Frankly Speaking

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Is this doing God’s work? At a November 2009 US Congressional hearing on the role of investment banks in the global financial crisis, Goldman Sachs CEO Lloyd Blankfein made his now-infamous remark that bankers like him were “doing God’s work”.

“We’re very important. We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. We have a social purpose,” he said.

Did he invoke God’s name out of frustration at being grilled or was it a manifestation of the arrogance of  people who work in the world of high finance to equate what they do with the work of God?

The latest scandal involving Goldman Sachs’ sale of collateralised debt obligations (CDOs) — those derivatives that were the source of the financial meltdown — is work that God would certainly not approve of.

Goldman had put together a tranche of low-quality mortgage loans with high-quality mortgage loans and sold them as CDOs. It must be stressed that these CDOs do not help companies raise capital to grow. They are nothing more than a game created for investors to bet on. 

The problem — and this is the basis for the US Securities and Exchange Commission’s action against Goldman — is that a hedge fund, Paulson & Co,  had helped select the low-grade loans that were to be packaged into the CDOs. And Goldman knew that Paulson would be placing bets against the CDOs turning bad.

In short, Paulson helped Goldman create a product that the former would then bet against. The result? Goldman collected a US$15 million (RM47.9 million) fee and Paulson made US$1 billion, while investors who bought the CDOs lost more than US$1 billion.

We call this the immorality of high finance, not doing God’s work.

And let us not think this only happens on Wall Street. It occurs here too.

We have investment banks who take companies for listing for a big fee, only to have these firms go bust a few short years down the road. There have been enough such listings to litter the trading floors. The latest is DIST Technology Holdings Bhd, whose financial woes occurred (by sheer coincidence?) a year after the sponsorship period covered by the promoter of its 2007 listing ended.

Regulators need to scrutinise Bursa listings more vigorously.

As John Mack, CEO of  Morgan Stanley, another giant investment bank, conceded at the height of the crisis: “Regulators have to be much more involved. We cannot control ourselves… [regulators] have to step in and control the Street.”
Deftech deal makes little senseThe government’s decision to pay RM8 billion to a local company for 257 armoured personnel carriers (APCs) had raised questions about the need to build the vehicles locally at such an exorbitant cost when they could be sourced off-the-shelf  much more cheaply.

Last Monday, DRB-Hicom Bhd’s wholly-owned unit, DRB-Hicom Defence Technologies Sdn Bhd (Deftech), received a letter of intent (LOI) from the government to develop, manufacture, supply and deliver 12 variants of the Malaysian AV-8 8x8 Armoured Wheeled Vehicle (AWV). The LOI provides the platform for Deftech to commence negotiations with the government on the details of the project.

Based on the value of the LOI, each of the APCs works out to RM31.12 million, which is several times costlier than other comparable vehicles such as the German-made Boxer Multi-Role Armoured Vehicle (MRAV) or the US-built Stryker 8x8 APCs.

According to reports, the average cost of the 472 Boxer MRAV units ordered by Germany and The Netherlands was US$3.3 million (RM10.59 million) each, including the development cost, some years ago. For the Stryker APCs, the base price was reported at RM6.2 million each.

Spending such a huge sum on APCs and touting it as a national project does not hold water if one cannot find international markets for such vehicles. Is there justification for such huge spending if the vehicles produced are just to cater to our Armed Forces? Do we face serious external threats that warrant such spending?

Any investment in APCs must have the economies of scale to bring down costs. That is the norm elsewhere.

The UK and Germany initially jointly developed the Boxer MRAV. They were later joined by The Netherlands. Yet, the UK withdrew from the programme and this resulted in an increase in the unit price because of lower demand for the vehicle. For the US-built Stryker APCs, Canada also cancelled its orders, which resulted in a higher cost per vehicle.

Given such a scenario, any venture into the capital-intensive project should have economic justification. If there is none, it is better to source the APCs from established players and use the excess funds for other more pressing needs.
Unusual shifting of bordersThe news came as a shock. Murphy Oil Corp announced that the production sharing contracts (PSCs) involving two sites off the shores of East Malaysia were terminated by Petronas as the areas were no longer part of Malaysia.

The US-based oil company, which is a major force in deepwater oil exploration and production activities, said in a statement to the New York Stock Exchange that the PSCs that were awarded in 2003 were terminated on April 7, 2010.

The question is what happened between 2003 and 2010 that changed the borders of Malaysia and Brunei? Was the demarcation of the boundaries a discussion that only a few were privy to? Or was it a matter that was decided in principle a few years ago and only implemented now?

Recall that in March 2009, following former prime minister Tun Abdullah Ahmad Badawi’s visit to Brunei, news reports quoted him as saying that the oil-rich sultanate had dropped its claim over Limbang. This was quickly dismissed by Brunei.

Was this really the case? Was the border demarcated after the talks in March 2009? Did Malaysia get Limbang in exchange for forgoing two offshore sites that are rich in oil?
This article appeared in Corporate page of The Edge Malaysia, Issue 803, April 26-May 2, 2010