Goldman Sachs’ Asia franchise suffers in 1MDB storm
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The action for one of the worst crises in Goldman Sachs’ history is now centred in the US, where prosecutors have charged two of the bank’s former executives with money laundering and bribing foreign officials.
Back in Asia, the Malaysian corruption scandal is still unfolding. The question now is how deep the rot goes and how serious the damage will be to Goldman’s wider business in the region, which the bank has built over decades.
‘Sure, all of my clients are crooks . . .’
The impact of the 1MDB scandal has been swift. Tim Leissner, the former Goldman partner who has pleaded guilty to crimes in connection to the 1MDB scandal, left Goldman in 2016, by which time the bank had already started pulling back in the region. In 2013 it ranked number two in investment banking for fees in south-east Asia but only two years later, after the public eruption of the scandal, it had fallen to number 24, according to data from Refinitiv.
Alex Turnbull was a trader at Goldman’s Singapore office in 2012 and 2013, the time the bank advised 1MDB, the Malaysian sovereign wealth fund at the heart of the scandal. Mr Turnbull, son of former Australian prime minister Malcolm Turnbull, is scathing in his assessment of the bank’s approach to the region.
He told the Financial Times: “The attitude among some of the banking guys was . . . ‘Sure, all of my clients are crooks — so how the fuck else am I going to deal with them?’
“They kind of took the view that if I want to get things done in Asia then I will have to do it in the, quote unquote, ‘Asian way’ . . . Maybe that is your opinion but that is also a breach of US law.”
Mr Turnbull has claimed that he was sidelined from his position after raising questions over the Malaysia dealings. Insiders at Goldman have rejected the claims, stating Mr Turnbull had no exposure to 1MDB.
Mr Leissner told a court in August that it was “very much in line of its culture of Goldman Sachs to conceal facts from certain compliance and legal employees”, according to a transcript made public earlier this month.
Goldman has sought to portray the actions as the misdeeds of individuals rather than the broader cultural problems identified by Mr Turnbull and Mr Leissner. Last week, chief executive David Solomon sent a voicemail to employees, saying he was “personally outraged” by the “reprehensible” behaviour of “those individuals”, which was “inconsistent with the good work and integrity that defines work that 40,000 of you do every day”.
Even if that message prevails, the reputational damage is serious and Goldman investors are bracing for fines of at least several hundred million dollars. In Asia, though, the response is mixed.
Goldman backs away from Malaysia
“If you’re a big corporate and you’re in early-stage talks [with Goldman] on your next derivatives structuring, you can imagine people on the board saying, ‘Do we really have to go with the guys involved in 1MDB?’,” said Kevin Kwek, a Singapore-based analyst at Sanford C Bernstein. “On the other hand, these guys are Teflon and they have very deep relationships.”
In Malaysia, the bank’s alleged involvement in a scheme that embezzled $2.7bn from 1MDB is creating the toughest challenge for its business since it expanded in the region a decade ago.
Prime Minister Mahathir Mohamad has refused to rule out forcing the bank out of the country, saying: “Goldman Sachs has done things which are wrong that they shouldn’t have done.”
When Goldman decided to target Malaysia and the rest of south-east Asia as part of a wider regional expansion 10 years ago, that effort was led by Mr Leissner as the bank’s then chairman of south-east Asia. Mr Leissner is credited with building the bank’s relationships with Malaysian tycoons and the government of Najib Razak starting in 2008.
Its government connections in Malaysia — reinforced by meetings between Goldman’s former chief executive Lloyd Blankfein and Mr Najib — initially proved lucrative. State-run 1MDB hired Goldman to work on $6.5bn in bond deals that brought in about $600m in fees, an uncommonly high rate for the services. Between 2008 and 2013, Goldman was the only western investment bank to rank among Malaysia’s top-10 fee earners.
At its peak in 2013, Malaysia generated about $82m in investment banking fees for Goldman, or 70 per cent of its total fees for south-east Asia, according to data from Refinitiv. The $600m earned on work for 1MDB is not captured in the fees data because it was earned on bond spreads. Banks often criticise third-party fees data for not giving a complete picture of how they generate revenues.
