Najib's 1MDB And Cayman Islands: The Skunk Cabbage

Hantu Laut

They have implicated he and his wife in the murder of Mongolian model Altantuya Shaariibuu, now they say he carted away RM7.0 billion of the people's money and hide it in the Cayman Islands.

The oppositions must be really desperate to spread its hate campaign against Prime Minister Najib. The implausibility is deafening.

Cayman Islands is an off-shore financial centre not a pirate's cove as made out by some opposition's leaders out to demonise the PM for their own political mileage. 

Cayman Islands is a British overseas territory and administered by Britain and is the 5th largest banking centre in the world. It has almost 300 banks, 800 insurers and 10,000 mutual funds and have global financial institutions such as HSBC, Deutsche Bank, UBS, Goldman Sachs and over 80 other administrators stationed there.It is also the world leading off-shore hedge funds jurisdiction.

The opposition is trying to paint a frosty picture of the operations of 1MDB and insinuated that Najib is planning to steal the people's money as per this loathsome article in Malaysiakini by the equally loathsome "Sang Kancil" called Rafizi. 

Cayman Islands is not a money laundering centre where one can park one's ill-gotten gains without questions asked. It is a bona fide international off-shore financial centre used by the world's big mutual and edge funds and serviced by equally reputable banks and financial institutions.

There have been various articles written on 1MDB as regard its investments and business activities that appeared in numerous blogs and news portal across the country.

The articles are targeted at the laymen who had little understanding of global investment and high finance, in another word, the nitty gritty world of international finance and investment. It's a political stinger to sucker the minds of the ignoramuses.

1MDB was set up as a sovereign vehicle wholly owned by the Malaysian government to raise funds and seek high yield investments in the global market. Naturally, there are and there will be many companies incorporated under the mother company as subsidiaries to take care of the various type of investments.

I am not sure how 1MDB obtain its working capital, whether it is direct from the government or from the market, or a mixture of both. From the little that I read, I presumed they obtain their funds from the market by issuance of foreign currency dominated bonds.

An article "Putting RM7.18b in Cayman Islands is beyond 1MDB's mandate" written by one M.Shanmugam, managing editor of the Edge, questioned the rationale of 1MDB depositing the money in the Cayman. The amount in question was the US$2.318 (RM7.18b) redemption of bond issued by PetroSaudi International (PSI). 

Before I get to the point let me ask whether there had been actual physical cash payout by PSI to 1MDB for the bond redemption, or was the bond a PIK bond?  I'll explain what PIK bond or PIK loan later.

The article also mentioned that as of 31 March 2012 the Islamic bond value had ballooned to RM6.8b including profit receivables, or interest payments that are due but not paid to 1MDB by PSI. 

Now, let see, if it is the same bond, how could after accrual of interests or dividend payments the amount is less than the original principal amount?

The same article also mentioned that on 1 June 2012 1MDB took up 49% equity stake in PetroSaudi Oil Services Ltd (PSOSL) at value equivalent to the outstanding amount due to 1MDB and an option (I  guessed) to buy the balance 51% at a token of US$10. 

The 'shares for bond' exchange he says had rendered the Islamic bond redeemed and no further cash transaction was required.

This is where I suspect the bond between PSI and 1MDB was a PIK Bond.

A PIK (Payment In Kind) Bond pays interest not in cash but in additional bonds or shares.It is a deferred coupon bond as there are no interest cash payments during the bond's term. Interest is only paid on maturity of the bond. Due to its high risk this kind of bond pays higher interest and are for sophisticated investors such as hedge funds, is not for the boys, or companies seeking cashflow.

My dissection here is only on the particular transaction with PSI and should not be construed as on the whole operation of 1MDB.  I do not have enough inputs to comment on the whole operation.

I agree, 1MDB should have more transparent disclosure of its dealings as it is wholly owned by the Malaysian government and the Malaysian people. 

I also believe Najib has no intention of cheating the Malaysian people, but if left in the hands of incompetent people disaster could happen. 

