by Tom Wright
Brunner’s stewardship of BSI would cost him and imperil the bank’s very existence. But Low, at least for now, had overcome another complication, and was readying for the next phase of his scheme. This time, Tim Leissner of Goldman wouldn’t miss out.
Chapter 25
Goldman and the Sheikh (The Second Heist)
Abu Dhabi, March 2012
In early March, Tim Leissner flew into Abu Dhabi, the humid Persian Gulf emirate, for a rare meeting with one of the world’s richest people: Sheikh Mansour Bin Zayed. As one of nineteen children of the founder of the UAE, the sheikh was worth an estimated $40 billion, and perhaps best known for his ownership of Manchester City Football Club. His grandparents’ generation had been born penniless, living as date farmers, camel rearers, and pearl fishermen, but the discovery of oil in the late 1950s had changed their fortunes.
Obtaining a sit-down meeting with Sheikh Mansour was almost unheard of, even for the most heavyweight investors. The sheikh’s power derived not only from his personal fortune, but also his role as chairman of the International Petroleum Investment Company, a $70 billion sovereign wealth fund. IPIC, financed by huge amounts of debt, recently had become a global investment force—it had even taken a stake in Barclays Bank of the UK during the financial crisis.
Wall Street bankers were often seen sniffing for deals at IPIC, which was in the process of building a futuristic modern headquarters, a series of domino-thin skyscrapers, one shorter than the next, which would offer panoramic views of Abu Dhabi’s main island and the expanse of the Persian Gulf. But few had met Sheikh Mansour.
Leissner was among the chosen, thanks to Low’s newfound closeness with Khadem Al Qubaisi, an aide to the sheikh. In a few days, the Goldman banker would be boasting to colleagues in Asia about his unparalleled access in the Middle East, although he was careful not to play up Low’s role in making this happen. But right now, he needed to get the sheikh to agree to a deal that could change his fortunes. He was on the cusp of winning the mega-1MDB business, for which he had spent years laying the groundwork.
In his meeting with the sheikh, Leissner was accompanied by Low, who also had traveled to the emirate. After pleasantries, the group got down to discussing the outlines of the deal. The Wall Street bank was preparing to sell a total of $3.5 billion in bonds for the 1MDB fund to finance the purchase of coal-fired power plants in Malaysia and overseas. The plan was for 1MDB to package these facilities, as well as some new plants, into one company and IPO the shares on Malaysia’s stock exchange. The listing could earn 1MDB around $5 billion, as the power plants put under one entity would be worth a lot more.
The problem was that 1MDB had never issued a U.S. dollar bond to international investors, and it had no credit rating. So, Goldman was suggesting it ask IPIC—a sovereign entity with a strong credit rating—to guarantee the issue. That would put investors at ease, giving them confidence that 1MDB would be able to repay the debt whatever the circumstances. In return for its guarantee, IPIC would acquire the rights to buy a stake in the listed power company at a favorable price.
This was Low’s latest blueprint for 1MDB, a way for the fund to enter the power-generation business, make some money, and, hopefully, paper over losses. But there were many oddities in the plan. Why would a Malaysian state fund seek a guarantee from a similar fund of another country? Why didn’t Malaysia’s government just offer a sovereign guarantee for the debt? Indeed, Leissner’s colleagues at Goldman’s Middle Eastern headquarters in Dubai, who did regular business with IPIC, found the idea preposterous and declined to get involved. Even IPIC’s own finance director raised questions about why IPIC would put itself at risk over another fund’s business—one with no track record, at that—but was outranked.
The sheikh, a youthful forty-one-year-old with a toothy grin, had the final say at IPIC. After Leissner and Low made their presentations, Sheikh Mansour gave the go-ahead. The proposal for IPIC to guarantee the Malaysian fund’s bonds may have looked strange, but it was an artificial construct, purely aimed at creating an excuse to divert more than a billion dollars from 1MDB.
Low had put the scheme together with Al Qubaisi, who was also the managing director of IPIC. They had gotten to know each other on the failed Claridge’s bid, and Low had brokered a deal for Aabar, an IPIC subsidiary, to buy a Malaysian bank. That deal had lost money for Al Qubaisi, but now Low was about to repay him many times over.
And IPIC’s guarantee was the linchpin of the plan.
