The Malaysia Scandal Is Starting to Look Dire for Goldman Sachs

By Matt Taibbi, Rolling Stone

01 January 19

A pioneering twist on third-world corruption might be the biggest scandal the Vampire Squid has ever faced

oldman Sachs, which has survived and thrived despite countless scandals over the years, may have finally stepped in a pile of trouble too deep to escape.

There’s even a Donald Trump angle to this latest great financial mess, but the outlines of that subplot – in a case that has countless – remains vague. The bank itself is in the most immediate danger.

The company’s stock rallied Thursday to close at 165, stopping a five-day slide in which the firm lost almost 12 percent of its market value. The company is down 35 percent for the year, most of that coming in the past three months as Goldman has been battered by headlines about the infamous 1MDB scandal.

Just before Christmas, Malaysian authorities filed criminal charges against Goldman, seeking a stunning $7.5 billion in reparations for the bank’s role in the scandal. Singapore authorities also announced they were expanding their own 1MDB probe to include Goldman.

In the 1MDB scheme, actors tied to former Malaysian Prime Minister Najib Razak allegedly siphoned mountains of cash out of a state investment fund. The misrouted money went to lavish parties with celebrity guests like Alicia Keys, a $35 million jet, works by Monet and Van Gogh, property in New York, Los Angeles and London, and (ironically) the funding of the movie The Wolf of Wall Street.

The cash for this mother of all bacchanals originally came from bonds issued by Goldman, which earned a whopping $600 million from the Malaysians. The bank charged prices for its bond issuance that analysts believe were suspiciously high – like a massage price that suggests you’re probably getting more than a massage.

Najib lost re-election in May, ending a 61-year reign for his party. National anger over 1MDB was a major reason for his downfall. The prime minister was allegedly central to the scam, which involved luring investors to national development projects that mostly never took place.

His election loss was a turning point. Until that time, international authorities had been unable to obtain cooperation from the Malaysian government, which under Najib insisted no crime had been committed.

Najib was one of the first world leaders to congratulate Donald Trump on his win in 2016. At least at one time, the two men were pals. They golfed together once at the Trump National Golf Club in Bedminster, New Jersey. Najib even claimed he had an autographed photo on his desk from Trump reading, “To my favorite Prime Minister. Great win!” Trump  hosted Najib at the White House last year, thanking the soon-to-be-ousted leader for “all the investment you’ve made in the United States.” Najib appeared to stay at one of Trump’s hotels on that trip.

On November 30th of this year, the Justice Department filed a civil forfeiture suit targeting more than $73 million funneled into the country by 1MDB players. There is email evidence the money may have been intended to help influence the Trump administration to drop the case.

But Najib’s electoral loss changed the picture. With his ouster, the new Malaysian government was suddenly eager to help outside investigators.  

“It completely reversed the situation,” says John Pang, a former policy adviser to the prime minister’s office in Malaysia. “Before, you essentially had the victim saying there was no crime. Now, you had the Justice Department meeting with a 1MDB task force in Kuala Lumpur.”

The change resulted in a string of new indictments, suits and prosecutions surfacing in the second half of 2018. At year’s end, Goldman is known to be under investigation in the U.S., Singapore and Malaysia, while 1MDB probes are ongoing in at least 10 countries. Goldman has seen two ex-employees criminally charged in the U.S. since the summer, one of whom pleaded guilty.  

What really set Wall Street afire was a pair of fall revelations. On November 8th, the Wall Street Journal reported longtime Goldman CEO Lloyd Blankfein – who stepped down on October 1st to “pursue other interests” – met on more than one occasion with one of the most infamous figures in the 1MDB scandal, Low Taek Jho, better known as “Jho Low.”

In that same week, Bloomberg reported Blankfein was an “unidentified high-ranking executive” in court filings associated with the case.

This was devastating news. The key question about 1MDB had always been whether the thefts were the actions of a few “rogue” bankers in a foreign outpost, or if the scam snaked higher.

The mere mention of Blankfein’s name in conjunction with a 1MDB court filing sent Goldman’s share price into freefall.

