The colourful family and friends of 1MDB

BY
KHAIRIE HISYAM
 | KiniBiz

DECEMBER 15, 2015 8:00AM

From its inception to the present-day state of disarray, 1MDB counts an interesting – and colourful – group of people who are either directly involved in its operations or who are linked to the company in some manner.

________________________________________________________________________

Controversial 1Malaysia Development Bhd (1MDB) has a “triple-tier” corporate governance structure, with a board of advisors chaired by the prime minister himself in addition to having a board of directors overseeing the senior management team.

That adds another shade of perplexing contradiction in light of the company’s dodgy dealings and controversial decisions in the past. KINIBIZ examines in no particular order some important characters involved:

Jho Low, the dealmaker

Penang-born Low Taek Jho, more commonly known as Jho Low, is a young businessman in his early 30s living a high-profile life, by his own admission rubbing shoulders with the likes of Paris Hilton and Leonardo DiCaprio.

Interestingly, the son of Larry Low of MWE Holdings fame began forging connections with the wealthy of the world when he went to top UK boarding school Harrow and then Wharton School of Business. There he reportedly became close to scions of wealthy Arab families, a connection which later would seemingly be instrumental in his deals.

It was also during this time that he got to know the prime minister’s stepson Riza Aziz, who was studying at the London School of Economics at the time. This led to Jho Low growing close to Riza’s mother Rosmah Mansor as well, according to a
New York Times report
 earlier this year.

These connections grew increasingly significant as he began to be involved in 1MDB back in its early days – this goes back to the time when the company was still known as Terengganu Investment Authority (TIA) and controlled by the Terengganu state.

In a previous statement, Jho Low’s representative stated that he was among many parties asked to offer advice during the initial stages of TIA’s life. Jho Low further claimed that he was no longer actively involved in any manner by mid-2009 when the federal government took over TIA and renamed it 1MDB.

However, his involvement may have extended to at least near the end of 2009, according to a series of articles published by Sarawak Report citing leaked documents which appear to be confirmed as genuine.

They alleged that despite having no formal role within 1MDB, Jho Low and his associates were in unusually active roles in setting up 1MDB’s first joint venture with Middle East-based Petrosaudi International – both parties were only officially introduced to each other days before signing the hasty venture.

The deal in itself raised concerns, among others because of the hasty manner in which it was concluded as well as the revelation by Sarawak Report that some US$700 million from the US$1 billion 1MDB committed to the joint venture was transferred into an unrelated bank account under the name of Good Star Ltd at RBS Coutts Bank Ltd, which Sarawak Report alleged is controlled by Jho Low.

As the 1MDB controversy erupted this year Jho Low became a household name among the public, not least because of these Sarawak Report revelations. Sarawak Report later published a photo of Jho Low standing beside the prime minister’s family in what it alleged was a meeting aboard a luxury yacht with other parties.

Tarek Obaid and Prince Turki – the PetroSaudi connection

PetroSaudi International, 1MDB’s first joint-venture partner under what has been revealed as shady circumstances, is an interesting company.

The independent oil and gas company was reportedly incorporated in the Seychelles in 2005 and has offices in Saudi Arabia, UK and Switzerland with projects in Ghana, Indonesia, Venezuela and Tunisia. Previously it was reported to have had a stake in Paraguayan oil company CDS but sold this stake in 2009.

Tarek Essam Ahmad Obaid
, co-founder and CEO, is a graduate of Georgetown University’s School of Foreign Service, according to the company’s website.

In turn Tarek is linked to
Prince Turki
, the seventh son of the late King Abdullah of Saudi Arabia, and both were often seen together in Riyadh. Past news reports have quoted Tarek as speaking on behalf of Prince Turki’s company Al-Obayya in 2004.

Tarek is also part of private equity company Genii Capital, where he partners with Renault F1 Team chairman Gerad Lopez among others. Subsequently in May 2010 Tarek joined Team Renault, although later in November that year Tarek relinquished his role as partner in Team Renault, according to Genii Capital in a statement.

Among other things Tarek had also donated US$10 million to Mayo Clinic in 2011, which led to a centre for surgery being named after his parents. In 2011 he credited the Saudi royal family when PetroSaudi generously chartered planes to lift Malaysians out of Egypt as crisis embroiled the nation.

Apart from 1MDB, PetroSaudi had also been involved with UBG Bhd, when in January 2010 it bought stakes linked to then-Sarawak chief minister Abdul Taib Mahmud for RM1.2 billion. Notably Jho Low was a board member of UBG then. PetroSaudi later took the company private.

THE MEN IN CHARGE

Shahrol Azral Ibrahim Halmi

Shahrol Halmi was the first CEO of 1MDB back when it was still TIA and under control of the Terengganu state government. Most of 1MDB’s major deals and borrowings took place during his tenure.

A Stanford University graduate, he formerly spent more than 15 years as a consultant at Accenture, where he worked on various sectors including financial services and oil and gas. His track record indicates an expertise in transformation initiatives.

Under his watch 1MDB issued its very first debt papers for RM5 billion, directly disobeying the board of directors who instructed the exercise to be put on hold. During the PetroSaudi joint venture episode, Shahrol had full knowledge of the US$700 million transfer into the bank account allegedly controlled by Jho Low, according to Sarawak Report.

He also oversaw the contentious decision to convert the joint venture in a loan to PetroSaudi as well as loan further funds later. It was under Shahrol’s watch that most of the questionable trail of power asset acquisitions was undertaken by 1MDB between 2012 and 2013, although considering the final major deal was signed just several months after he resigned as CEO he may have been instrumental in arranging the final purchase too.

He resigned his position as CEO on March 15, 2013 as 1MDB’s debt count stood at RM36 billion as of the 2013 financial year ended March 31, 2013 (FY13). However he remained as 1MDB board member. Shahrol then went on to the Performance Management and Delivery Unit (Pemandu), where he is presently a director reporting directly to Pemandu chief Idris Jala.

Mohd Hazem Abdul Rahman

Mohd Hazem took over from Shahrol Halmi on March 15, the day the latter resigned, as 1MDB was sitting on about RM36 billion in debt. Prior to that he was chief operating officer of 1MDB since August 2012.

Under his watch 1MDB would further undertake more than RM12 billion in borrowings although for the most part these seem to be related to rolling over existing debt. Among others he oversaw the extinguishing of the controversial Aabar options for billions of ringgit as well as the first redemption of 1MDB’s billions of investments in the Cayman Islands.

A graduate of the Weatherhead School of Management at Case Western Reserve University in the US, Mohd Hazem holds a degree in management, specifically in banking and finance. He joined 1MDB from Sime Darby Motors unit Auto ConneXions Sdn Bhd, where he was managing director.

According to 1MDB, Mohd Hazem has extensive experience in corporate turnovers and strategy, with a total of 17 years in various sectors including power and equities. He resigned on Jan 5, 2015.

Arul Kanda Kandasamy @ Azrul Kanda

Appointed on Jan 5, 2015, Arul Kanda comes from an extensive background in structured finance, corporate finance and restructuring with experience in London, the Middle East and Malaysia.

Arul, a Malaysian national and pointedly described by one federal minister as a Muslim, is described by some as a debt restructuring specialist. Almost immediately after coming in, he announced in February a halt on all new deals and borrowings and rolled out a rationalisation plan for 1MDB which includes monetising its power assets and divesting some equity in its real estate business.

However, Arul also comes with some connection to at least one Middle Eastern player that has been linked to 1MDB. The link raised concern on Arul’s interests when he was appointed to helm 1MDB.

A UK qualified Barrister, with an LLB from the London School of Economics and an LLM from University College London, he was also a former board director at RHB Investment Bank and reportedly at RHB Capital too.

Arul came from Abu Dhabi Commercial Bank (ADCB) – majority owned by the government of Abu Dhabi, which also controls International Petroleum Investment Co (IPIC) and Aabar, which has business dealings with 1MDB – where he was executive vice-president and head of investment banking. He also formerly worked at Barclays Capital and Credit Agricole and also holds board positions at Global Investment House (Kuwait) and ADCB Macquarie Infrastructure Fund.

Notably ADCB, which bought a 25% stake in RHB Capital in 2008 from the Employees Provident Fund, reportedly named Arul to sit on the company’s board as its representative. ADCB later sold the stake to another Abu Dhabi government investment arm, Aabar Investments PJS.

In turn Aabar, which is controlled by Abu Dhabi’s IPIC, was granted the notorious option to buy up to 49% stake in 1MDB’s power assets in exchange for IPIC’s guarantee of two bonds issued to buy the power assets.

THE BOARD OF DIRECTORS

Lodin Wok Kamaruddin (from Aug 11, 2009)

Chairman of 1MDB board of directors, Lodin Wok Kamaruddin is widely viewed as a loyalist of Prime Minister Najib Abdul Razak following close professional ties – his career spans defence-related companies and funds.

Lodin is CEO of Lembaga Tabung Angkatan Tentera (LTAT) since August 1982 and Boustead Holdings group managing director since 1991. Notably Najib was defence minister during the years 1990-1995 and 1999-2008.

He was appointed to the 1MDB board on Aug 11, 2009, the same day Sime Darby group chief Mohd Bakke Salleh was reappointed to the board before the latter resigned again from the board, allegedly in protest over how the PetroSaudi joint venture deal was conducted by company management.

While this sudden change raised eyebrows at the time, the company stated the intention was to tap into his expertise. As controversy erupted this year following increased media reportage on 1MDB, Lodin has publicly come out to defend the company although some of his statements prove problematic under closer scrutiny.

Ismee Ismail (from March 23, 2009)

A chartered accountant, Ismee Ismail comes from a long corporate background involving companies such as Arab Malaysian Development Bhd, Shell Malaysia Trading Sdn Bhd, Danaharta Nasional Bhd and Felda Global Ventures.

Among others Ismee also sits on the board of Bank Islam Malaysia Bhd, its parent BIMB Holdings and Syarikat Takaful Malaysia.

Presently Ismee is group managing director at pilgrimage fund Lembaga Tabung Haji.

Mohd Bakke Salleh (Feb 27 – April 7, 2009; Aug 11 – Oct 19, 2009)

Former 1MDB board chairman and member over two brief tenures, Mohd Bakke Salleh is presently president and group chief executive of conglomerate Sime Darby Bhd. His career has included a spell as group president and CEO at Felda Global Ventures Holdings Bhd as well as group managing director and CEO at Lembaga Tabung Haji and a stint at Danaharta Nasional Bhd.