If You Are Fundamentally Screwed Blame It On Mahathir

Hantu Laut

I am beginning to think Malaysians are not very smart lot, the very reason we are left behind countries like Singapore,Hong Kong,Taiwan and South Korea.

Malaysians are just too smart for their own good.

The government have provided more than basic infrastructures and opportunities for the people to grow with the time. 

As former Prime Minister Abdullah Badawi said "We have first world infrastructures but third world mentality" We are left behind the real tiger economies because of us, not because of the government.Government can only do so much. 

The greatness of a nation much depend on its citizens, the attitude and aptitude of the people.

Unfortunately, Malaysians are too slow or too lazy to change. 

They want the luxury and comfort of the Western's world standard of living but do not want to put in the effort and hard work, unlike the Taiwanese, South Koreans, Hongkees and Singaporeans, some working as long as 12 hours a day.

Today, these tiger economies of Asia are rewarded with higher wages and better standard of living. 

Malaysians, have become accustomed to the dependent mentality, the "teenage syndrome". Years of government subsidies have spoiled them as they yearn for more and more subsidy. It has the cheapest petrol price in the region yet they still complained to no end. 

Anwar Ibrahim has promised to reduce the price of petrol if Pakatan win the next general elections. Hanging the carrot, stupid Malaysians believe him. 

Pakatan have promised to reduce the prices of almost every conceivable consumables, it makes one wonder from where are they going to get the money. Unless, they increase the debt ceiling there is no way they can finance all that they have promised. Malaysia have set its debt ceiling at 55% of GDP and the present debt to GDP ratio is hovering around 52/53%.

If contradiction is the buzz word, it's surely in Pakatan, they have also promised to reduce the budget deficit. 

Malaysians have the habit of blaming their government for their failures and shortcomings.If they are civil servant stagnated in their positions they will blame the government instead of their own incompetence. 

It has become pivotal point to blame Mahathir for everything that have gone wrong with this country, but this beautiful country is far from being a beggar's state, we have yet to slide into the gutter. 

When it come to investing, the average Malaysians are just as clueless, either of poor judgment or insatiable greed.

Many of you  must have read the recent  debacle of some gold trading houses that have been caught operating without licences by Bank Negara. Some members of the opposition and the inimitibly stupid investors blamed Mahathir  for asking them to invest in gold ... accused Mahathir of saying it is better to invest in gold than keeping your money in the bank.

We all know Mahathir had never been an investment guru and would never be one, if stupid is as stupid can be, these investors should have known better,  politicising the issue will not bring their money back.

Some of the investors have set up Facebook account supporting the companies and demanding Bank Negara to stop its action against the companies.One such company called Genneva  has a Facebook set up by its subscribers and have the bloody cheek to blame Bank Negara for their dilemma out of their own stupidity. The Facebook here.

Every sensible investor should know the first mandatory requirement before you part with your money, if the companies are not accredited banks or investment institutions approved by Bank Negara, is to check on the background of the company.

What brings these people to such investment companies? It is greed,  because such companies offer high return that can tempt even those with a sliver of greed and most Ponzi schemes offer nonsensical guaranteed return that anyone who knows about money matters wouldn't touch them with a ten-foot pole. Any company that promised to pay monthly or quarterly dividends should be high on the suspect list of Ponzi scheme.

You can buy paper gold through most banks in Malaysia, why don't these people buy from these accredited banks? Simply because such banks don't guarantee return on your investment, be it gold, unit trusts or any other investment. The only guaranted return a bank can give you is time (fixed) deposit,  which currently pays miserable rate, hence, the attraction to Ponzi schemes.

Malaysians never seemed to learn their lessons from the past. There have been many cases of Ponzi schemes in the past that have defrauded investors of million of ringgits yet thousands still flocked to such schemes without second thought. 

The Swisscash Investment programme, an Internet based scam was one such bogus investment house that defrauded Malaysians of millions of ringgit. The investors learned a bitter lesson with this too-good-to-be-true scheme that promised 300 % return in 15 months. With SC and Bank Negara intervention investors managed to get back 20 cents to the ringgit of their money, which, otherwise, would have been naught.