The closing price of Goldman stock on November 8th was $231.65. By November 12th, after investors had a weekend to digest the WSJ and Bloomberg articles, it had fallen to $206.05, reaching a low of $151.70 before bouncing back up a bit this week.  

Goldman has been forceful in addressing the charges that Blankfein met with Low. Reached for comment this week, the bank said it has identified three meetings at which Low might have been present, but has only been able to confirm Low’s presence at one.

“Mr. Blankfein had an introductory, high-level meeting in December 2012 with the CEO of Aabar, which was an existing client of the firm,” says company spokesman Michael DuVally. “At Aabar’s request, Mr. Low accompanied the CEO to that meeting.”

Duvally insists, however, that the firm has no evidence of any contact more extensive than that.

“Mr. Blankfein does not recall any one-on-one meeting with Mr. Low, nor have we seen any record to suggest such a meeting occurred.”

In December, outside analysts predicted the bank might need to set aside $1 billion or more for penalties. The company is having ongoing conversations with the Justice Department, but has not discussed numbers yet. 

In addition to the Malaysian action seeking $7.5 billion, the company is facing two more class-action lawsuits filed by investors, and a significant amount of negative press.

For all that, the scandal is still not well understood. 1MDB was a twist on third-world kleptocracy, one that exposed a new flaw in the global financial system.

Dictators have always plundered national riches. But they could only steal assets that existed. For instance, in former Zaire, now the Democratic Republic of Congo, Mobutu Sese Seko shifted profits of mineral sales to private accounts. In the Philippines, Ferdinand and Imelda Marcos swiped proceeds of sales of sugar, tobacco, bananas, coconuts and everything else they could get their hands on. Saddam Hussein stole oil revenues.

Malaysia is rich in copper, timber and oil. But Najib and his cohorts didn’t have to steal any of those resources.

“He didn’t steal diamonds or bananas. He stole debt,” says Pang. “This is something completely new. And he couldn’t have done it without a bank the size of Goldman.”

The Stanford-educated Pang was inadvertently thrust into the 2016 campaign news cycle when a memo he wrote to White House officials questioning Barack Obama’s support of Najib was outed by Wikileaks. His memo is in the Podesta emails.

He’s now living in the U.S. for fear of his safety after speaking out against 1MDB, around which, on top of everything else, there has been considerable violence.

Pang believes the public still hasn’t grasped the significance of 1MDB. The scandal showed that all it takes is a corrupt official and a morally flexible bank office to generate billions in public losses.

“All [Najib] needed was a signature and a couple of Goldman bankers,” he says.

1MDB was a sovereign wealth fund, “owned and controlled by the Malaysian government, through its Ministry of Finance,” as our Justice Department put it in one of its court filings.

This fund was ostensibly created for development projects on behalf of the Malaysian people, in areas like “energy, real estate, tourism and agribusiness.”

Over the course of three major bond issues, 1MDB raised about $6.5 billion from investors around the world. According to the U.S. government, about $2.7 billion of that money was misappropriated and “distributed, in part, as bribes and kickbacks” to help keep the scheme going.

Other monies reportedly ended up in the hands of a small group of corrupt insiders close to Najib, who then laundered the cash via one of the great spending sprees of our time.

The key figure was Jho Low, who is currently an international fugitive and allegedly spent awesome sums ripped from the 1MDB pot. The chubby-cheeked Low, tabbed the “Billion Dollar Whale” in a book about the scandal by Tom Wright and Bradley Hope, is said to have used 1MDB funds to become an instant “Asian Great Gatsby,” traveling the planet and hurling cash in all directions, including parties in Vegas and London. The book claims he spent up to $500,000 on single parties that featured performances by the likes of Lady Gaga and Dr. Dre. Low was basically the Malaysian version of Jeff Spicoli hiring Van Halen to play his birthday party.

The idea that a figure as prominent as Blankfein might have granted a meeting to so incautious a figure as Low – who reportedly once used stationary from the Sultan of Brunei to procure seats at the London nightclub Chinawhite – is part of what has Wall Street so shaken. It’s a little like hearing the Pope was taking selfies at the Adult Video awards.

“It explodes the myth of the solemnity of these guys,” is how Pang puts it.

