Billions and billions – a wasted development opportunity

Bankers often wonder why they have a poor reputation. Perhaps they need to look no further than events surrounding Goldman Sachs and its banking activities in Malaysia. These events show how banks totally miss out on the potential for development of people and society through a focus on earning money on money – for the bankers and their clients but not for society.

Over the last few weeks several stories have been published that make it possible to better see the full scope of what occurred after Goldman helped underwrite and place bonds totalling about USD 6.5 billion for 1Malaysia Development Berhad. For this effort Goldman reportedly earned USD 650 million in fees – 10% of the funds raised.

However, it soon became clear that this transaction was not about raising funds for development in Malaysia. According to the Financial Times on 21 October, up to USD 4.5 billion of the funds raised were looted by a variety of connected individuals and used to finance their rather expensive lifestyles.

Goldman has since entered into a variety of agreements in multiple countries to address legal and compliance shortcomings in this transaction. The Financial Times reported in July that Goldman will repay USD 2.5 billion to Malaysia as well as guarantee that Malaysia will receive USD 1.4 billion from the sale of assets that were financed with stolen funds and which have since been seized by various legal authorities. Hong Kong regulators fined Goldman USD 350 million as reported by The Star on 22 October. And morst recently US authorities fined Goldman USD 2.3 billion as reported in The New York Times. So it appears that on a transaction totalling USD 6.5 bilion for a fee of USD 650 million, Goldman will be paying over USD 5.1 billion in fines – not a very winning business model for any bank.

As a banker I have often worked with very large numbers and therefore lose touch with reality and the impact on the average person. So I decided to look at these numbers in the context of the average Malaysian household. Per Malaysian government statistics, the average household of 4 people had a median income of 5,873 Malaysian ringgit (USD 1,400 at current exchange rates). If Goldman would have donated its USD 5.1 billion in fines to Malaysians, the average household would have received about USD 660 per household – a windfall of nearly 45% of their annual income. I suspect that this one time payment would have had a much greater impact on development in Malaysia than raising money to be looted by a select few.