The Most Extravagant Networking Ever
The 19th century French writer Honoré de Balzac said that the secret of a great success is a crime that has never been found out because it was properly executed. The crime of Jho Low, the shadowy figure behind Malaysian Prime Minister Najib Razak’s 1Malaysia Development Berhad (1MDB) sovereign wealth fund, was well-executed. But it was found out, only because it was just too big – including the most lavish networking ever done.
The 1MDB fund scandal
The story of Malaysia’s 1MDB sovereign wealth fund is one of leveraging stolen wealth in order to pursue preposterously expensive networking at the highest level.
I was trying to find a way to characterize my attitude toward this, when I stumbled on an interview in The New York Review of Books with a Bangladeshi-born British writer named Zia Haider Rahman. In it, Rahman says, “I have misgivings about transacting in social capital.”
I have the same misgivings, almost pathologically so. If I feel that a contact I could make, or a contact I have made, might serve to help me to transact in social capital, I will shy away from that contact. For me, the most depressing words in the English language are, “It’s not what you know, it’s who you know” – because I refuse to believe them, yet I know they are often true.
The central character in the 1MDB story, a Malaysian Chinese named Jho Low, had exactly the opposite pathology. For him, who you know – and whom who you know knows – is the ultimate pursuit, justifying any effort, any expense.
Imagine, then, my schadenfreude as I read Billion Dollar Whale, a book about the 1MDB scandal by Wall Street Journal reporters Tom Wright and Bradley Hope, as Low’s mountain of extravagantly accumulated social capital crumbled.
The man behind the scenes pulling the strings
Low’s networking, and his habit of implying he was connected to enormous wealth, began with his family. His father, a successful businessman, sent Low for his last two years of high school to Harrow, the exclusive English boarding school, where he could rub elbows with children of wealth such as members of the royal families of Brunei and Kuwait.
In London, Low got to know Riza Aziz, the stepson of Malaysia’s then-defense minister Najib Razak, and the son of Najib’s high-spending wife Rosmah. Through Aziz, Low became close to his mother Rosmah, and to Najib, who later became Malaysia’s prime minister.
By leveraging other friendships made in school, Low set up meetings with officials in Saudi Arabia, Abu Dhabi, and Kuwait, eventually bringing Najib – now prime minister – to meet a member of the Saudi royal family (actually a rather lowly one) aboard a fabulously-appointed (but actually rented) enormous yacht.
Suitably dazzled, Najib – and others – gained the impression that Low was extremely well-connected and could access great wealth, which could be brought into Malaysia, and some of it applied politically to help Najib retain office.
This pattern of convincing people he was well-connected, and connected especially to great wealth, carried Low very far; so far that the impression of excellent connections diluted the due diligence efforts that normally would, and should, be pursued by the likes of Goldman Sachs, Deutsche Bank, and other establishment institutions.
The first heist
Low, with the help of a Goldman banker, Tim Leissner, had, in 2009, set up a sovereign wealth fund called the Terengganu Investment Authority, associated with one of Malaysia’s nine hereditary princes, the sultan of Terengganu. The fund raised $1.4 billion in Islamic bonds, and when Najib ascended to the office of prime minister, Low convinced him to take over the fund, broaden its purpose and seek Middle Eastern backing.
After the impressive yacht trip later that year where Low arranged for Najib to meet the Saudi royal family member, Najib and Rosmah toured the Middle East with Low, meeting the crown prince of Abu Dhabi. After that meeting, Najib announced the formation of a new sovereign wealth fund, the 1MDB.
Low then organized a joint venture between the 1MDB fund and a Middle Eastern company called PetroSaudi International, which had rights to develop oil fields in Turkmenistan and Argentina supposedly worth $2.5 billion. PetroSaudi would put their oil rights into the joint venture, and 1MDB would put in $1 billion in cash.
The joint venture was set up, and the 1MDB cash was to be transferred to a Swiss account. Except that of the $1 billion in cash, $700 million was sent to another, mysterious Swiss account.
That account was in fact owned by a Seychelles company called Good Star Ltd. Good Star was 100% owned by Jho Low. Low had done his research. He had found that the Seychelles was virtually the only place that allowed “bearer-share” companies, companies with just one share controlled by whoever physically held the stock certificate.
What was Low doing? Billion Dollar Whale authors Wright and Hope do not engage in intensive speculation about Low’s motives, but one can make inferences.
Low had been refused an explicit finder’s fee on this deal and on a previous deal he had set up in Malaysia. Perhaps he was trying to ensure that he received what he thought were his just desserts. Also, he may have felt that he controlled the fund anyway by virtue of his relationships with Prime Minister Najib and the PetroSaudi partners, so he might as well have actual control.
The most lavish, most expensive high-end networking ever done
Low used this money to wage a campaign of social networking such as the world has never known. He held frequent parties in expensive locations that could cost well into the millions each. He hired celebrities to attend, like Leonardo DiCaprio, Paris Hilton, and a list of other famous names, giving them expensive gifts (tens of millions of dollars of art to DiCaprio alone). Other prominent – and rich – attendees, impressed by Low’s celebrity connections, were drawn in.