With gelled-back hair and a bodybuilder’s physique, the result of two hours a day pumping iron, the forty-year-old Al Qubaisi was a striking figure. The Al Qubaisi family had married into the ruling Al Nahyans a generation earlier, a family tie that had helped his career. After working for the Abu Dhabi Investment Authority, the emirate’s most well-known and largest sovereign wealth fund, he had become managing director of IPIC in 2007, but his real power lay as Sheikh Mansour’s trusted dealmaker.
There was another attraction to Al Qubaisi: He had a reputation for taking kickbacks on deals, making him incredibly rich. Low had spent hundreds of millions on parties, mansions, and trophy investments like the L’Ermitage hotel, not to mention secret payments to his coconspirators. Yet he craved greater riches: He wasn’t happy with a smattering of low-profile deals in real estate. He wanted to become a genuine mogul. The Wolf of Wall Street was slated to kick off filming in the second half of 2012, and Low still didn’t have financing in place. He needed more cash, and he sensed Al Qubaisi could deliver it—for a price.
Through his relationship with Sheikh Mansour, Al Qubaisi was one of the most powerful men in the emirate. Even in the brash and showy UAE, Al Qubaisi struck bankers as an unparalleled egoist, traveling with a retinue of Egyptian security guards and embossing his initials—KAQ—on cigars, drink coasters, boxes of tissues, and even his collection of high-end cars worth tens of millions of euros, which he kept in a storage facility in Geneva and at his villas in the South of France.
In Abu Dhabi, Al Qubaisi wore the traditional emirati cloak and head covering, and had a family home, a sprawling villa, where his wife and four children lived. But like many rich emiratis, he conducted a different life overseas. At his villa on the Côte d’Azur, with Bugattis and Ferraris parked outside, he partied with models, and he had a younger Moroccan wife in Paris. When abroad, he traded in traditional emirati dress for tight-fitting T-shirts, including one with a montage of images of Al Pacino’s Tony Montana from the 1983 film Scarface. Once, when an executive showed up to Al Qubaisi’s mansion in France to discuss business, he answered the door wearing a skimpy swimsuit, while women in bikinis lingered in the background.
The sheikh oversaw IPIC, and he liked to have the final say on major deals, like this burgeoning business with 1MDB. But he also delegated incredible powers to Al Qubaisi, who had the ability to green-light acquisitions without board approval. With a single execution of his wide, sharp signature, he could okay a multi-billion-dollar deal on behalf of the fund.
“Khadem was the only man in the world who you could call with a $10 billion deal and he’d just say ‘yay’ or ‘nay.’ He thought he was God,” said one financier.
In return, Al Qubaisi ensured that Sheikh Mansour remained flush with funds to pay for a lifestyle that required vast expenditures: salaries for dozens of staff, the cost of maintaining houses, boats, cars, and planes around the globe. IPIC had been founded in 1984 to invest in oil-related companies, but with Al Qubaisi at its helm, the fund and its subsidiary, Aabar Investments, had engaged in a spending spree, most famously its bailout alongside Qatar of Barclays in 2008, which saved the bank from a government takeover, but also the acquisitions of minority stakes in Daimler-Benz, UniCredit, Virgin Galactic, and other companies—all of them major deals.
The boundaries between IPIC, a state fund, and the sheikh’s personal business empire were not always sharply drawn. In the case of the Barclays acquisition, for instance, British regulators believed Sheikh Mansour was putting
in the money, when in fact the funds came from IPIC. Although he had not invested any personal cash, Barclays issued warrants to the sheikh as part of the deal, allowing him to buy shares in the bank at a low price. He eventually made more than $1 billion in profit—at no risk to his own funds.
Aabar’s books contained a tangle of transactions with companies tied to Sheikh Mansour, involving land and loans in the billions of dollars. In addition to his day job, Al Qubaisi oversaw these private businesses, and his privileged position, close to the Al Nahyans, gave him free rein to feather his own nest. In a 2009 lawsuit filed in the United States, two businessmen claimed Al Qubaisi had asked for $300 million in kickbacks during a failed bid to take over the Four Seasons hotel chain. (The plaintiffs later withdrew the suit.)