He holds an economics degree from the London School of Economics in UK and is also a fellow of the Institute of Chartered Accountants in England and Wales and a member of the Malaysian Institute of Accountants.

His second and final departure from the 1MDB board was alleged to have been in direct protest over the PetroSaudi joint venture deal, which was hastily signed in direct disobedience of board instructions to carry out proper due diligence, according to sources. However, Mohd Bakke has declined to speak about his time at 1MDB when speaking to the media.

Azlan Mohd Zainol (Aug 11, 2009 – Jan 11, 2010)

Like Mohd Bakke, Azlan comes from an accounting background. He is also fellow of the Institute of Chartered Accountants in England and Wales and a member of the Malaysian Institute of Accountants.

Azlan is mostly known for his time helming pension fund Employees Provident Fund, where he was CEO between April 2001 and April 2013. His long corporate career had spanned various companies including Malaysian Resources Corp Bhd (MRCB), RHB Investment Bank and a non-executive directorship at Rashid Hussain Bhd.

Sarawak Report alleged that Azlan also eventually departed following the contentious PetroSaudi joint venture deal, though he left some months after Mohd Bakke.

Ong Gim Huat (from Jan 12, 2010)

A corporate man, Ong comes from a real estate and construction background with over 30 years of experience. Among others he was a former president of the Real Estate and Housing Developers Association (Rehda) and currently chairman of Kwong Wah Yit Poh Press Bhd.

Past news reports, citing records from the Companies Commission of Malaysia, have reported Ong as a business partner of Jho Low’s father as both are shareholders and directors for 30 years of Wonder Bay Sdn Bhd, a Penang-based property development company, since its incorporation in 1995.

Notably Ong has signed off every 1MDB annual report in his capacity as director alongside the respective CEO at the time, according to records.

Christopher Lee Sian Teik (Feb 27, 2009 – March 23, 2009)

A lawyer with over 25 years’ experience, Lee is joint managing director of law firm Christopher & Lee Ong and specialises in capital markets, mergers and acquisitions, and special projects. He was
admitted
 to the Malaysian Bar in 1986.

According to his firm’s website Lee has also advised clients on financing exercises and transactions, both conventional and Islamic, including issuances of sukuk, bonds and debt papers.

His expertise also extends to corporate debt restructuring and over his career he has been involved in negotiating and advising on power purchase agreements and concession agreements, although his time at 1MDB board does not match the time frame of 1MDB’s later power asset purchases.

Ashvin Jethanand Valiram (from Feb 2, 2010)

A director at 1MDB, Ashvin is a luxury goods trader who also specialises in travel-retail. He is the third-generation owner of the Valiram Group, often credited for growing the business into a glamorous luxury niche.

In 1996 he broke a new niche by opening the world’s first retail store at an airport focused on selling fabrics. Today the Valiram Group operates 250 stores in 10 countries, representing 150 brands from Australia, China and Malaysia to Thailand and Russia.

According to the prime minister, Ashvin’s inclusion in the board is due to his entrepreneurial spirit, though the socialite is also often said to be close to the premier’s family. It is unclear how 1MDB benefits from his entrepreneurial spirit.

THE BOARD OF ADVISORS

Nor Mohamed Yakcop

1MDB’s board of advisors, chaired by Prime Minister Najib Abdul Razak, includes a number of familiar as well as new faces. Among them is Nor Mohamed Yakcop, former minister at the Prime Minister’s Department as well as former finance minister II between 2004 and 2009.

Among others Nor Mohamed is also remembered for a 32-year stint at Bank Negara Malaysia and was allegedly involved in a controversial currency speculation scandal involving the central bank in the early 1990s, with losses hitting RM30 billion by some estimates.

Mohd Sidek Hassan

Former chief secretary to the government for six years between September 2006 and June 2012, Mohd Sidek is also chairman of Petronas since July 2012. Interestingly he was born in Pekan, which is the prime minister’s constituency.

Among others Mohd Sidek’s career in public service has included being secretary-general at the Ministry of International Trade and Industry. A controversy some two over years back involved his daughter and son-in-law when the two managed to win most of available feed-in tariff quotas issued by the Ministry of Energy, Green Technology and Water.

However the ministry refuted claims of preferential treatment, stating the bidding was done online and automatically via a first-come, first-served basis.

Sheikh Hamad Bin Jassim Bin Jabr Al-Thani

A former prime minister of Qatar, Sheikh Hamad is officially special advisor to 1MDB and was appointed following a memorandum of understanding (MoU) signed between 1MDB and Qatar Investment Authority (QIA) in May 2010.

Sheikh Hamad is also CEO of QIA. Days after the MoU was signed, news reports emerged suggesting that QIA will partner 1MDB in its 486-acre Bandar Malaysia development on the site of a former military air base at Sungai Besi.

1MDB is presently in the process of selling a 60% stake in the Bandar Malaysia project and is mulling bids from two undisclosed bidders.

The company has suggested before that the bidders are foreign entities.

Khaldoon Khalifa Al Mubarak

Another Middle-Easterner on the 1MDB advisory board is Khaldoon Khalifa, who is CEO of Abu Dhabi investment company Mubadala Development Co. Interestingly Khaldoon became chairman of the Manchester City football club in 2009 when the Abu Dhabi United Group took partial control, succeeding former Thai premier Thaksin Shinawatra.

Notably in October 2012 Mubadala signed a deal with 1MDB to work on the Tun Razak Exchange (TRX) development, the twin project of Bandar Malaysia development with an estimated gross development value of as high as RM40 billion.

Ali Bin Hamsa and Mohd Irwan Serigar Abdullah

Ali Hamsa

Ali Hamsa is presently chief secretary to the government while Mohd Irwan is secretary-general to the Ministry of Finance, which is helmed by Prime Minister Najib in his capacity as finance minister.

Ali took over from Mohd Sidek in 2012 and comes with a background in economics, obtaining a Master’s degree from Oklahoma State University, US in 1986 before going on to obtain a PhD in environmental science and economics in 1997.

Mohd Irwan Serigar Abdullah

Meanwhile, Mohd Irwan also holds a PhD in economics from the International Islamic University in Kuala Lumpur.

Separately he had overseen a secret government fundraising company called Pembinaan PFI Sdn Bhd, which was originally set up as a private finance initiative for public projects but operates in opacity (see Issue 003 of KINIBIZ Magazine).

Chang Zhenming

A former professional Go player, Chang is presently chairman and president of the CITIC Group of China. His professional career had seen decades spent in varying roles across the CITIC Group, which stands for state-owned investment company China International Trust and Investment Corp.

In particular some of his time at CITIC had seen close involvement with the financial markets, specifically in respect of bonds. In the early 1990s he was in charge of fundraising for CITIC via issuing bonds in the international markets, foreign exchange and securities.

Bernard Arnault (no longer on board of advisors)

With a nett worth of US$36 billion as of Nov 30, 2015, Bernard Arnault is the 13th richest man in the world and the top in France by nett worth. He is chairman and chief executive of LVMH Moët Hennessy Louis Vuitton, considered among the world’s leading taste-makers with an empire spanning 70 brands including Dom Perignon, Bulgari, Louis Vuitton, Fendi and Sephora.

It is unclear why Arnault was included in the board of advisors for 1MDB and when he left – the 1MDB website no longer lists him as a member of the advisory board.

However, he is no stranger to controversy following news reports in the UK over close ties with former British prime minister Tony Blair’s family when the latter was still premier. British media have photographed him going on holidays with Blair’s family and the latter became advisor to LVMH in 2010.

Yesterday:
Anatomy of a money-spinner

Tomorrow:
How 1MDB lost RM6 bil through bond mispricing

                This entry was posted on Friday, 25 December 2015, 5:10 pm and is filed under
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After ‘annus horribilis’, can M’sians look forward to a better year?

Koon Yew Yin

Malaysiakini

26th Dec 2015

COMMENT
 Our prime minister is said to have had an “annus horribilis”. He will probably be very happy when this stressful year for him comes to an end.

Malaysians who are not familiar with this Latin term may have dirty thoughts when hearing the term for the first time. They should be excused for thinking of rude or four-letter words when cursing the BN government for making the lives of many Malaysians so hard and miserable.

It is safe to say that our prime minister is not alone in his year of disaster and misfortune. Millions of Malaysians are having it worse – much worse.

At least the PM’s personal bank account has increased by RM2.6 billion. But pity him; let’s not forget that much of this money has had to be distributed to Umno leaders, including members of parliament, state assemblypersons, supreme council members, division leaders, bloggers, media experts, etc.

Much of it has also gone to various consultants, and even more to ‘special consultants’ such as Jho Low.

This ‘fayloh’ (fat man), as he is popularly known in less polite circles, seems to have played out the prime minister, the entire cabinet, and the whole 1MDB board, as well as Bank Negara, etc.

Yes, that was one hell of a move. It deserves to go into the Guinness Book of Records for its sheer size and audacity, especially the super yacht Mediterranean excursion. But I guess that will never happen.

As for the ordinary rakyat, the list of complaints against the government will run into several pages and is getting longer by the day. Every day, it appears that there is a new scandal.

Corruption not about God

Meanwhile our Minister of Integrity in the PM’s Department, Senator Paul Low Seng Kuan aka Corruption Hunter King of Malaysia has said that he would be out of a job if Malaysians were “Godfearing” and held themselves accountable for their own actions.

The minister, who holds the portfolio of promoting governance and integrity, said that if all Malaysians possess that trait, even cabinet members would not dare abuse the power entrusted in them and would instead practice good governance.

That to me is one of the most stupid statements of the year!

Taxpayers like me and readers are paying big bucks for Low’s salary, car and driver allowance, local and overseas travel, medical, pension entitlement, etc, so that he takes his job seriously and works hard at catching the crooks, especially the big-time ones. But our crocodile man seems to be able to catch only small or baby crocs. The big crocs seem to be able to get away with lots of cash.

And what can he come up with to explain his inability to do his job properly? Malaysians are not God-fearing!

He seems to be implying that since Muslims are Godfearing, Christians are God-fearing and Hindus are Godfearing, therefore all other Malaysians such as Taoists or Buddhists or others who do not believe in God are the ones responsible for corrupt activities.

Corruption has nothing to do with whether one is God-fearing or not. Ask any ordinary Malaysian who or what is the cause of corruption and I am sure you will hear an earful about “condos for cows”, “submarines which cannot dive”, “Mara property fraud in Melbourne”, and many more which have been kept out of the news headlines.

