claim that Goldman suckered the government in a recent bond deal in which the investment bank served as both advisor and purchaser—typical, they say, of a corrupt and incompetent regime that has been in power for five decades.
The Financial Times and Wall Street Journal both have in-depth accounts of the controversial Goldman deal, but these are the basics: 1Malaysia Development Berhad, a state-controlled fund that reports to Prime Minister Najib Razak, issued government bonds with a face value of $3 billion that were purchased by Goldman in a private placement for only $2.71 billion. Unusually, the bonds were sold before receiving a credit rating—Standard & Poor’s was consulted only after the bonds were purchased by a Goldman trading desk known as the Principal Funding and Investing Group.
Why the rush? Wong Chen, trade and investment bureau chairman for the opposition PKR party, noted that the sale came on March 29, only three days before the prime minister dissolved parliament in the run-up to the election. “If our local banks had arranged for this exercise, they will only charge a nominal fee as it is considered a national duty to work on government backed bonds,” he told the Free Malaysia Today news site. “But instead, Goldman Sachs was hired and was reported to have been paid about RM220 million ($72 million). Local banks would have only charged about six figures.”
Those fees would come on top of the hundreds of millions of dollars that Goldman’s trading desk could make by selling the bonds closer to face value. Goldman told the Journal that it performs “the same consistently high global standards of due diligence and business selection in connection with all securities offerings.”
The election in Malaysia is going to be the closest in recent memory, and is being hotly and at times violently contested. Thousands of cases of election-related arson, fighting, and intimidation have been recorded by police. Malaysia’s wealthy elite have been moving their funds offshore in case the opposition triumphs. Even a narrow win by the ruling party could result in chaos.
1MDB, for its part, strongly denies wrongdoing. It expressed regret in a press statement that “certain quarters with political agendas have hidden facts to persistently make baseless allegations. This is a smear campaign for their own intended benefit.” It said accusations that 1MDB put proceeds in Cayman Islands companies to vanish from public view were “based on a lie” and “absurd.”
Public commentators remain unconvinced, given the rushed and “under-the-radar modus operandi” used by 1MDB and Goldman Sachs. Undeniably, business in Malaysia has so far been good to Goldman. But along with everyone in Malaysia, its bankers will no doubt be watching Sunday’s election very closely.