Behind his brash demeanor, Al Qubaisi had a problem. Unlike ADIA, which could rely on payments from the state’s oil profits, IPIC was fueled mainly by debt. By 2012, it had $19 billion in borrowings, and only the Abu Dhabi government’s 100 percent ownership ensured its debt was awarded investment-grade credit ratings. The fund’s image as a major investor, in fact, was partly a mirage. After the crisis, when Al Qubaisi saw an opportunity to buy stakes in big Western companies and banks, he turned to Wall Street for financing.
Goldman Sachs, Morgan Stanley, and others made huge profits arranging derivatives financing for IPIC—just another naive emerging-market sovereign wealth fund—helping to make up for subdued markets and economies in the West.
But it was becoming harder for Al Qubaisi to raise money from Wall Street. In 2011, the de facto ruler of the UAE, Sheikh Mansour’s brother, Mohammed Bin Zayed, had ordered all debt issuances to go through a central authority to avoid a repeat of the Dubai debt crisis, in which state entities overborrowed and had to be bailed out by the UAE government to the tune of $20 billion. As he was searching for new ways to keep the cash flowing, Al Qubaisi came into contact with Jho Low, who boasted he could sign multi-billion-dollar deals involving the 1MDB fund.
Like Al Qubaisi, Low was a young, unaccountable figure who, through relations with the truly powerful, controlled billions of dollars. Low had brokered Aabar’s investment in RHB, the Malaysian bank, which had lost money, but his latest proposal would more than make up for that debacle. IPIC agreed to guarantee the 1MDB bonds, and Goldman set about arranging the issue.
Chapter 26
Bilking the State
New York, March 2012
At Goldman’s global headquarters at 200 West Street in downtown Manhattan, a forty-four-story skyscraper on the Hudson, completed just after the financial crisis, senior bankers were growing concerned over this business in faraway Malaysia. But the unorthodox dealmaking had a powerful supporter: President Gary Cohn.
Bald with a pointed skull, and furrows across his brow, the fifty-one-year-old banker was a formidable presence. He was aggressive and blunt, a personality forged on Goldman’s trading floors, where he had launched his career alongside Lloyd Blankfein. When his friend rose to chief executive, Cohn had taken the number two job and had remained a loyal lieutenant, helping defend the company’s precrisis bet against the housing market. Now, with Western economic activity subdued, Cohn was spearheading a drive to do more deals with sovereign wealth funds in emerging markets. And that led him to throw his support behind a potentially lucrative line of business that Leissner and Andrea Vella were developing in Malaysia.
Cohn had set up a special cross-divisional unit to make money from sovereign wealth funds—co-investing with them in private-equity deals, devising hedging strategies, or simply raising capital. This business line was colloquially termed “monetizing the state” inside Goldman and was a major focus inside the bank. Cohn started to travel regularly to Southeast Asia, where he had high-level meetings about co-investing with Singapore’s powerful Temasek Holdings investment fund. He viewed 1MDB very much in this vein, although the fund shared almost no similarities with Temasek, a professionally run entity.
The backing of a domineering and powerful personality like Cohn afforded significant cover to those involved in the 1MDB business and drowned out the voices of those who were uncomfortable with the plans to raise billions of dollars for the fund. David Ryan, president of Goldman in Asia, was among those urging caution. He had visited 1MDB’s staff in Malaysia and came away with concerns over its plans to take on so much debt, and the inexperience of its management, none of whom seemed to have overseen multi-billion-dollar investments before.
The potential deal wound its way through five Goldman committees that look at financial and legal risk. One of the main points of debate was the role of Jho Low, whose exact position baffled some Goldman executives. The bank had turned down Low for a private banking account in Switzerland, so it could not formally enter into a major deal that involved him. One Goldman executive, in an email to colleagues on March 27, acknowledged Low was a “1MDB Operator or intermediary in Malaysia.” But in conversations with Goldman staff around the same time, Leissner denied Low was involved in the deal. Such middlemen were considered highly risky at American banks because of the possibility they were receiving bribes, a violation of the Foreign Corrupt Practices Act that could lead to a big fine.