If absence of “God-fearing” is Low’s reasoning, he should close shop, resign from his position immediately, and save taxpayers from having to bear the cost of keeping a PM-, Umno- and BN-fearing minister in the cabinet.

Prayer is not enough

But we have bigger problems than Paul Low.

As if the pain of having to pay GST to make up for the big hole in our national finances caused by 1MDB and other scams is not bad enough, our oil, gas, palm oil, and commodity exports are doing badly. Plus, our ringgit has been dropping like a stone. Maybe it is because the whole nation is not God-fearing.

Thank God, the ringgit has steadied somewhat during the last month. Let’s pray together with Low that the cabinet ministers practice good governance and do not abuse the trust and power entrusted to them.

Those with children studying abroad must pray harder as their ringgit shrinks in foreign currency terms.

Oftentimes, prayer is not enough. What we need to do is kick the responsible party in the backside.

But even that does not seem to be working.

So for this coming year, I urge Malaysians not only to rely on prayers or on delivering the government and authorities a kick in the backside.

I suggest we kick BN out altogether and elect a new government the quickest opportunity we have.

For a better year, we need a better government – that is, a change of government.

KOON YEW YIN, a retired chartered engineer, is a philanthropist.

                This entry was posted on Saturday, 26 December 2015, 9:05 am and is filed under
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How 1MDB lost RM6 bil through bond mispricing

BY
KINIBIZ

DECEMBER 16, 2015 8:00AM

1MDB has already lost some RM6 billion by mispricing its bonds. So was this deliberately done, and whose pockets ended up bursting at the seams?

________________________________________________________________________

A big chunk of 1Malaysia Development Bhd’s (1MDB) fundraising over the years had been through issuing bonds. However, the company had been massively underpricing its bonds, losing some RM6 billion according to KINIBIZ estimates – and this is not paper but real, cold, hard cash.

When a bond is issued, it has a coupon rate and a face value. The coupon rate typically remains constant over the life of the bond and is a promise by the issuer to pay a certain percentage of the face value of the bond each year.

Bonds are commonly priced to give roughly similar yields as other comparable bonds in the open market. Yields are the annual coupon payments for the year divided by the price of the bond. Yields are adjusted by raising or lowering the bond price – they move in opposite directions.

But bonds are fickle things where small changes make huge differences, especially if the maturity period of the bond is long.

For example, a RM5 billion bond priced to yield two percentage points more than market rates over 30 years can mean underpricing of at least RM1 billion. It’s like selling property below the market price only for the buyer to immediately flip it at market price, taking the difference as quick profit.

This was what 1MDB did with its bonds. Its various bonds over the years were priced to yield considerably more than going market rates at the time, which in turn heavily discounted the bonds’ prices compared to market levels.

The result was that the bonds were issued to unknown investors much cheaper than they should have been. These investors were then able to flip them into the open market at the higher prices 1MDB should have issued them at in the first place and pocket cold, hard cash in profits.

And the price difference was instant, clean profit for these unknown investors. No local institutions had access to these bonds, said traders, and the identities of those given this first bite have been kept secret.

Mispricing from the start

These mispricing shenanigans (see table) started from the very beginning, when 1MDB was still Terengganu Investment Authority (TIA), incorporated in February 2009 as a state sovereign wealth fund for Terengganu.

It started off by issuing a 30-year RM5 billion bond with 5.75% coupon rate, payable semi-annually and arranged by AmInvestment Bank Bhd. However, this bond was issued at a 12% discount or 88 sen for every RM1 par value. 1MDB’s annual report places this yield figure at 6.71%.

Before we attempt to find a more sensible yield figure for this bond, it is important to note that the 30-year tenure is unusually long compared to a maximum of 20 years for government securities.

When 1MDB (as TIA) issued this 30-year bond, Malaysian government securities were trading at a yield of roughly 4.8% while Cagamas bonds, which do not carry explicit government guarantee, traded at about 5.28% yield.

According to bond analysts, a 25-30 basis point (100 basis points = 1 percentage point) premium to government bonds is acceptable for a bond with explicit government guarantee such as TIA’s 30-year bond. If we add another 30 basis points for the extra 10-year tenure, the fair yield for this bond would come to about 5.4%.

However, the effective annual interest rate was at 6.71%, considerably more than this fair yield figure. This higher rate can only be achieved by lowering the issue price, meaning the bond was issued too cheaply considering the yield could have been lower around 5.4%.

Calculations using a bond calculator found the mispricing undervalued the RM5 billion bond by about 20%. In other words, whoever got that first bite would have pocketed RM1 billion by buying this bond at the undervalued price and subsequently selling it back to the market at more sensible prices.

Previous KINIBIZ checks found the bond was even traded at a premium of RM1.20 for a RM1 par value bond, a substantial 36% increase over the effective issue price of 88 sen per RM1 par value.

Such bond mispricing represents an upfront siphoning of money by undervaluing the bonds and selling them at market price, the penalty being paid by higher interest rates over the tenure of the bond.

Mispricing, again and again

In May 2012, 1MDB through its subsidiaries issued two more bonds at par value of US$1.75 billion apiece. These 10-year bonds were to finance its power assets shopping spree and were arranged by Goldman Sachs.

They were co-guaranteed by both 1MDB and Abu Dhabi’s International Petroleum Investment Co (IPIC), the latter being granted a 10-year option to acquire up to a 49% stake in 1MDB’s power assets come a future listing exercise in exchange for the co-guarantee.

This option was later extinguished by paying US$1.23 billion or some RM5 billion to IPIC, the funds obtained from a term loan.

The coupon rates for these two bonds were between 5.46% and 5.8% for the first one, issued under 1MDB Energy Ltd, and between 5.60% and 5.7% for the second by 1MDB Energy (Langat) Ltd.

However, this indicates a mispricing as well, as yields for 10-year US Treasuries in May 2012 were in the 1.63%-1.98% range. In other words, the bonds, at roughly 6%, were priced about 425 basis points higher, if we assume the US Treasuries carried a rate of 1.75% then.

This is a strange difference. Around the same time Petronas’ bonds were trading at US Treasuries plus 185 basis points only. This means 1MDB bonds were priced some 240 basis points higher than its nearest comparable issuer in the Malaysian sector.

If we assume 1.75% as the rate for US Treasuries then, and a reasonable spread of 200 basis points, the issue should carry an interest rate of around 3.75%. Instead it was issued at 6%.

The implications are tremendous – the difference of 225 basis points would have undervalued each bond by about RM1.2 billion, or a total of RM2.4 billion for both, calculations show.

Letter of support

The two bonds of US$1.75 billion apiece were not the last that were arranged by Goldman Sachs for 1MDB. The investment banker also arranged another 10-year US dollar bond for 1MDB amounting to US$3 billion, backed by a letter of support from the government. This carried an effective interest rate (yield) of 6%, again implying similar mispricing.

The mispricing here could have amounted to as much as RM2.4 billion, assuming a similar mismatch in the rates as the earlier two US dollar bonds.

While the government has denied issuing an effective letter of guarantee for the bond issuance, the terms of the letter of support are unambiguous: should 1MDB fail to service its debt commitments vis-a-vis the US$3 billion bond issuance, the government would step in and provide financial support.

Deliberate intention?

The mispricing of 1MDB’s bonds happened multiple times. Once may be an error, twice may be a coincidence but thrice is a definite trend.

Like meat butchers who would know how to cut beef, bond professionals would have known what is involved in pricing bonds. Therefore it boggles the mind to imagine simple incompetence at work here.

And that leaves only one frightening, outrageous possibility: a deliberate intention to siphon off billions of ringgit.

Troubling questions arise. The most pressing are who the mysterious investors were and why they were effectively handed billions of ringgit in quick profit on a silver platter – all they needed to do for these handsome profits was to flip the bonds on the open market.

It does not end there. Who decided to give these mysterious investors the opportunity to make such windfall profits near-instantly and why? Did these mysterious investors give something to someone in return?

Into whose pockets did these lost billions really go into?

In light of these urgent questions, one report by Bloomberg in May 2013 stands out. The wire service had reported that Goldman Sachs made an eye-watering US$500 million from arranging three 1MDB bonds over the preceding year.

That was almost the same amount the federal government paid each month for its outstanding debt at the time. The firm’s revenue from the 1MDB bonds alone came at 7.7% of their collective face value, which is multiple times the normal commission rate.

Notably, Bloomberg reported that part of this US$500 million came from Goldman Sachs buying these bonds upfront at discounted rates and subsequently selling them at higher prices to investors.

The available clues on how 1MDB mispriced its bonds fit perfectly here. Was Goldman Sachs given the exclusive first bite at the massively underpriced cherries that were 1MDB’s bonds?

If yes, the pressing question is why 1MDB stood by and allowed Goldman Sachs to pocket such huge windfall profits upfront. Had this been a conscious decision, it may even amount to breach of fiduciary duty considering these lost billions rightfully belonged in 1MDB’s own coffers had the bonds been more sensibly priced.

In other words, these bond mispricing shenanigans border on the criminal. Yet sadly none of these losses would ever show up in 1MDB’s books. As a company wholly owned by the Minister of Finance Inc, the federal government’s arm, it is simply billions lost for Malaysia as a whole.

Yesterday:
The colourful family and friends of 1MDB

Tomorrow:
Other questionable use of loans – the Goldman bonds

                This entry was posted on Saturday, 26 December 2015, 10:35 am and is filed under
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Will God-fearing Paul Low ask the Prime Minister to withhold presentation  of NSC Bill to the Yang di Pertuan Agong for Royal Assent until Shahidan’s promise to Parliament to improve the Bill’s “shortcomings” had been honoured?

What are Malaysians, Christians and non-Christians, to make of the  cryptic speech by the Minister in the Prime Minister’s Department, Datuk Paul Low, that if the government is God-fearing, then there would be no need for him to be in the cabinet?

Speaking yesterday  at the Christmas high-tea reception organised by the Christian Federation of Malaysia (CFM), which should have been attended by the Prime Minister, Datuk Seri Najib Razak himself, Low said:

“If we have the fear of God, actually there is no need for me to be in the government.

“If we have this fear, we will be concerned for justice, good governance, integrity, the environment, fairness. We will not abuse the power that is entrusted on us ourselves as leaders.”

Deferring the very intriguing issue raised by Low whether one should be in a Cabinet when it is God-fearing or not God-fearing, the most pressing issue facing the country  is one of the unfinished business of the year 2015.