These greedy Malaysians who think they have the midas touch again blamed the government for their bad judgement and rapacious desire to get rich quickly in a get-rich-quick schemes.

Phnom Penh

Shahrizat:Who Let The Cows Out?

Hantu Laut

Condominium and Mercedes for cows. Available in Malaysia only! Order now!

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These cash cows and the government have a lot of explaining to do. Firstly, how in hell can the government give grants and cheap loans to a family-run private enterprise, charging interest much lower than what the government paying for its short and long-term bonds.

Government bond's coupon rates:

Malaysian Government Securities (MGS) - Conventional
MGS Benchmarks			Trading Yields			Total Volume (RM million)	Daily change (bps)
Tenure	Maturity	Coupon (%)	Low (%)	High (%)	Close (%)
3-year	Aug-2014	3.434	3.03	3.08	3.05	98.27	0
5-year	Sep-2016	4.262	3.24	3.26	3.25	121.57	1
7-year	Sep-2018	3.580	3.54	3.55	3.55	170.00	1
10-year	Jul-2021	4.160	3.70	3.71	3.71	63.90	-3

The then Prime Minister Abdullah Badawi under whose watch this ignominious anomaly occurred should be hauled up to explain to the Malaysian taxpayers why he thinks the Shahrizat family deserved such special treatment. The government could have run the project under its own GLC to bring cheaper meat to the people as part of its social obligations.The interest rate of 2% charged to the private company is cheaper than prevailing FD rates and the government coupon's rates.

Dancing cows.

The big question is do you need MYR250 million to run a feedlot farm of the size run by the Shahrizat's family and how was it that the company was allowed to drawdown on the loan when the project was not even ready to start? Why was there no due diligence dictated to the borrower before he was allowed to draw down on the loans?

The Chairman of NFC (National Feedlot Corporation) Dr Mohamad Salleh's explanation that the purchase of 2 units luxury condominium was giving better return than leaving the money in the bank is an insult to the intelligence of level-headed Malaysians. In the first place, what was the business objective, cows or condominiums? Were the properties rented out and what was the return on investment or was the property occupied by Shahrizat's family and whether any rent paid to the company? These are questions left unanswered.

UMNO treating the matter lightly is going to come back and haunt them during the elections.

The aegis of former Prime Minister Abdullah Badawi, Deputy Prime Minister Muhyiddin Yassin, UMNO Youth chief Khairy Jamaluddin coming to the defence of Shahrizat and her family on this shameful affair of treating the people's money as their own is contemptuous and scandalous.

Shahrizat, cannot distance herself from the scandal as it involved her husband and children and she a minister in the cabinet and a big part of the government.

Shahrizat, should take a leaf out of the books of disgraced politicians in the West, should have resigned voluntarily and save Najib the embarrassment.

Keeping her in government would be untenanble and a poisoned chalice to UMNO.

Najib should drop her from re-election.

Bank Bumi Mystery Figure Dies

The late Lorrain Esme Osman (center)

The man at the center of what was then the world’s biggest bank failure and Asia’s biggest corporate failure takes his secrets to the grave

Was Lorrain Esme Osman the man who ordered the death of Bank Bumiputra auditor Jalil Ibrahim in Hong Kong in 1983? The death on Aug. 8 of Osman, the onetime chairman of Bumiputra Malaysia Finance, makes it ever less likely that the identity of the culprit will be revealed.

But Osman always ranked high on the list of suspects of those behind a murder that sparked the collapse of the Carrian Group, a Hong Kong corporate edifice created by Malaysians but built on bogus accounting, corruption and sheer bravado and which ensnared numerous greedy or gullible international bankers, auditors and lawyers. Carrian was the biggest Asian corporate collapse of that era, seriously blackening the reputations not just of Malaysian companies but the Hong Kong and Shanghai Bank – through its investment banking subsidiary Wardley -- and the accounting firm then known as Price Waterhouse, which not only audited Carrian’s dubious accounts, but whose then-senior partner John Marshall was appointed managing director of the major Carrian companies for 18 months before they collapsed.