Until recently, conventional wisdom held 1MDB was a scheme cooked up by the two Goldman bankers on the ground: Malaysian-born Roger Ng and German-born Tim Leissner, the husband of “hip hop’s original first lady,” Kimora Lee Simmons.

Ng has already agreed to return about $29 million. Leissner has already pleaded guilty and agreed to return $43.7 million, while also admitting that upwards of $200 million flowed from 1MDB to accounts that he and a relative of his controlled.

As the Times put it in November, Goldman has tried to cast Leissner as a “rogue” employee. But it’s now apparent the story is far more complex.

According to Wright and Hope’s book Billion Dollar Whale, for instance, Goldman’s Asia President, David Ryan, was suspicious of some of the deals in the third bond issue. Ryan was troubled by the news the deal had reportedly been sealed by just a conversation.

After all, a $3 billion bond issue would normally involve banks fighting tooth and nail with detailed written proposals. But senior Goldman officials, including then-bank president and former senior Trump economic adviser Gary Cohn, reportedly overrode Ryan’s objections and supported the deal. 

What was in it for the bank? About $600 million in fees. Goldman may have made some of that money on gains while it held the bonds, i.e. not all of that widely quoted sum was a pure fee. Also, the deal was unusual in that the bank purportedly held all the risk on the bonds for a long time, as much as a year in the third transaction.

Still, Goldman charged Malaysia what by all accounts was a beyond-exorbitant price. The Billion Dollar Whale authors asserted the bank earned “two hundred times the typical fee.”

Clare Brown of the Sarawak Report, who broke many of the early stories about 1MDB, was writing about Goldman’s pricing a long time ago. In one story in 2013, she noted that when the bank earned $196 million in one transaction, that represented “around 8.8% of the issue’s total nominal value rather than the normal rates, which might be expected to amount to around 0.25%, according to traders.”

Reached by email this week, Brown said recent events only bring what was obvious some time ago into greater focus. “Basically, anyone with any knowledge of the markets and banking could see this deal was fishy as hell,” she says, adding, “What is absolutely clear is there is no way the bosses of the bank could have failed to see what a mere onlooker like myself was calling out back in 2013. They ALL HAD TO KNOW.”

“Should have set alarm bells off around the globe,” is how market analyst Eric Salzman, who writes the humorous MonkeyBusinessBlog, puts it.

Goldman has survived many scandals in recent years. The bank paid $550 million to settle the infamous “Abacus” affair, in which Goldman helped hedge fund investors create a born-to-lose mortgage investment product to bet against.

Then they agreed to pay another $5 billion to settle claims of improper “packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities” between 2005 and 2007.

But 1MDB is both a financial and existential threat to the bank. In its most recent quarterly filing, Goldman said it expected to face “significant fines, penalties, and other sanctions,” as individuals and nations alike will be scrambling to recover pilfered funds.  

The larger damage may be to the bank’s name. The apparent inability of Goldman’s internal control mechanisms to question the source of a mysteriously lucrative $600 million bond deal sent a powerful signal to investors.

“Were those fees worth the reputational damage?” asked Bloomberg.

“People are cynical, of course, and think they’ll still get away with a fine,” says Pang. “But this is as serious a situation as they’ve faced.”

What’s kept the financial system together since 2008 is a widespread belief that even if bankers at places like Goldman are greedy or amoral, they’re at least sharp in a self-interested way, “the smartest guys in the room.” We’re now finding out that even that last part might not be so true. Greedy, amoral and not too bright: Welcome to the modern financial system.

A Damning New Report on LGBT Persecution in Chechnya

By Masha Gessen, The New Yorker

01 January 19

 

n October, 2017, a young man named Maxim Lapunov spoke at a press conference in Moscow. Flanked by L.G.B.T. and human-rights activists, Lapunov, shaky but collected, told the story of being kidnapped in the street in Grozny, the capital of Chechnya, and being held by the police for twelve days and tortured. “They started beating me with batons,” he said. “I’m not sure how long it lasted, but it was a long time .?.?. They hit my legs, hips, buttocks, back. They would hit me until I fell down, let me catch my breath, make me stand up, and start over.”