This is the most iniquitous, pernicious and monstrous piece of legislation ever presented by the Najib premiership of which Low is a member of the Cabinet, the National Security Council (NSC)  Bill –  is Low joining the majority of Malaysians in deploring the NSC Bill or is Low subtly defending it?

After the NSC Bill was rushed through the Dewan Rakyat “like a thief at night” without proper prior notice or consultation with Members of Parliament or the civil society on the last day of budget meeting of Parliament on Dec. 3, Low  said critics and opposition politicians should not worry about potential abuse of power by the NSC bill when it became law as it was created specifically for security issues, citing the Lahad Datuk incursion in Sabah on 2013.

He said that the new powers under the NSC Bill will not be used against government detractors and politicians, and  that criticism against the bill was because of the trust deficit towards Putrajaya.

Low said the law would only be used for acts of terror but added that the government had to work on addressing the people’s trust deficit.

Unfortunately, both at the Dewan Rakyat and Dewan Negara, Low’s understanding for the rationale for the NSC Bill was not reflected  by the speeches of Datuk Seri Shahidan Kassim, another one of the 10 Ministers in the Prime Minister’s Department,  responsible for shepherding the Bill through Parliament.

Can God-fearing Low explain why the wide powers asked by by the Executive in the NSC Bill are not placed under the Prevention of Terrorism Act (POTA), and the proposed National Security Council parked under POTA, if  terrorism, whether the Lahad Datuk variety or the new terrorist threats emanating from ISIS, is the real target of NSC Bill?

It is clear that UMNO/BN Ministers and leaders have a bifurcated understanding of the NSC Bill, one group like the God-fearing Low who believes that it was designed solely to fight the threat of terrorism, while another group like the Wanita UMNO leader, Datuk Seri Sharizat Jalil who believed the Bill had larger objectives, even to nab those out to “topple” Najib as Prime Minister, whether by democratic and constitutional means or otherwise.

Shahidan had promised the Senate that the government would “consider and scrutinise in details” the weakness, flaws and dangers of the NSC Bill raised by Members of Parliament to “improve the bill”.

Will God-fearing Low ask the Prime Minister to withhold presentation  of NSC Bill to the Yang di Pertuan Agong for Royal Assent until Shahidan’s promise to Parliament to improve the Bill’s “shortcomings” had been honoured?

As the NSC Bill violates the  two Rukunegara principles of the Supremacy of the Constitution and the Rule of Law in Malaysia,  Low should justify his God-fearing position in Cabinet by getting the agreement of the Prime Minister for  the Bill to  be further studied and amendments brought to the Special Parliament at the end of January for passage before presentation to the Yang di Pertuan Agong for Royal Assent.

Why is there  an unholy haste to make the NSB Bill into law, as if any further delay will have apocalyptic consequences to the nation – when the government can wait for some three years after the Lahad Daruk before presenting such a Bill to Parliament?

                This entry was posted on Saturday, 26 December 2015, 8:28 am and is filed under
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Another questionable use of loans – the Goldman bonds

BY
P. GUNASEGARAM
 | Kinibiz

DECEMBER 17, 2015 8:00AM

In just one year, 2013, 1MDB had a huge US$6.5 billion (some RM27 billion at current exchange rates) of borrowings from bonds arranged by Goldman Sachs, nearly 65% of total borrowings. The problem is that it is not possible to ascertain how the funds were used.

________________________________________________________________________

In 2013, 1Malaysia Development Bhd (1MDB) finalised US$3.5 billion through two bonds of US$1.75 billion each, both jointly guaranteed by 1MDB and International Petroleum Investment Co (IPIC). They carried effective interest rates of close to 6% (see Part 3 of this issue on the bond mispricing).

And then there was the US$3 billion bond, also priced at around 6% effectively, which had a letter of support from the Malaysian government.

Basically, the first tranche of US$1.75 billion worth of borrowings was to be used to fund the purchase of Tanjong Energy (US$810 million) and the rest for general corporate purposes. The second tranche of US$1.75 billion was to be used to fund Mastika Lagenda (Genting Sanyen) (about US$692 billion), with the balance for future acquisitions and general purposes.

But here’s the strange thing – despite the borrowings of US$3.5 billion (RM14.7 billion at an exchange rate of RM4.20 per US dollar or RM11.55 billion at RM3.30 per US dollar), there were substantial energy-related loans in the books of 1MDB as at March 31, 2014, the latest balance sheet date.

These include a RM6.17 billion syndicated loan, another one for RM452 million and a term loan of RM600 million, making in all a total of RM7.2 billion in energy loans, which were not repaid from the borrowings. Why is this so when the total borrowings at that time from these amounted to a massive RM11.55 billion at least?

Also, if 1MDB had not invested in the PetroSaudi caper or recovered the RM7 billion plus it had in the venture, it would have been enough to cover a substantial part of the cost of energy acquisitions.

Now that’s just the tip of the iceberg. In return for IPIC being joint guarantor of the loan, some US$1.4 billion or 40% of the US$3.5 billion bonds value had to be kept in deposits with IPIC subsidiary Aabar Investments PJS. In other words, 1MDB had use of only 60% of the nett proceeds of the US$3.5 billion.

Worse, The Wall Street Journal reported earlier this year that this US$1.4 billion (RM5.88 billion at current exchange rates) payment to Aabar is missing. The newspaper said that a further RM993 million that 1MDB paid to IPIC could also be missing.

Also as part of the deal to guarantee the US$3.5 billion bonds, Aabar had an option to purchase a 49% stake in the energy assets. To extinguish this option Aabar was paid a massive RM4 billion which is one-third of the original cost of the power assets and 40% of the recent sale price of RM9.83 billion for the power assets.

While the proceeds for the extinguishing of the assets came from redemption of the Cayman Island assets, according to one statement, another states that the proceeds from a US$975 million Deutsche Bank term loan was used to pay for the option. This leads to confusion about which money was used to extinguish the options.

Effectively then, 1MDB raised some RM11.55 billion through the US$3.5 billion bonds but 40% or RM4.6 billion (at exchange rates then) went as security deposit to Aabar, which received RM4 billion as payments for extinguishing options and other interest payments.

The US$3 billion (RM12.2 billion at current exchange rates) bond that was guaranteed by a letter of support from the Malaysian government is just as bad, or worse.

This was basically meant as a blank cheque investment into Abu Dhabi Malaysia Investment Co Ltd (ADMIC) which is a 50:50 joint-venture company between 1MDB and Aabar. The US$3 billion proceeds were to go directly into ADMIC and Aabar was to match this with its own funds of US$3 billion.

Until today, it is not clear if Aabar has paid up its share of the US$3 billion for the joint venture.

Goldman Sachs’ bond document has some shocking revelations and caveats. At the time of the offering, ADMIC had made no investments and “has no plans, arrangements or understandings with any prospective target businesses concerning an investment, acquisition or project.

“Consequently it is not expected that ADMIC will immediately have any revenues from its investments with which to pay dividends to the issuer in respect of the issuer’s 50% investment in ADMIC”. The issuer is 1MDB Global Investments Ltd, incorporated in the British Virgin Islands and wholly owned by 1MDB.

Thus, the entire bond issue is based on that letter of support from the Malaysian government which will have to bear the consequences of any non-repayment by 1MDB.

Further, the document, dated March 8, 2013, goes on to say that at the time of 1MDB’s investments of the nett proceeds in ADMIC, “it is anticipated that Aabar will NOT yet have contributed sufficient capital to meet its obligations under the joint-venture agreement.

“The issuer has no control over Aabar and there can be no assurance that Aabar will meet its funding obligations”.

It is shocking that 1MDB has undertaken to commit such funds to ADMIC without so much as getting a similar commitment from its joint-venture partner.

ADMIC did not have a formal investment plan then but planned to invest according to some criteria but “in certain cases, ADMIC may make investments which do not meet some (or all) of the factors” listed.

These factors include strategic value, strong value proposition, strong free cash flow, strong competitive industry position and experienced management team. However, even a cursory glance at its balance sheet indicates that it did not adhere to such criteria.

For sale investments, listed under current assets, amounted to RM12.9 billion and auditors cannot establish a proper value for them. Deposits and other cash equivalents amounted to RM9 billion, of which half could not be used because they are security deposits with Aabar.

Elsewhere 1MDB claimed that the US$3 billion is part of seed capital for the Tun Razak Exchange project but it seems to be far in excess of what is required especially considering that 1MDB is already making sales of land from this project and not developing it first and then selling.

Thus, despite RM42 billion of loans, or RM34 billion of loans if inherited loans from power assets of some RM8 billion are excluded, it has precious little to show in terms of assets other than the recently sold power assets valued at RM9.83 billion.

Yesterday:
How 1MDB lost RM6 bil through bond mispricing

Tomorrow:
How 1MDB overpaid Goldman Sachs

                This entry was posted on Sunday, 27 December 2015, 8:25 pm and is filed under
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How 1MDB overpaid Goldman Sachs

BY
KHAIRIE HISYAM
| Kinibiz

DECEMBER 18, 2015 8:00AM

With a number of questionable dealings over its seven years or so of existence, a considerable part of 1MDB’s shenanigans have involved Goldman Sachs who were handsomely, and extremely generously, rewarded. But why is the US firm so close to 1MDB?

________________________________________________________________________

As the fires of the 1Malaysia Development Bhd (1MDB) controversy, long confined to embers unnoticed by the public, continue burning this year, authorities foreign and domestic have turned their attention to one of the company’s friends: Goldman Sachs.

It is no secret that Goldman Sachs seems to enjoy an intimate working relationship with 1MDB, having seen its services engaged for all three of 1MDB’s foreign market bond issuances.

However, the relationship raises questions as Goldman Sachs also seems to have reaped what appears to be extremely generous fees from these bond issuances, far above normal rates, which KINIBIZ looks more closely at further in this article.

The US Federal Bureau of Investigation (FBI) is now reviewing the firm’s business relationship with 1MDB as part of a broader probe into the latter, Reuters reported in October 2015. In November, the Malaysian Anti-Corruption Commission (MACC) also visited the firm’s KL office in its own probe into 1MDB.

These tie into a wider global investigation across three continents over possible money laundering activities involving 1MDB. However, as questions grow over 1MDB’s questionable dealings over the years, public attention has not perhaps been sufficiently directed towards the role Goldman Sachs have played.

Preferred overseas arranger

And it has been quite a role – of all 1MDB’s different borrowings, Goldman Sachs has been closely involved in arranging the single largest share of its RM42 billion or so in total borrowings.