The Carrian disaster also resulted in the near collapse of BMF’s parent, Bank Bumi, which required nearly US$1 billion in recapitalization by the Malaysian government. It was the biggest bank failure in the world at the time. It is unique for another reason. Despite considerable suspicion of fraud and corrupt payments to officials, the Malaysian government, then headed by Prime Minister Mahathir Mohamad, declined to attempt to prosecute any of the bank’s officers or government officials. It was the first major milestone in a culture of impunity that has handicapped Malaysia’s ruling Barisan Nasional ever since.

Lorrain Osman already has a place in history but for a different if related reason. He spent a record seven years on remand in London’s Brixton prison fighting extradition to Hong Kong to face various charges related to BMF and its relationship with Carrian. That he managed to fight for so long against extradition to what was then a British colony with an almost identical judicial system was thanks to apparently limitless access to funds for legal plus friends in high places in Kuala Lumpur and London. Although he was eventually extradited to Hong Kong he only served a few months in jail there because of his period on remand and he left Hong Kong owing a million pounds sterling to the government in legal fees.

For most Malaysians, and in particular Jalil’s widow, the issue was who and what caused him to be murdered. A small-time Malaysian businessman named Mak Foon Than was convicted of the actual murder, which took place at the ultra smart Regent Hotel (now the Intercontinental) on the Kowloon waterfront. Although Mak denied the murder but only confessed to helping dump Jalil’s body in a banana grove, he was convicted. (Mak claimed that a Korean hit man had done the deed but no such person was traced). Mak served his sentence and is now a free man living, apparently prosperously, in Penang. He has always kept his silence – doubtless wisely.

He had no obvious motive for being involved other than as one who performed errands for more important Malaysians. So which important Malaysian was desperate to see Jalil dead? Or was Jalil killed by mistake, the cord around his neck being intended to frighten, not kill?

Osman, who was staying in Hong Kong at the time, was an obvious suspect. Jalil, sent from KL to find out more about what was going on at BMF, was obstructing a big new loan by BMF to parties related to the Carrian group needed in a last-ditch effort to prevent it from going under. Osman was BMF chairman but Jalil insisted on approval from KL. Another was the founder and head of the group, George Tan, also a Malaysian, who was even more desperate for the life-saving cash but had no evident connection to Mak. More distant suspects included the bankers, lawyers and accountants who had taken Carrian kickbacks or made unprofessional judgments for money. One lawyer, a senior partner in Hong Kong’s largest law firm was found dead in his swimming pool with a concrete manhole cover around his neck. This was deemed suicide.Read more.

Good God ! Are We Dumb ?

Hantu Laut

Being a businessman for many decades and dealing with the intricacies of the banking system, international trade and UCP rules(Uniform Customs and Practice) for Documentary Credits and reading the frivolity of the explanation given by the private secretary to the Yang DiPertuan Besar of Negeri Sembilan Tuanku Jaafar goes to show that the private secretary has little grasp of how the banking system operates.

It is true Tuanku Jaafar didn't take a direct loan from the bank but he has irrevocably committed himself to pay the amount of the Standby Letter of Credit in the event of a drawdown.

Standard Chartered Bank(SCB) must have with the agreement of Tuanku Jaafar issued an 'Irrevocable Standby Letter of Credit' to Connecticut Bank of Commerce (CB) for a specified validity period which means the LC cannot be revoked before its expiry or without expressed consent of the beneficiary. Tuanku Jaafar has also agreed to pledge his fixed deposit as security to SCB which is also irrevocable.

A Standby LC is a form of guarantee issued by banks to other banks either for a third party specific performance or for the beneficiary bank to give credit to a third party whom the beneficiary bank may not be comfortable with unless the party concerned can provide tangible security usually in the form of 'Banker's Guarantee'.A Standby LC instead of 'Letter of Guarantee' is the preferred instrument if the transaction is in a foreign country.