Yet Leissner, who had traveled with Low to meet Sheikh Mansour, must have been fully aware the Malaysian was directing the show. In this period, the German banker would travel all over the world to meet Low, whether in Kuala Lumpur, Hong Kong, or Switzerland. Low’s plan was for 1MDB to sell the bonds quickly and secretively via a private placement. Typically, most companies issuing bonds prefer to do so through a public issuance, in which the bank arranging the deal canvasses a wide range of investors. Through this process, called book building, banks with access to a large network of investors can reduce a company’s cost of funds. Investors in a private placement, by contrast—typically big institutions like pension funds or hedge funds—demand higher returns. The advantage is that companies can raise money quickly and without getting credit ratings from big agencies like Moody’s and Standard & Poor’s. The process also involved much less scrutiny, just how Low liked it.
The 1MDB fund had agreed to pay $2.7 billion for power plants owned by Malaysian billionaire Ananda Krishnan’s Tanjong Energy Holdings, the first of a series of acquisitions it planned to make in the sector. To give the deal a veneer of authenticity, 1MDB needed an independent valuation of the plants. Leissner stepped in, asking Lazard if it could oblige. The U.S. bank agreed to take a look, but its bankers crunched the numbers and couldn’t figure out why 1MDB was willing to pay $2.7 billion for the suite of plants, which were located in Malaysia, as well as Egypt, Bangladesh, Pakistan, and the UAE.
The deal seemed favorable to Tanjong, especially given that its power-sale agreement with the Malaysian state would soon run out, handing the government leverage to achieve a bargain price. Lazard believed the whole deal smelled of political corruption. It was common in Malaysia for the government to award sweetheart deals to companies in return for kickbacks and political financing; that was what Lazard thought was going on, and so it pulled out.
With no other choice, Goldman instead became an adviser to 1MDB on the purchase, as well as helping the fund raise the capital. The bank provided a valuation range that justified 1MDB paying $2.7 billion for the plants.
Leissner was at his most charming as he tried to cajole members of 1MDB’s board of directors to accept Goldman’s terms for selling the bonds. Sitting opposite the Goldman banker in a room at the fund’s downtown Kuala Lumpur offices, just a few weeks after Leissner’s meeting in Abu Dhabi, some of the board members looked skeptical. Goldman was preparing to launch what it internally dubbed Project Magnolia, a plan to sell $1.75 billion in ten-year bonds for the 1MDB fund. But some board members were alarmed by what Leissner had informed them: Goldman would likely make $190 million from its part in the deal, or 11 percent of the bond’s value. This was an outrageous sum, even more than Goldman had made on the Sarawak transaction the year before, and way above the n
ormal fee of $1 million for such work.
The banker defended Goldman’s profit by pointing out that 1MDB would make big returns in a future IPO of the power assets, all without putting down any money of its own.
“Look at your number, not at our number,” he said cajolingly.
Working together with Andrea Vella, the Goldman executive who headed up the debt and structured finance business in the region, Leissner had arranged for a rerun of the Sarawak bond. As last time, the PFI trading desk would buy the entire issue, using its massive capital, and later find investors. That meant Goldman would be taking on all the risk and 1MDB would get the money quickly. Despite some questions, the board, filled mainly with Najib loyalists, was ultimately a rubber stamp, and it wasn’t going to mount a serious attempt to stop this plan in its tracks.
Even at Goldman, some bankers, including David Ryan, considered the bank’s likely profit excessive. Alex Turnbull, a Hong Kong–based Goldman banker whose father, Malcolm Turnbull, would later become Australia’s prime minister, also raised concerns internally. Turnbull wasn’t involved in the deal, but he knew how bond markets worked, and he sent an email to colleagues expressing disbelief about Goldman’s profits. The email led to a reprimand from Goldman’s compliance department, while Turnbull’s boss told him to keep his mouth shut if he ever wanted to get promoted. He left the bank almost two years later for reasons unrelated to 1MDB.
Internally, Leissner, backed by Vella, defended the returns as commensurate with the risk Goldman was taking by buying the entire $1.75 billion in bonds. The 1MDB fund was paying most of its fee to Goldman by selling the bonds at a discount, and the bank would make its money if they could find investors willing to pay a higher price. But the face value—that is, the undiscounted price—was still high enough to yield 6 percent annually to an investor, a high return given the guarantee from IPIC, and an inviting proposition at a time when rates in Western economies and Japan were hovering close to zero. In fact, Goldman already had lined up mutual funds in South Korea, China, and the Philippines to buy the bonds. The sale was handled quietly, and one Goldman employee was told to keep all correspondence about the bond off email. If word got out Goldman already had buyers, its profits would not seem justified.