The firm was the arranger for all three of 1MDB US dollar bonds, which amount to US$6.5 billion in total value, issued overseas. By contrast, 1MDB’s domestic financing exercises were spread across four different financiers.

At current exchange rates (US$1 = RM4.24 as of Dec 1, 2015) this US$6.5 billion figure comes to RM27 billion.

It would perhaps be fairer to use the 2013 exchange rates as the bonds were issued then. Statistics indicate that the lowest point of the ringgit relative to the greenback in 2013 was at RM3.30 to the US dollar, which translates into about RM21.5 billion in total value of the three bond issuances.

In any case, the RM21.5 billion in total from overseas bond issuances carry a fair value of RM19.8 billion, which makes up 47% of 1MDB’s total of RM42 billion or so in total borrowings, according to its latest available annual report.

Another RM16.3 billion in financing was raised domestically, with a fair value of RM13.9 billion. The remaining borrowings were inherited debt following 1MDB’s power asset purchases between 2012 and 2013.

Exorbitant fees for 1MDB

An interesting facet of 1MDB’s close relationship with Goldman Sachs is its questionable generosity towards the US investment banking firm. For its role in arranging the three bond issuances, the firm made about US$500 million.

This figure, which is nearly the same amount the Malaysian government was spending in 2013 to pay its monthly debt commitments, amounts to 7.7% of the three bonds’ total value. Part of these earnings contributed to an industry-beating growth of 69% in fixed-income underwriting fees in one quarter that year for Goldman Sachs, according to Bloomberg data.

That percentage raises eyebrows, considering underwriters earn on average 1.32% of US high-yield junk bonds in 2013. Among others, lawmaker Tony Pua, member of parliament for Petaling Jaya Utara and member of the Public Accounts Committee, has asked whether 1MDB was being “fleeced naked” by the US firm.

In comparison, other government-linked entities have raised funds by paying far fewer in fees on a percentage basis. Citing a previous fundraising exercise by state-linked Tenaga Nasional Bhd, Pua claims the power distributor paid only 2% to raise US$350 million (RM1.2 billion at the time).

Specifically for Goldman Sachs, Pua claimed that Goldman Sachs charged fees and expenses amounting to 1.3% in a previous fundraising exercise for Equisar International Inc while charging 0.3% for Apple Inc. In a previous financing exercise for the Mexican government, Goldman Sachs charged 0.2% in fees and expenses.

First bite in bond mispricing?

While seemingly excessive, Goldman Sachs’ earnings from arranging the three 1MDB bonds were not all from underwriting fees. Part of the earnings came from the firm buying the bonds at a discount to face value before marking them up for on-sale to investors, according to a previous Bloomberg report.

It raises concerns on potential wrongdoing that may border on the criminal. The three bonds arranged by Goldman Sachs were among the four bonds by 1MDB that had been identified as grossly mispriced, resulting in an unidentified party reaping windfall gains by essentially flipping the bonds for huge profit after buying them cheaply (see Part 3 of this issue on the bond mispricing).

According to KINIBIZ calculations, these three bonds were mispriced by some RM4.8 billion or thereabouts, resulting in 1MDB losing out on this amount which it should have gotten by issuing the bonds. The fourth bond, which was issued domestically and underwritten by AmInvestment Bank, was mispriced by RM1 billion, meaning 1MDB lost nearly RM6 billion in total from mispricing its bonds.

In contrast, the parties given a massively discounted first bite to the bonds were able to pocket the difference – a mind-boggling sum of billions – instantly.

And the question is why 1MDB allowed any party to make such huge gains. Coming back to Goldman Sachs, two basic issues arise on ethics and whether 1MDB was deliberately allowing this to happen.

On the ethical question, what arises is whether it is proper for Goldman Sachs, acting as arranger for the bond issuances, to also be the first buyer considering that leads to a conflict of interests – its own as a buyer as well as that of its client, the seller, whom it is supposed to be advising.

However, a previous lawsuit filed in 2013 by former New York Federal Reserve senior examiner Carmen Segarra claimed that Goldman Sachs had no firm-wide policy against conflict of interest in its dealings.

She was contesting her termination for refusing to comply with alleged orders to falsify her findings on Goldman Sachs, which had already come under fire in recent years for advising both sides in several deals as well as being seen as putting its own interests above that of its clients.

This followed a high-profile incident in 2010 when the US Securities and Exchange Commission charged the firm for fraud after it advised clients to buy its collateralised debt obligation products while itself taking a short position against them.

A second, secret, client?

The question around Goldman Sachs’ ethics leads to the second issue: was 1MDB misled by Goldman Sachs into grossly discounting the bonds or did 1MDB sanction this action?

The latter scenario points to a potential breach of fiduciary duty on 1MDB’s directors’ part and suggests a starker possibility of criminal intent.

If Goldman Sachs proves to be the mysterious party being allowed to pocket such clean, instant profit, the numbers do not add up – RM4.8 billion or so translates into roughly US$1.5 billion according to the lowest 2013 exchange rate of RM3.30 to the US dollar.

By contrast Goldman Sachs’ total earnings from the three bond issuances only amount to US$500 million, including the portion that came from fees and expenses.

Where were the rest of the mispricing gains? Did someone involved in the exercises also pocket part of the mispricing difference for their own gain? These questions remain unanswered today and, unfortunately, have not been asked enough to 1MDB.

In any case, it is clear from what information is available that the intimate relationship 1MDB enjoys with Goldman Sachs carries troubling implications insofar as proper governance goes and any independent probe interested in the truth should also look closely at 1MDB’s undue generosity towards its preferred advisor.

Yesterday:
Other questionable use of loans – the Goldman bonds

Tomorrow:
The RM7 billion PetroSaudi caper

                This entry was posted on Monday, 28 December 2015, 1:16 pm and is filed under
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1MDB and the Money Network of Malaysian Politics

by Tom Wright and Bradley Hope

Wall Street Journal

Dec. 28, 2015

Prime Minister Najib Razak tapped wealth fund to ease ruling-party’s victory

KUALA LUMPUR — Malaysian Prime Minister Najib Razak was fighting for his political life this summer after revelations that almost $700 million from an undisclosed source had entered his personal bank accounts.

Under pressure within his party to resign, he called together a group of senior leaders in July to remind them everyone had benefited from the money.

The funds, Mr. Najib said, weren’t used for his personal enrichment. Instead, they were channeled to politicians or into spending on projects aimed at helping the ruling party win elections in 2013, he said, according to a cabinet minister who was present.

“I took the money to spend for us,” the minister quoted Mr. Najib as saying.

It still isn’t clear where the $700 million came from or where it went. But a six-month Wall Street Journal examination revealed that public entities spent hundreds of millions of dollars on a massive patronage machine to help ensure Mr. Najib’s United Malays National Organization stayed in power. The payments, while legal, represented a new milestone in Malaysia’s freewheeling electoral system, according to ruling-party officials.

The UMNO has led every Malaysian government since the country’s independence from Britain in 1957, making it one of the world’s longest-ruling political parties. Its extraordinary grip on power has delivered economically for Malaysia, boosting living standards and establishing the country as a fast-growing emerging market and U.S. ally in Asia.

But its dominance of the vote, its critics contend, has prevented Malaysia’s democracy from maturing in a similar fashion, instead leaving a system riven by patronage and vote-buying that analysts say has consistently skewed results in UMNO’s favor.

The Journal examination, which included interviews with ruling coalition politicians and former government employees as well as a review of documents related to a state-investment fund Mr. Najib set up, found hundreds of millions of dollars in unreported political spending. Much of it flowed from public sources or programs set up for other purposes.

The effort relied heavily on the state investment fund Mr. Najib controlled, 1Malaysia Development Bhd., according to minutes from 1MDB board meetings seen by The Wall Street Journal and interviews with people who worked there.

The prime minister, who is chairman of 1MDB’s board of advisers, promised repeatedly that the fund would boost Malaysia’s economy by attracting foreign capital. It rolled up more than $11 billion in debt without luring major investments.

Charity projects

Yet Mr. Najib used the fund to funnel at least $140 million to charity projects such as schools and low-cost housing in ways that boosted UMNO’s election chances, the Journal investigation found.

The minutes portray a fund that repeatedly prioritized political spending, even when 1MDB’s cash flow was insufficient to cover its debt payments.

Board members wondered aloud if they would get in trouble. In a meeting on Dec. 20, 2014, they discussed what to do about police who came to investigate allegations of financial irregularities, according to the minutes.

The 1MDB fund also transferred hundreds of millions of dollars to politicians through Ihsan Perdana Bhd., a company formed in 2011 to carry out 1MDB’s corporate social responsibility programs, said a person involved with setting up the fund. Ihsan Perdana is exempt from filing financial statements, according to Malaysian company records.

Malaysian investigators believe the cash that ended up in Mr. Najib’s personal accounts moved through government agencies, banks and companies linked to 1MDB. At least $14 million flowed into his accounts via Ihsan Perdana, according to documents from a Malaysian government investigation.

The source of that $14 million was SRC International Bhd., a company controlled by Malaysia’s finance ministry, which Mr. Najib also heads, the documents show.

The prime minister signed checks from his personal accounts to lawmakers, who used the money as they saw fit, according to the Malaysian cabinet member interviewed by the Journal and another lawmaker who said he accepted the money.

Mr. Najib declined multiple interview requests. He has denied wrongdoing or taking money for personal gain, while defending 1MDB spending as good for Malaysia. He hasn’t explained where the $700 million in his accounts came from or how it was used.

Senior UMNO politicians have said the money was a political donation from an unnamed Middle East donor. Malaysia’s anticorruption agency has defended Mr. Najib’s right to use personal accounts for political transfers, which isn’t illegal under Malaysian law.

The 1MDB fund is the focus of probes in at least six countries, including in Malaysia by the nation’s anticorruption body, central bank, auditor general and a parliamentary committee.

Executives at 1MDB declined interview requests. The fund denies its business decisions were driven by politics and has pledged to cooperate with investigations. It said in a statement: “We note with surprise that The Wall Street Journal continues its campaign to malign 1MDB, a campaign based on old and recycled allegations.”

A spokesman for UMNO, whose financial reports aren’t required to be publicly disclosed, didn’t respond to requests for comment.