Other instrument used to make advance payment to a third party overseas is 'Red Clause Letter of Credit', mainly used for short-term trade transactions where the supplier may need additional working capital to complete the goods purchased by an overseas buyer.Such arrangement is only possible between parties that have long term business relationship and trust each other.

By the arrangement with SCB Tuanku Jaafar become a guarantor to any liability incurred under the Standby LC.Disputes about the beneficiary’s right to draw should be settled outside the letter of credit transaction.It means SCB cannot become a party in the dispute.

An injunction issued by the Seremban High Court and served on CB which is in America may not be enforceable.

The statement further said “It is clear from the facts that Tuanku Ja’afar did take steps to rescind the LC and prevent a call on the LC before any alleged funds were released by CB to Texas Encore. Despite these steps, CB called on the LC and payment was made by the bank,”.You can't legally rescind something that clearly says 'Irrevocable'.

It is not about Tuanku Jaafar took a loan or not from the bank, it is about probity, that's why the court ruled in favour of SCB.

Derivatives:Hantu Was Right

Hantu Laut

On 2nd October I wrote about the state of the American economy and the likely causes of the financial meltdown in America under my posting "American Get Screwed".

One of the reasons leading to the financial crisis was the use of financial derivatives. These are very complex financial instruments that not many investors understand the workings and risk involved.They are supposed to reduce risk but in the wrong hand,greed and overexposure could be disastrous.

There are wide range of derivative contracts traded on the financial markets based on different kind of assets and indexes.You can even have derivatives on the weather.How all these different instruments work you may have to visit the investment gurus on Wall Street(where it was invented) to explain to you.

Below is a paragraph of what I wrote on 2nd October:

"Much of the troubles started from highly innovative and risky financial derivatives, over-extended credit,over-speculation of trading in stocks and bad financial management.Some of the top CEOs in America are undeservedly overpaid with some having pay packages running into hundreds of million.Their over-indulgence in highly speculative financial derivatives were the cause of the meltdown"

Many of you would still remember Baring Bank and its rogue trader Nick Leeson who speculated in derivatives trading that brought the centuries- old bank to its demise.That's what derivatives can do to banks,corporations or anyone who are greedy,careless or have no understanding of the mechanics of these complex instruments.Former Federal Reserve Chairman Alan Greenspan was a great believer and supporter of these beastly business tools.

Lehman Brothers and Merrill Lynch were creators of credit derivatives.These derivatives are the sweethearts of investment banks and brokerage houses by selling them and making huge upfront fees and premium payments.Another victim,AIG jumped on the bandwagon and went overboard in derivatives involving the sub-prime market.

Below is an article on the subject that appeared in the New York Times yesterday, 8th Oct:

By PETER S. GOODMAN

Published: October 8, 2008

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added. Read more....

The Asian markets are going to take a big tumble today because of what happened on Wall Street yesterday.The Dow was down 7.3% in yesterday's trading.

The whole world is in financial turmoil.Malaysia is still in a slumber.More concerned with politics than state of the economy.The KLSE is the only exchange that is not in sync with the other markets.Are we fundamentally strong or are we living in a state of denial.Watch the market next week.

Next post:'Where Crude Oil Heading For'

Bush's America Busted The World

Hantu Laut

As I have said earlier in my article 'American Get Screwed' it is still a big question mark whether the US$700 billion is sufficient to bail out the sick US economy and predicted that the shock waves would hit the shores of other countries soon.It has begun and is only the beginning.The real tsunamis have not started yet.

The domino effect will certainly take place as many of the markets are indirectly links through many of the huge hedge funds that placed their portfolios in the global baskets. Wall Street has always, for some unknown reasons, been the barometer for other markets to follow. It's the triggering mechanism for boom or bust.