Lapunov, an ethnic Russian who grew up outside Chechnya but was working in Grozny, is the only person who has come forward as a victim of the anti-gay purges in Chechnya. Many other victims have spoken anonymously, but Lapunov went on the record in the hopes that his abusers would be prosecuted. Russian prosecutors, however, refused to open a case, and a Russian court has refused to consider Lapunov’s complaint. A report released on Friday, by the Organization for Security and Cooperation in Europe, confirms that what happened to Lapunov is by no means exceptional: kidnapping, torture, and even extrajudicial killings are the norm in Chechnya, as it is the norm for Russian federal authorities to ignore these practices.

There is a bitter poetry to the entire text of the report. The O.S.C.E. itself comes out of the 1975 Helsinki Accords, a major Cold War–era document that got the Soviet Union to commit to observing human rights—at least on paper—and thereby launching the Soviet dissident human-rights movement. The Moscow Mechanism, as it was called, was a 1991 addition to the agreements, designed to enable the O.S.C.E. to conduct investigations in signatory countries, and to compel these countries to participate in the investigations. Russia, however, refused to coöperate with the latest investigation. The rapporteur and Austrian academic Wolfgang Benedek sought fact-finding assistance from Russian authorities, and was turned down. Benedek had to rely on interviews with victims and activists, including Lapunov, who has fled the country for fear of retribution. “Having interviewed Mr. Lapunov myself I can confirm his credibility,” the report states. “His story also is nearly identical to similar stories from other victims.”

Benedek notes that by signing the Helsinki agreements, in 1975, the U.S.S.R. promised, among other things, that no one would be subjected to arbitrary arrest or arbitrary detention. Chechnya is a part of the Russian Federation, which, in turn, is the legal heir to the Soviet Union’s international commitments. In Chechnya, Benedek writes,

Reports of a general practice of humiliation, inhuman treatment and torture in order to obtain confessions are confirmed by victims and witnesses, in particular with regard to certain groups like LGBTI persons, alleged drug users, Islamists and suspected terrorists, including human rights defenders and journalists. The use of electric shocks is a constant pattern which anybody picked up by the police has to expect. Cases of kidnapping and enforced disappearances exist in the context of extra-judicial killings and during the illegal detentions after which people might reappear.

The report focusses on the anti-gay persecutions, which, it suggests, are incited by the Russian federal law against so-called propaganda of homosexuality, but also on trumped-up prosecutions and on extrajudicial killings. Twenty-seven men were killed in Grozny on one night in January, 2017, the report indicates; they were suspected of “terrorist” activity and summarily executed. Two cases of torture are given as examples of a general practice: “Khizir Ezhiev, a senior economics lecturer at the Grozny State Oil Technical University, who reportedly was abducted, tortured and killed, after having participated in a group on social media, which was critical of the [Chechen] Republic’s leader, Mr. [Ramzan] Kadyrov. Another case is the reported abduction and torture of Khusein Betelgeriev, a former senior faculty member at the Chechen State University.”

The federal government in Russia has long willfully ignored the state terror in Chechnya at best; at worst, it has encouraged it. Chechen authorities, for their part, attack victims, witnesses, and their families when someone dares to come forward. Human-rights organizations in Chechnya have been forced to shut down because, the report says, “the harassment in recent years on human rights monitors has been so severe that it has become too risky to continue this work.” Right now, Oyub Titiev, the head of the Grozny office of the remaining human-rights organization, Memorial, is imprisoned and facing trial on what the report calls “obviously fabricated evidence.”

Following a standard format for such reports, Benedek makes recommendations for improvement to both the Russian Federation and its Chechen Republic. But so little hope is there for any improvement inside Russia that three out of five of the rapporteur’s recommendations to O.S.C.E. member states concern people fleeing Chechnya, especially those of them who are L.G.B.T.I. They should be granted refugee status, Benedek suggests, and given special security considerations, including safe housing and even new identities. As desperate as these recommendations sound, they may be as unrealistic as the hope that Russia will improve in its approach to human rights. Following an initial wave of international attention in 2017 to the fate of L.G.B.T. Chechens, when Canada and several European countries welcomed more than a hundred refugees, offers of protection have dried up. Dozens of cureently displaced L.G.B.T. Chechens will continue to struggle to find a safe haven.