1MDB – modus operandi of SWF

The way the 1MDB operates and the attacks on its integrity have become a great publicity case in Malaysia and a political football between those in power and those waiting to unseat those in power. Given the fact that both sides are quite equally matched in political influence and with significant support on the ground, the contenders are not going to get away easily or be thumped down without putting up a big fight.

In the rumour mills, there have been speculations as to how a fund like this would or could make money for the people behind the fund. And it is interesting to see the different processes involved and how money is being made. The first part is the source of fund. As a sovereign fund, the funding is easy if the people behind it could use all the political influence and power to get cheap fund without having to go through the due process of qualifications as a reliable and credible borrower. It is a case of just demand and the money will appear, OPM, or from govt linked organizations where there is no individual owners to talk about.

Such funds are not only easy to come by, the terms of repayment are just as fluid if not hazy. It can be on a continuous basis with no beginning and no ending, round tripping or refinancing and refinancing with the funds remaining in the SWF forever and unaccountable to anyone. With this part secure, there is money, plenty of money, unlimited supply of money.

The next big question is how to siphon the money out from the fund. Oh, I have skipped the investment part completely. Maybe I should touch on this, as suggested by some analysts as to how the SWF will invest the good money to make good returns. The trick is NOT to make money. Profitable investments are only good on paper but not worthwhile if the money cannot be taken out from the fund. So paper profits or cooking the books to show profits would do.

The best and easiest part is to lose money, the more the better. Any bad investment would mean the money in the fund can be drawn down, or lost, spent. With this model, investment becomes so easy and needs only a little bit of ingenuity. Find junk companies, boost up their share prices, inflate them as high as possible, buy high, very high. Then let the price falls and sell at the bottom. Junk companies can be created by proxies or cronies. Some junk companies can be a shell or fictitious, never mind. The intent is to lose money in order to get the money out from the SWF.

Just imagine if each investment in a junk or fictitious company would lead to a loss of $300m, how much could be pocketed if 10 such companies would to fail? Easily $3b and setting aside a few hundred millions for the cronies and proxies would be small change and everyone very happy.

The other important trick is to keep the accounts secret to allow the fund to write whatever profit or loss it so desired. In a way the fund can keep on running in perpetuity, with new money coming in and pocketed by announcing bad deals and big losses. Then top up with more of OPMs.

This is a very simple model of how to make SWFs make money for the people behind them, no transparency, no accountability, just get a few cronies to go through the motion of investing in loss making companies over and over again. No one will bother to check it out, no one will bother to complain and ask for accountability. 1 MDB was just unfortunate that it could not keep its activities under wrapped and was exposed prematurely. If not, it could be a golden goose that would lay unlimited golden eggs.

The genuine SWFs got to sweat to make money, to justify to shareholders, to govts and auditors, and be accountable for the profit and loss. It is not easy to make good and profitable investments. Not everyone is a Warren Buffett. But making ‘sure loss’ investment is a piece of cake. The small difficulty is how to make the loss as big as possible and still look genuine.

This is great fun, oops funs, to operate. No stress, no need to work too hard and money is coming in by money going out in loss making investments. Simply ingenious!