It is not the collapse of the stocks markets that is most worrying and one that could cause major catastrophe, it is the banking system that would decide whether we would go into a major financial disaster or not.As long as the banking system is sufficiently liquid the world major economies would be safe.If it is not than a major catastrophe is not a figment of one's imagination.

The collapse of Lehman Brothers was most unexpected and the US government has allowed it to be the sacrificial lamb and sent it to the grave to save some other bigger monsters. The unprecedented major equity taking in AIG by the US government could be a trend of things to come as it implements it rescue plan.The government could end up becoming reluctant shareholders in many major corporations.

In 1979 when the US Congress agreed to bailout Chrysler there were major outcry, protest and objection from the business community and Lee Iacocca ridiculed by the press for his effort to convince Congress.The rescue package was only US$1.5 billion then, not in cash or equity, but in loan guarantees and was paid back by Chrysler ahead of schedule. Today the enormity of the rescue package and the number of companies to be rescued is mind-boggling and nobody blamed or ridiculed George, his Treasury and Federal Reserve for the failure to regulate the banking system.Because they all wanted George Bust to get the money for them so they wouldn't go bust.

The man who now handles the rescue package is Henry Paulson the Treasury Secretary who gave the US$700 billion to a 35-year old wiz-kid from Wall Street to head and manage the rescue plan.

The de-regulation of the of the financial system was the biggest culprit to this messy affairs for which the Bush Administration and his financial regulating arms should take full responsibility.As President he had failed to take action to reverse the laissez-faire and take immediate action to regulate and stop the greed and excesses in the system.

Although it may be too late to lay the blame, the American people should be made to know that they have a President who are more prepared to show the world the military might of the nation by going to wars at the expense of the American taxpayers and the innocent lives of non-American people abroad.

The next US President that carry on the same policy would also fail to arrest the economic problems as what had happened under Bush's policies.He spent more time with the generals than with the economists and failed to see the even bigger danger than Osama Bin Laden and his band of terrorists, the internal threat of a failed economy that can bankrupt the nation.

With banking failures occurring in almost every major economies the doom scenario could only be averted if those governments took immediate measures to save the financial system from breaking down.

The financial meltdown in the West may not necessary affect the Asian financial markets in the presence but would certainly affect the GDP growth in most Asian countries that have huge export bills to the West.The problem that can eventually affect Asian major economies is if the West is unable to recover and its recession turned to depression.

A loss of confidence in the banking system and attempts to taking money out of it by panicky depositors causing serious run on banks in any of the major economies could contagiously spread panic and run on the entire banking system of the world.

By then,the US Government can keep on printing the worthless 'greenback' and bankrupt every nation on this earth.

When that happened, only God and Robert Mugabe can help us.

American Get Screwed

Hantu Laut

The US Senate has approved the US$700 billion bailout package to save the moribund financial sector from biting the dust.The contentious bill is expected to go back to the House of Representatives tomorrow for final approval by congressmen.

This is the biggest bailout in the history of America without which the economy could go under and into serious depression similar to the Great Depression of the 1930s which started with the meltdown at Wall Street on 29 October 1929 that precipitated widespread panic and the onset of a prolonged depression not only in America but throughout the world.

Chicago, 1931

Shouldn't the top billionaires in America who probably had benefited much from the troubles of the financial markets also be asked to come to the rescue?

Much of the troubles started from highly innovative and risky financial derivatives, over-extended credit,over-speculation of trading in stocks and bad financial management.Some of the top CEOs in America are undeservedly overpaid with some having pay packages running into hundreds of million.Their over-indulgence in highly speculative financial derivatives were the cause of the meltdown.

In America,the poor getting poorer ,the rich getting richer and the taxpayers getting screwed.

The American taxpayers should demand that the government should also find the culprits to this astronomical financial disaster and bring them to book if there were criminal act in their dealings.

The financial system has gone completely kaput.The banks assets to capital ratio are diminishing every day and whether the US$700 billion is sufficient to save the sinking ship is not yet known.

The rest of the world should brace themselves for the shock waves that may reach their shores soon.