Goldman’s brand has shown little sign of recovery, taking 17th spot in south-east Asia for fees as of the start of November, bringing in only $27m. Malaysia has generated no fees for the bank for the past two years, according to Refinitiv. Other markets such as Singapore and Indonesia are also down.
Bankers in the region argue that as long as Malaysia’s ruling coalition — which ousted 1MDB founder Najib Razak in the May elections — is in power, Goldman is likely to be shut out of the country, even if it reimburses the bond fees.
“They’ve been persona non grata for some time,” said one senior banker in the region. “The government-linked companies haven’t touched them for ages. The only good client they really had apart from 1MDB in Malaysia was [tycoon] Ananda Krishnan, but you haven’t seen him using them either.” Mr Ananda could not be reached for comment.
Goldman’s office in the country has been slashed in size, with just an asset management team remaining, according to a person familiar with the matter. The bank’s former chairman of investment banking in Malaysia, Yusof Yaacob, left in 2014 to join Deutsche Bank as chief country officer.
Since the breakout of the 1MDB scandal in 2015, Goldman’s name has been noticeably absent from sizeable deals done by large Malaysian investors, such as sovereign wealth fund Khazanah. Nor has it won significant business from the two largest investors in neighbouring Singapore, Temasek and GIC, during that time, according to a list of large M&A deals on which the bank has worked.
Instead its clientele in Malaysia has included smaller groups such as Australia-listed iProperty and private equity house Navis Capital Partners. It has also worked on a few inbound deals, such as Bank of China (Hong Kong)’s investment in Malaysia.
The flurry of south-east Asia deals under Mr Leissner stood out in the bank’s broader Asia business, which has focused most of its resources on China.
China focus endures
Goldman has brought in about $640m this year in fees from Asia excluding Japan, putting it third behind Bank of China and Citic. Business from China accounts for just over half of that income — a 40 per cent increase on all of last year and a record high for the bank.
The bank made early inroads into China, forging ties with some of the country’s most important financiers. It underwrote the initial public offering of Tsingtao Brewery in 1993, the first flotation of a Chinese company on the Hong Kong stock exchange, presaging tens of billions of dollars in similar deals.
In 2004 it struck a deal with powerful Chinese financier Fang Fenglei for one of the first foreign securities joint ventures in the country. This arrangement, brokered by then-chief executive Henry Paulson, was hailed as a major breakthrough in China, ushering in several similar joint ventures by rivals.
“The China presence for global banks matters for perception, and because you’re bringing in global clients and local know-how,” said George Kuznetsov, head of research and analytics at Coalition, the financial services data provider.
The escalating 1MDB scandal has not dissuaded China’s largest state groups from hiring Goldman. It worked on Postal Savings Bank of China’s $7.6bn public flotation in 2016 and ChemChina’s $44bn acquisition of Swiss agro-business giant Syngenta in the same year.
Its brand is highly coveted, as underlined when a Shenzhen-based firm trading under the same Chinese characters was caught offering its services online in 2015.
This sweep of lucrative Chinese deals was arranged under the watch of Andrea Vella, Goldman’s former co-head of investment banking for Asia excluding Japan.
However, this month Mr Vella became the latest Goldman casualty in the 1MDB saga, raising questions over the direction of the bank’s top leadership in the region.
The US Department of Justice said recently that an Italian partner at the bank was a co-conspirator in the scheme to embezzle billions from the Malaysian fund. Mr Vella, who is from Rome, has not been charged but was quickly put on leave.
New leadership in Asia
Attention has now focused on Todd Leland, who moved to Hong Kong late last year as the bank’s co-president in the region alongside Asia-Pacific securities head James Paradise.
Mr Vella and co-investment banking head Kate Richdale were both moved out of management roles in October, prompting Mr Leland to be appointed as the bank’s sole leader for investment banking. The posting is Mr Leland’s first in Asia, and it is viewed as a challenge for a banker fresh to the region.
“This is not the job he moved here to do but he’s been doing it for several months,” a Goldman colleague said.
The 1MDB case still threatens to produce more ugly surprises for Goldman. The group’s shares in the US took their sharpest one-day dive since 2011 earlier this month after Malaysia’s finance minister said it would seek a refund on the billions lost in the scandal. The bigger worry for Mr Leland and his colleagues is that the reputational damage it suffers could be even more expensive.
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