A U.S. Federal Bureau of Investigation probe into 1MDB is looking at assets owned by Mr. Najib and his family, including luxury real estate in New York and Los Angeles, according to people familiar with the matter. These people said the agency is also is looking at the funding of a film-production company, Red Granite Pictures, which was set up by Mr. Najib’s stepson and produced The Wolf of Wall Street starring Leonardo DiCaprio.

These inquiries are at an information-gathering stage and neither Mr. Najib nor any of his family members have been accused of wrongdoing. Red Granite Pictures, in a statement to the Journal, said that neither the stepson nor the company engaged in any “inappropriate” business activities.

Tens of thousands of protesters took to Kuala Lumpur’s streets in August to call for Mr. Najib’s ouster over his handling of the economy and management of 1MDB. Some lawmakers are still calling for him to resign.

Activities like the use of personal bank accounts to fund election spending don’t happen in “most decent democracies with an element of accountability,” said Lily Zubaidah Rahim, a University of Sydney professor who is involved with the Electoral Integrity Project, a survey of voting standards with Harvard University.

Mr. Najib’s UMNO party, founded in the 1940s to represent ethnic Malays, has ruled for decades in coalitions with parties drawing support from ethnic Chinese and Indian minorities.

UMNO benefited from an affirmative-action program it set up in the 1970s that reserves an outsize proportion of state jobs, school places and government contracts for Malays, who make up just over half of Malaysia’s 30 million people.

Opposition critics say UMNO doled out contracts to Malay companies in return for donations to fund election spending. Ruling coalition politicians confirmed the practice in interviews but emphasized it is legal.

There are no laws in Malaysia on how much a company or individual can give to a party or politician, and neither is required to report who donated. Candidates are limited to spending $47,000 during election periods, but there are no caps on what a party can disburse. There are no laws against tapping state resources for campaigns.

Disbursing money or other favors to sway an election, known as vote buying, is prohibited but widespread, politicians say. Malaysia’s election watchdog has no legal power to investigate complaints.

After 2008 elections in which the ruling coalition lost its two-thirds majority in parliament, the UMNO ditched its leader and elevated Mr. Najib, then deputy prime minister. He pledged to end corruption and improve transparency. He promised a Malaysia in which all citizens benefited, dubbing the effort “1Malaysia.”

MALAYSIA’S 1MDB DECODED

He also talked about the need to break UMNO free from dependence on corporate donations, said people who interacted closely with him. Yet Mr. Najib knew he needed funding sources, they said.

An opportunity presented itself when Jho Low, a Malaysian financier then in his late 20s, appeared.

Hailing from the Malaysian state of Penang, Mr. Low studied in England and befriended Mr. Najib’s stepson in London, according to people who know him. He later attended the University of Pennsylvania’s Wharton School.

In Malaysia, he helped set up an investment fund for the oil-rich Terengganu state, he told a Malaysian newspaper in 2010. Mr. Najib turned the fund into a federal entity and 1MDB was born.

Mr. Low, whose full name is Low Taek Jho, would later help direct election-related spending, despite not holding a formal title within UMNO, said a former Malaysian ruling coalition politician interviewed by the Journal.

Mr. Najib and 1MDB executives said the fund was supposed to attract investment in energy, real estate and tourism, with no mention of charity spending.

Opposition parties pointed out that Malaysia already had a sovereign-wealth fund pursuing similar aims, Khazanah Nasional Bhd., and asked why 1MDB was put under Mr. Najib’s control.

Nurul Izzah Anwar, a lawmaker and daughter of Malaysia’s opposition leader, called 1MDB’s setup an “absolute sham” and “a blatant attempt by the PM to have direct intervention in the management of the wealth fund.”

The prime minister told parliament that his stewardship of 1MDB was to ensure it spurred economic development and foreign investment so that wealth “can be distributed equally regardless of race and ethnicity, but for 1Malaysia.”

From the outset there was an air of secrecy. Senior management shot down suggestions to share documents on Google, arguing Malaysia’s political opposition might access them, a former employee said.

Mr. Low dialed in to conference calls but was referred to by a code name, “UC,” the person said.

In September 2009, 1MDB signed its first major deal, a joint venture with Saudi oil firm PetroSaudi International Ltd. to invest in energy projects.

Of a $1 billion investment from 1MDB, approximately $700 million instead moved to another company’s bank account, according to a draft report into the fund’s activities by Malaysia’s auditor general, a copy of which was reviewed by the Journal.

The account was owned by Good Star Ltd., a Seychelles-based firm set up by Mr. Low, according to the person who was involved with the formation of 1MDB.

What happened to the money is unclear. The following year the joint venture was wound up without investing in any major energy projects.

The 1MDB fund denies wrongdoing and says it made a profit on the venture. The Saudi company says the venture was profitable for 1MDB.

Two board members, including 1MDB’s chairman, resigned in 2009 and early 2010 over the way the fund handled the venture, the auditor general report said. Attempts to reach them were unsuccessful.

In early 2010, Mr. Najib authorized creating a 1MDB charity arm that gave $140 million for corporate social responsibility spending up until the 2013 elections, the fund’s board minutes show. None of it was required to be reported in 1MDB financial accounts, though some projects were publicized in fund promotional materials.

The prime minister’s office viewed 1MDB as a way to finance projects aimed at boosting UMNO’s popularity, said Oh Ei Sun, who at the time was Mr. Najib’s political secretary. Money from 1MDB was available for projects drawn up by staff in the prime minister’s office, he said.

“If we thought it could help the incumbent government pull in some votes, we could propose that,” said Mr. Oh. He said he helped give scholarships to ethnic Chinese students, but said he later quit, citing his concern about lack of transparency in the government.

1MDB’s management proposed the spending should only happen when the fund made profits, but asked for a waiver of the rule to allow immediate spending on schools, the minutes say.

In July 2010, the prime minister traveled to Sarawak, a rainforest-covered Malaysian state on Borneo island whose voters include members of indigenous tribes. Ahead of the visit, 1MDB’s board of directors approved around $540,000 in financial aid to build shelters for tribal people, among other uses.

The board’s chairman “noted that it is vital for the company to win the support of Sarawakians, particularly the natives,” the minutes said.

There was wasteful spending. Malaysia’s government in 2010 sold prime land in Kuala Lumpur to 1MDB at below-market rates to develop a financial center, in a joint venture with a subsidiary of an Abu Dhabi sovereign-wealth fund.

After spending almost $2 million to organize a launch party, 1MDB ditched the event when the Gulf emirate’s crown prince decided not to attend, according to board minutes.

Local media began criticizing the fund.

“The company is perceived as a secretive cloak-and-dagger setup with sinister motives to benefit cronies and not the Malaysian people,” read a plan submitted to the board in October 2010 by 1MDB’s management to improve the fund’s image.

The solution was a media blitz to promote 1MDB’s focus on “new sources of growth,” the plan said. Mr. Najib, in other minutes, ordered the board to better promote 1MDB education scholarships.

To book profits, the fund took the land it bought cheaply from the government and marked it up to market prices. In the financial year ended March 31, 2011, the fund revalued the land by 426%, even though it had neither sold nor developed it.

The fund also borrowed heavily. Goldman Sachs Group helped it raise $6.5 billion in bond issuances in 2012 and 2013. Some money was used to buy power plants.

Project stalled

A $3 billion bond two months before the 2013 elections was supposed to fund development of the Kuala Lumpur financial center, according to offering documents. The project stalled and the money was used for other purposes, including working capital, according to a 1MDB financial statement.

A Goldman spokesman declined to comment.

As elections approached in 2013, the fund began transferring hundreds of millions of dollars to politicians to spend on their campaigns, said the person who helped set up the fund.

Mr. Najib began pushing out checks from his accounts to politicians, according to a lawmaker quoted in local media and the cabinet minister interviewed by the Journal.

Shahrir Abdul Samad, a UMNO parliament member, was quoted saying he was given over $300,000.

“To whom else can I ask for financial assistance for administration expenses if not from the party president himself,” Mr. Shahrir said in an interview with an official website run by the ruling coalition. “That explains the money the party president received is for party use,” not Mr. Najib’s enrichment, he said.

Mr. Shahrir didn’t respond to requests for comment.

Mr. Najib announced projects like hospitals and low-cost housing across the country.

The 1MDB fund financed free trips to Mecca for more than 1,000 village headmen. Letters to the recipients came from the prime minister’s office.

Mr. Najib has said such projects show that 1MDB is beneficial to Malaysians. Local media reports note the program, started in 2011, is adding more pilgrimages annually.

Perhaps the biggest UMNO effort to win back votes was in Penang, a historic trading entrepôt won by the opposition in 2008.

Mr. Low, the financier, returned home to Penang before the May election and acted as a senior strategist, according to the former ruling-coalition leader in the state.

Coalition candidates were told by Mr. Low they could request money for their campaigns and he would deliver it, the politician said. Candidates asked for money to paint voters’ houses and give out free food and other favors, the politician said.

‘Flowing like hell’

The source of the money, which didn’t flow through official UMNO channels, and its total size were unclear, ruling-coalition politicians said.

Another former coalition lawmaker said he assumed the funds came from corporate donors. “The money was flowing like hell,” he said.

A school friend of Mr. Low’s, Geh Choh Hun, organized a group called 1Malaysia Penang Welfare Club, which hired a hotel ballroom and handed out checks for hundreds of thousands of dollars to nongovernment groups, according to people who attended. It is unclear where the money came from. Mr. Geh declined to comment.

Loh Cheng Kooi, executive director of the Women’s Center for Change, a female-empowerment organization, said she got almost $70,000 from the welfare club.

She said she assumed the government was financing the event because of “1Malaysia” slogans at the ballroom.

In the days before voting on May 5, UMNO supporters organized free dinners and gave out cash, according to people who attended.

UMNO lost the popular vote and failed to win Penang. But its coalition won enough votes to hold on to power nationally.

After the victory, 1MDB had only about $20 million in cash compared with liabilities of over $10 billion, board minutes show. 1MDB says the value of its assets covers the fund’s debt.

Deloitte Touche Tohmatsu Ltd., the fund’s current auditor, told 1MDB’s board in February 2014 it had received emails and letters alleging “financial reporting fraud” in connection with the PetroSaudi deal, the changing of auditors and alleged overpayment for power-plant assets, the board minutes show.

The auditor said there was no evidence of wrongdoing, according to the minutes, and signed off on 1MDB’s accounts. The fund reported a net loss of around $200 million in the year to March 31, 2014, the last available results. Deloitte declined to comment.

