"Investment bankers compose a very creative group of people."
"Investment bankers compose a very creative group of people."
Investment banking (or merchant banking, as it is called in the United Kingdom) is one of the most fascinating parts of the world of finance. It is also one of the most important: Investment bankers create financial mechanisms that allow those who have pools of unused funds to connect with those who have need of those funds, especially business enterprises. Because of their bridge-building activities, investment bankers may well be called the engineers of the finance industry.
Investment bankers compose a very creative group of people. They have to be creative because the needs of people with unused funds often do not match the needs of businesses and other needers of funds. To bring the two sides together, investment banks often have to underwrite—committing to buy, as opposed to merely marketing a public issue of debt or equity securities. The more difficult is the job of bringing together the sources and users of funds, the fatter the fees of the arrangers, i.e., the investment banks.
From time to time, one comes across cases in which investment bankers try to be so creative that they run afoul of the regulatory authorities. The most recent case—one that hit the newspaper headlines around the world—is the case involving 1MDB (1 Malaysia Development Berhad).
The American investment bank involved in the case is the revered Wall Street institution Goldman Sachs. The US Department of Justice (DOJ) has arrested two former Goldman Sachs officers—a Malaysian and an American—on two criminal charges, namely, conspiracy to commit bribery and conspiracy to commit money laundering, arising from a Goldman Sachs underwriting of close to US$6.5 billion worth of 1MDB bonds. The DOJ also filed criminal charges against another Malaysian official for allegedly masterminding and acting as an intermediary to the fund. No charge has been filed against Goldman Sachs.
The US DOJ said that the two former Goldman Sachs officers “ repeatedly circumvented Goldman Sachs’ overnight tools for countering fraud.” The business culture at (Goldman Sachs), particularly in Southeast Asia, was “highly focused on consummating deals,” DOJ noted. The charges against the indictees stated that Goldman Sachs earned $600 million in fees for arranging three 1MDB bond issues.
1MDB is a sovereign wealth fund established by the UMNO (United Malay National Organization) administration headed by former Minister Rajib Razak. The fund is intended for the “betterment of the Malaysian people.” Razak is currently undergoing trial for conspiring to violate the Foreign Corrupt Practices Act by allegedly bribing government officials in Malaysia and Abu Dhabi. The DOJ indictments state that bribes and kickbacks totaling US$2.7 billion were paid to Razak and other government-official clients.
Things look bad for former Prime Minister Razak and his co-indictees, against whom the evidence appears to be strong. They also look bad for 1MDB, which very likely will not be able to recover all the embezzled funds. Above all, things look bad for the entire investment banking industry, which has been seen to be “focused on consummating deals” and earning fees.