To keep the prime minister and his wife happy, Low also made gifts of jewelry to Rosmah totalling in the tens of millions. He suggested ways to use 1MDB funds to shore up Najib’s political capital, like pouring money into selectively chosen school districts.
But even the $700 million wasn’t enough to fund all this partying and gift-giving. While Low tried several business ventures to help fill the hole created by his over-the-top spending, most fell through and others were insufficient to cover the loss.
Most notably, Low and some associates formed Red Granite Pictures to produce the movie The Wolf of Wall Street, starring DiCaprio – ironically, a movie about fraud.
But more was needed. Leissner – with top Goldman approval, including from Goldman President Gary Cohn – stepped up to help, ignoring danger signs. Goldman arranged another $3.5 billion in bond sales, $1.4 billion of which was diverted to a British Virgin Islands fund by Low and his co-conspirator Khadem Al Qubaisi, managing director of the $70 billion Abu Dhabi sovereign wealth fund International Petroleum Investment Company, or IPIC. The BVI fund was cunningly named to sound like a sister fund of Aabar, a fund controlled by IPIC, but in fact it was controlled by Low and Al Qubaisi.
This infusion of funds enabled Red Granite to finance The Wolf of Wall Street, and Low to continue his unending stream of incredibly expensive parties and gifts.
The borrowing and diverting wasn’t over yet though. Deutsche Bank subsequently made hundreds of millions of dollars of loans to 1MDB, much of which was also diverted for Low’s use.
How did Low pull this off? When questions were raised about where the money was that was supposedly deposited in these accounts – or demands to bring the money back to a Malaysian account – Low put them off with vague, often conflicting, explanations of where the money was or what it was being used for, or claims that information couldn’t be provided because of government secrecy.
Intermediaries whose compliance departments raised flags let it go anyway, because of the profits they could reap and the assumption that sovereign wealth funds don’t default. 1MDB had to go through three of the Big Four accounting firms to get its financial statements approved, dumping one and hiring another each time the accounting firm balked.
Eventually it unravelled, thanks in large part to diligent reporting by some obscure, and some prominent news media. Clare Rewcastle-Brown, who ran the Sarawak Report blog, relentlessly pursued leads indicating that something was wrong with 1MDB. Most Malaysian newspapers were in the government’s pocket, but one, the English-language business newspaper The Edge, was another major headache for the fund and for Low and the prime minister. Finally, in July 2015, informed by these sources, The Wall Street Journal weighed in with an article raising suspicions about 1MDB.
Many of the personages involved in this scandal were brought to account. Najib lost his next prime minister election in May 2018 to his long-time opponent Mahathir Mohamad. The new government raided Najib’s and Rosmah’s apartment and confiscated $274 million worth of jewelry, handbags, watches, and cash. Najib was later arrested and is awaiting trial in May.
Jho Low, however – the mastermind behind the whole scam, according to Wright and Hope – has not been apprehended. Wanted by Singapore as well as Malaysia and the U.S. FBI, Low is reportedly residing in China and able to travel easily throughout that country. A web site continues to protest his innocence.
The role of Goldman and the banks
The amount of money diverted to fund extravagant partying, networking, and failed business dealings may have added up to billions – and yet Goldman, Deutsche, and others continued to lend billions more. For Goldman, it was part of its new strategy of “monetizing the state” – partnering with sovereign wealth funds to make money from them.
And Goldman did make money, heaps of it. Wright and Hope estimate that Goldman made more than half a billion dollars for its role in raising funding for 1MDB – and it did it with little financial risk to itself.
Even the mutual funds and other investors to whom Goldman sold bonds suffered little. The Abu Dhabi sovereign wealth fund IPIC had guaranteed the bonds, supposedly collateralized by funds received from 1MDB that didn’t materialize. And at Low’s urging IPIC further provided $1 billion, which Najib’s Finance Ministry promised to repay, to avoid defaulting on the Deutsche Bank loans.
Goldman made a bundle, though its reputation was once more damaged. Damage to reputations of large finance industry companies, however, seems in most cases to do them little actual financial harm.
Who lost from this whole saga? As Wright and Hope conclude: “The whole notion of ‘monetizing the state’ – in countries without rule of law and sophisticated investors – risked costing taxpayers in poor places for the benefit of Wall Street.”
Goldman’s strategy of monetizing the state was launched by Cohn in the wake of the 2008 financial crisis, after which Goldman’s ability to monetize the American public was diminished. So its strategy was to take recourse to monetizing the public in second and third world countries. As Wright and Hope say, “Goldman had made hundreds of millions of dollars and 1MDB was in disarray, at a high cost to Malaysia’s people.”
The force that once held these practices – which earn respected financial institutions prodigious amounts of money and their executives outlandish levels of compensation – in check, was not financial penalties but shame. But unfortunately, shame no longer exists.
Economist and mathematician Michael Edesess is adjunct associate professor and visiting faculty at the Hong Kong University of Science and Technology, chief investment strategist of Compendium Finance, adviser to mobile financial planning software company Plynty, and a research associate of the Edhec-Risk Institute. In 2007, he authored a book about the investment services industry titled The Big Investment Lie, published by Berrett-Koehler. His new book, The Three Simple Rules of Investing, co-authored with Kwok L. Tsui, Carol Fabbri and George Peacock, was published by Berrett-Koehler in June 2014.