A few months later, a UMNO politician filed a report with police over alleged financial mismanagement by 1MDB, according to board minutes from December 2014. Officers visited 1MDB’s headquarters but left without taking away evidence.

One board member worried whether they could be charged for “criminal breach of trust.” The fund’s general counsel answered it was unlikely given no one on the board had personally benefited from 1MDB’s activities, the minutes say. The board’s chairman suggested convening in the future outside of 1MDB’s offices to “reduce the risk of bugged meeting rooms.”

The fund is now trying to wind down operations by selling assets to pay down debt. In November, it agreed to sell its power plants to a Chinese state-owned company for $2.3 billion, almost 20% less than it had paid for them. 1MDB says it “essentially broke even” given that the buyer also assumed some debt.

The prime minister told parliament in November there was nothing unusual about government-controlled companies donating money to political parties.

But he has vowed to change the system, setting up a bipartisan parliamentary panel to look at election reform.

“There is an urgent need to regulate political financing to ensure accountability and transparency,” Mr. Najib said.

He promised new laws would come into effect before the next elections, in 2018.

—Paolo Bosonin contributed to this article

                This entry was posted on Tuesday, 29 December 2015, 5:03 pm and is filed under
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Did Paul Low imply  that the Najib Cabinet is not a “God-fearing” one, which is why the country is inundated with so many political, economic and nation-building crisis?

Yesterday, I had asked what the ”cryptic” speech of the  Minister in the Prime Minister’s Department, Datuk Paul Low at the Christmas high-tea reception organised by the Christian Federation of Malaysia (CFM) really meant – when he said that if the government is

God-fearing, then there would be no need for him to be in the Cabinet.

To the overwhelming majority of literate Malaysians, regardless of race, religion or politics, it could only mean two things:

Firstly, the Najib Cabinet is not a God-fearing one, and needs God-fearing Ministers to ensure that it does not  completely lose  its moral compass; and

Secondly, Low is “God-fearing”, and he is either fighting  a very lonely battle or in any event, fighting a losing battle among a handful of “God-fearing”  Ministers who are committed to  a national and sacred mission to ensure that the Cabinet keeps to the straight and narrow path of serving the people and nation and not just themselves and their cronies.

Who are the other Cabinet Ministers who are “God-fearing”, whether Muslim or non-Muslim?

Furthermore, was Low   implying  that the country was inundated with so many political, economic and nation-building crisis precisely because the Najib Cabinet is not “God-fearing”?

Is this what Low meant?   if not, what did  he mean by his speech on Christmas Day?

It is not open to Low to decline to explain the meaning of his Christmas speech, for if he is so “God-fearing”, surely he is not fearful of explaining what he actually meant?

Was Low being conceited or humble – conceited in claiming himself to be a “God fearing man”; humble for conceding that he is not “God fearing” enough, as the Cabinet is crawling with Ministers who are not “God fearing:”!

This is not the only controversy of Low’s Christmas speech, the other surprise was Low’s Quixotic attempt  to resurrect Najib’s 1Malaysia signature policy when Najib himself appeared to have cremated and buried the 1Malaysia Policy after the 13th General Election almost two years eight months ago!

Low urged the Christian community to back up 1Malaysia, although  in the past 32 months, all Cabinet Ministers, even the the father of 1Malaysia, the Prime Minister himself, have virtually abandoned  the 1Malaysia policy apart from perfunctory acknowledgement of its existence in the Najib pantheon of policies.

Low said:

“We ridicule and do not believe in it (1Malaysia) because certain people and leaders said certain things and looks like we are not serious about it. Sometimes, we even implement policies that contradict the spirit of 1Malaysia.

“Nevertheless, I believe in the spirit of 1Malaysia.

“I want to ask the Christian community and other communities – come back to promote 1Malaysia.

“1Malaysia should be more about the values we uphold and not about ethnicity. We can find common values among ethnic and religious groups.”

Was Low serious in his speech at the Christmas High Tea or was he just speaking for the sake of speaking, not expecting his speech to be taken seriously in any manner?

In the past 32 months, how many times had Low raised in Cabinet to urge the Prime Minister and Ministers to be serious in promoting the 1Malaysia policy, and to roll back the rising tide of the  politics of race and religion, hate and falsehood built upon race and religious rhetoric,  and to move beyond sheer gimmicry of 1Malaysia  to serious nation-building policy based on the 1Malaysia objective to create a nation where everyone regards himself or herself as a Malaysian first,  race, religion, region or socio-economic background second?

Najib himself was a poor specimen of his own 1Malaysia poiicy, or he would not have asked the question in his UMNO presidential speech  at the UMNO General Assembly on Dec. 10 whether he should be an Malay ultra or be pro-Malay only, and whether he must be Islamic or not.

Had Najib forgotten about the 1Malaysia policy when he delivered his UMNO Presidential Address after  six years and seven months as the  Prime Minister of Malaysia –  after tens and even hundreds of million of ringgit  had been spent on 1Malaysia promotional products?

It would appear that Najib’s premiership  is adrift and at sea, bereft of any direction or vision for Malaysia.

Did Low raise at any Cabinet meeting after Najib’s UMNO Presidential Address on Dec. 10 that something was amiss about the 1Malaysia Policy and asked the Prime Minister and the Cabinet whether the government is still serious about the 1Malaysia Policy and committed to it?

Or are we  seeing the spectacle of Najib’s government degenerating into a “tail wagging the dog” phenomenon, where small cogs in the wheels of government are controlling and setting the pace and direction of government, as for instance, a department like Biro Tata Negara (BTN) disregarding the 1Malaysia Policy and continuing to ensure that the “Ketuanan Melayu” ideology is the directing policy of the government and which regards non-Malays as “orang tumpang” and not sons and daughters of the Malaysian soil.

If Malaysia is to succeed as a nation, taking our rightful place in the international community as a plural society which punches above our weight because of our political, economic, educational, socio-cultural and nation-building achievements, we must ensure that more and more Malaysians embrace the 1Malaysia concept and reject narrow and exclusive racial, religious and cultural interpretations of the Malaysian narrative.

What Malaysia needs are not Malay ultras, Chinese ultras, Indian ultras, Iban ultras or Kadazan ultras but Malaysian ultras!

Why should the Prime Minister of Malaysia be struggling with whether he should be a Malay ultra or not, if he is still loyal to the 1Malaysia Policy and his declaration that he is the Prime Minister of all Malaysians, and not just of any ethnic group only?

Can Low respond to these questions arising from his speech at the Christmas High Tea on Thursday?

                This entry was posted on Tuesday, 29 December 2015, 6:19 am and is filed under
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More pain ahead seen for Malaysia economy

By Pauline Ng

Singapore Business Times

Dec 29, 2015

Slumping ringgit, oil prices, business and consumer sentiment add up to a pessimistic 2016 outlook

Currency analysts predict further devaluation in the ringgit in 2016 with projections ranging from 4.49 to 5.00 to the greenback from about 4.30 at year end.

Kuala Lumpur –

“KU” or bitter was the Chinese character most picked by Malaysian Chinese businesses to characterise 2015 which saw the introduction of a consumption tax, public transport hikes and numerous other cost increases made worse by a tanking ringgit that has lost nearly a fourth of its value against the US dollar over the year after dropping 8 per cent in the  previous year.

Sadly, the signs are pointing to an even more tumultuous 2016.

With global oil prices slumping below US$40 a barrel – bad news for oil producers such as Malaysia – and business and consumer sentiment stuck at lows last seen during the global financial crisis of 2008, the reality of a diminishing ringgit is expected to hit businesses even harder in the new year because of price adjustments for new stocks.

In truth, there have been a number of price revisions in the past year, especially in April when a 6 per cent Goods & Services Tax (GST) kicked in.

The domino effect of GST has been made worse by the feeble ringgit and its impact on import costs – it’s decline was not arrested by the government’s “proactive measures” in January.

Currency analysts predict further devaluation in the currency in 2016 with projections ranging from 4.49 to 5.00 to the greenback from about 4.30 at year end.

Not surprisingly domestic consumption – previously a main engine of growth – is stuttering as households struggle to balance rising expenses with stagnant incomes. One wag mocking the government’s persistent fiscal deficit observed: “I now have my own fiscal deficit to contend with.”

RHB Research Institute executive director Peck Boon Soon said cash handouts to lower income households have provided some cushion. “But the effects were eroded by GST and the increase in daily expenses brought about by the weaker ringgit.”

He rates the currency’s sharp depreciation as the most challenging factor given its far reaching implications on investments and consumption.

“The decline is across the board,” he said, noting property, construction, manufacturing (bar exporters) and services are suffering, prompting concerns of further job cuts. “Right sizing” exercises in the banking sector saw an estimated loss of 8,000 jobs this year, adding to the 7,000 positions axed by Malaysia Airlines in its bid to become a newer, leaner entity.

Real estate transactions have also slowed and property prices are expected to moderate further in 2016. Home loan approvals shrunk by about a tenth this year after registering zero growth last year.

GDP growth is expected to moderate to 4-4.5 per cent in 2016 from about 5 per cent in 2015 but analysts caution economic indicators are weakening rapidly amid the ringgit’s feeble performance.

Aghast at Putrajaya’s lack of action, independent currency analyst Suresh Ramanathan stressed market mechanisms need to be put in place urgently including ensuring dollar liquidity and even cutting interest rates to assist the economy. “Then only will sentiments improve and fundamentals remain intact.”

Should external factors including oil prices, China’s slowing economy and US interest rate hikes further move against Malaysia’s interests, Putrajaya will not have much room to manoeuvre given the narrowing fiscal space, including high public and household debt.

The Trans-Pacific Partnership with the anticipation of more investments and business opportunities ought to benefit Malaysia, even though it will take another two to three years before it materialises.

But Malaysia will not gain the full benefit of economic liberalisation until it scraps exemptions for bumiputra policies and government-linked companies, observed Institute for Democracy and Economic Affairs chief executive Wan Saiful Wan Jan.

Other Asean economies that used to trail in Malaysia’s wake are now advancing faster, less hamstrung by impediments including a five-decade-old bumiputra affirmative action policy.

Investor disquiet has deepened because of the lack of transparency over scandal and debt-laden 1MDB and the controversial deposits of some US$700 million into the personal bank accounts of Prime Minister Najib Razak, ostensibly by an Arab donor.

This has led Mr Najib’s younger brother and banker, Nazir, to say that Malaysia is proving to be a harder sell these days given concerns about its political stability and the independence of key institutions including the central bank.

Investors are concerned about Bank Negara governor Zeti Akhtar Aziz’s impending retirement in April as events over the past year have led many to conclude that the authority of the central bank has been undermined.

Despite Bank Negara recommending criminal proceedings against 1MDB for its breach of exchange control laws in its overseas investments involving US$1.3 billion, Attorney General Apandi Ali decided otherwise.

That official investigations have amounted to nothing after nearly a year has seriously eroded trust in government institutions.

Tellingly, even though the economy is on shaky ground, most think it has been put on autopilot as the country’s leaders appear more intent on deflecting criticism of 1MDB and Mr Najib.

Also the finance minister, Mr Najib has managed to pare the fiscal deficit to a more acceptable 3.2 per cent of GDP; however, the continuing slump in global oil prices could put next year’s 3.1 per cent target at risk.

A credit downgrade by Fitch was averted this year but subsidy cuts and the GST have taken a toll on a wide segment of Malaysians not used to paying taxes since they fall under the taxable threshold.

Retail Group Malaysia managing director Tan Hai Tsin said all sub-sectors have seen a 20-50 per cent slowdown in businesses, but he is hopeful of a marginal growth of 1.3 per cent this year.

On the equities front, the benchmark KLCI underperformed and is about 5 per cent lower year to date. Most analysts are cautious about next year’s prospects but an additional RM20 billion (S$6.5 billion) in state funds could help support undervalued stocks.

Initial public offerings were dismal last year as sentiments were hit by global factors and 1MDB’s problems including its RM42 billion debts. Antipathy towards the state-owned company ruined its listing plans for its power subsidiary Edra Global Energy Bhd.

In the end, Kuala Lumpur opted to lift a 49 per cent cap on foreign ownership and allowed China General Nuclear Power Corporation (CGN) to acquire all of Edra Global for nearly RM10 billion cash and the assumption of its gross debts in an effort to rationalise 1MDB’s position.

The Chinese, who are hoping to land the high speed rail project between Kuala Lumpur and Singapore, have also said they will buy more government bonds should there be a substantial exit of Malaysian bonds by foreign funds back to the US.

Even so, given that the majority bumiputra community chafe at ethnic Chinese domination of the economy, the sale to the mainland Chinese of Edra – and perhaps other strategic assets to come – was enthralling to many, particularly as a substantial part of the year was occupied by the politics of race baiting. This new dimension is set to become all the more riveting in the coming months and years ahead.

                This entry was posted on Tuesday, 29 December 2015, 9:37 am and is filed under
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The RM7 bil PetroSaudi caper

By
P. Gunasegaram
 | Kinibiz

DECEMBER 19, 2015 10:30AM

First, it was a JV, and some US$700 million out of US$1 billion initial capital ended up in an unrelated company linked to Jho Low. And then it became a loan, and then it became an equity stake and an option which was subsequently sold and invested, over RM7 billion, in the Cayman Islands and redeemed. As much as RM4.2 billion could have gone into extinguishing an option. The rest is still somewhere out there.

________________________________________________________________________

The first major investment that 1Malaysia Development Bhd (1MDB) made – an injection of US$1 billion into a joint venture (JV) with PetroSaudi Holdings (Cayman) Ltd, 1MDB-PetroSaudi Ltd – ended in tragedy as US$700 million was immediately siphoned off to a company allegedly related to Jho Low, Good Star Ltd.

Basically, 1MDB injected US$1 billion cash into the JV but PetroSaudi’s share was an asset dubiously valued at US$1.5 billion. The valuation report was presented on the day the valuer was appointed.

While 1MDB was supposed to have injected the US$1 billion into the JV, the JV inexplicably received just US$300 million, with the remaining US$700 million being transferred to a company which was totally unrelated to the JV. Leaked emails indicate that the company, Good Star Ltd, was related to Jho Low.

This was one of the most shocking revelations about 1MDB and although it happened way back in 2009, some six years ago, this was revealed in reports only this year.

Sources say the 1MDB board was extremely unhappy with this then and instructed the management to get the US$700 million back but this was not done. Two board members, Mohd Bakke Salleh and Azlan Mohd Zainol, resigned because of this, the former in October 2009 and the latter in January 2010.

For the first three years of its life since 2009, 1MDB’s sorry role was to put money into the JV and fund PetroSaudi. As at end of Mar 31, 2012, its financial year-end, 87 sen of every ringgit borrowed of RM7.9 billion, or some RM6.9 billion, went into the JV.

The charts indicate the money trail involving the JV.

First, in September 2009, 1MDB invested US$1 billion for a 40% stake in a joint venture with PetroSaudi. PetroSaudi injected no cash, putting in a Caspian Sea oil reserve at US$1.5 billion as its share.

But for some reason that was never explained, on March 31, 2010 (the last day of its financial year) it “sold” its stake in the joint venture back to PetroSaudi for US$1.2 billion, making a profit of US$200 million which it booked. But it did not get cash for it. Instead, PetroSaudi issued an 11-year bullet repayment Islamic murabaha carrying an interest rate of 8.67% to 1MDB.

Not only that, barely a year later at its next financial year-end, on Mar 31, 2011, it had extended a further US$500 million via a five-year bullet repayment loan to PetroSaudi. And then exactly a year later, it extended yet another loan of US$330 million to PetroSaudi, making in all a grand total of RM6.8 billion equivalent at that time, using various exchange rates prevailing.

According to notes on “subsequent events” in the annual report for the year ended Mar 2012, PetroSaudi on June 1 that year redeemed the outstanding notes of RM6.8 billion, including profits. Yes, you might have guessed it, it received no cash – it was via yet another asset swap.

For the RM6.8 billion, 1MDB this time accepted a 49% stake in PetroSaudi Oil Services Ltd and a put and call option to buy the remaining portion at an option price of US$10, with options being exercisable any time up to its maturity on Dec 31, 2015. It did not say what kind of a company this was.

That means 1MDB injected money for an asset, sold it to PetroSaudi for debt notes, bought more notes from PetroSaudi, very suspiciously each time at balance sheet date when interest payment would be due, and then accepted assets again for settlement of the loan.

Finally, on 12 Sept 2012 less than three months later, 1MDB sold the 49% stake in its latest acquisition to “an external party” for a “consideration” of US$2.318 billion, which works out to just under RM7 billion at exchange rates then. It sold off more than 70% of its assets but it did not say who the external party was that it sold it to.

Subsequent leaked emails show that this was sold to Bridge Partners International Investment Ltd which issued promissory notes for US$2.32 billion.

And if one thought that we can heave a sigh of relief that the money is finally coming back to Malaysia, no, that was not to be. “The total consideration arising from the disposal was reinvested in various classes of participating shares in a Segregated Portfolio Company, registered in Cayman Island,” the notes in the annual accounts said.

More recent leaked emails indicate and other sources reveal that 1MDB received US$1.22 billion out of the US$2.32 billion in November 2014. A big part of this, US$993 billion (RM4.2 billion at current exchange rates), was used to extinguish an option granted to Aabar Investment PJS, a company linked to Abu Dhabi.

This option was granted to Aabar in relation to participation in a 49% stake in 1MDB’s energy assets. The question that immediately arises is why pay over RM4 billion to extinguish an option on assets which were sold recently for just RM9.83 billion.

In case you are wondering, the remaining US$1.11 billion is somewhere out there in various portfolio investments outside the country. Will it be recovered? Time will tell, and time is likely to be very unforgiving as far as 1MDB is concerned.

Yesterday:
How 1MDB overpaid Goldman Sachs

Tomorrow:
How 1MDB overpaid for its power assets

                This entry was posted on Tuesday, 29 December 2015, 12:10 pm and is filed under
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Very soon, comedians like Harith would have to call it a day because Ministers like  Ahmad Maslan, Abdul Rahman Dahlan, Paul Low and even Najib would have taken over their jobs

When comedians like Harith Iskandar pillory Ministers not just on stage, but in the public domain, the stocks of His Majesty’s Ministers and Deputy Ministers have fallen to a new low.

Harith is right that going by Ahmad’s definition that the deputy minister has got three jobs as Pontian MP, deputy international trade and industry minister and Umno information chief, he (Harith) would have got six jobs – as comedian, emcee, writer, actor, coach and director!

However, as Harith rightly pointed out, it does not mean he has six jobs but only that he does six different things.

In fact, going by Ahmad’s definition, the person having the most jobs in the country would be none other than the Prime Minister, Datuk Seri Najib Razak himself.

He is Prime Minister, Finance Minister (at one time, even trebling in Cabinet as Minister for Women), UMNO President, Barisan Nasional President, MP for Pekan, going to be Chairman of the highly-criticised National Security Council, Chairman of the Advisory Board of the much-maligned 1MDB – and Chairman of countless government-related boards and commissions, a list which Najib himself  would not  be able to recite offhand.

Does this mean, going by Ahmad’s definition, that Najib is the most overworked  and underpaid person in the country?

Not to forget a job which Najib had accomplished  without equal  in the world, getting RM2.6 billion donation for a general elections which were  deposited  in Najib’s personal banking accounts before the 13th General Election in March 2013!

Very soon, comedians like Harith would have to call it a day because Ministers and Deputy Ministers like  Ahmad Maslan, Abdul Rahman Dahlan, Paul Low and even Najib would have taken over their jobs; leaving the professional comedians probably with the option of venturing into politics to encroach into the protected domains of the Ministers and deputy ministers!

This whole episode would been quite fun to end the year 2015, except that it is reflection of  a grim and gloomy year, not only hounding Malaysians with two mega scandals – Najib’s RM2.6 billion donation and RM55 billion 1MDB – but haunting the people with the host of economic woes caused  by GST (Goods and Services Tax) implementation, devaluation of the Malaysian Ringgit,  fall in the price of commodities, flight of capital and loss of confidence of  foreign investors.

Parents  preparing their children for the new school year found that  prices of school supplies have gone up by 30%  while  low-income Malaysians face a  hard and harsh new year, sandwiched between falling incomes and rising prices with simple pleasures like goreng pisang, satay and tom yam not spared the inflationary spiral.

Instead of Ministers and deputy Ministers doubling up as comedians, the Government should come out with an economic blueprint to increase the people’s productivity and incomes – which is what Najib’s Budget 2016 had dismally failed to do.

Najib should take the opportunity of a Special Parliament at the end of January to present a revised Budget as well as a special economic blueprint for Malaysians to face up to the hard and harsh new year.

                This entry was posted on Tuesday, 29 December 2015, 8:50 am and is filed under
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