Goldman Sachs, the world’s most prestigious investment bank, is still an enigma to the good people of Rembau. In this article, we will attempt to explain how this investment bank operates for their understanding, and so that they can even impress their relatives this Hari Raya.
The first step is to understand what Goldman Sachs actually does, and how it is different from famous local banks like Maybank, CIMB and Bank Rakyat.
The difference in one word – customers.
Customers of Maybank consist of three categories – individuals, Small Medium Business and the larger Malaysian corporates. The bulk of these customers use Maybank for two main services – loans and deposits. To serve their customers, Maybank operates a wide branch network across Malaysia, and there is even an ATM at D’mart in Bandar Baru Serting. Basically, Maybank makes a large portion of its profit by making loans to people at lets say 5.50% and getting the money to make those loans by taking deposits at 2.50%.
The customers for Goldman Sachs on the other hand can be categorized into four categories
- The largest companies in the world,
- Pension funds and investment funds throughout the world
- The richest people in the world
- The biggest financial traders in the world.
The biggest difference between an investment bank like Goldman Sachs and Maybank is that Goldman Sachs does not make almost any money from loans funded by deposits. In fact, whilst loans could account for up to 80% of the assets of a bank like Maybank, loans only make up about 6% of the assets of Goldman Sachs. And secondly, Goldman Sachs takes in only very little deposits, actually only 16% of its liabilities are deposits.
So if they don’t make loans and they don’t take deposits, how does an investment bank like Goldman Sachs operate?
The answer is that Goldman Sachs operates in several different business models.
The first model is called the ‘investment banking’ model.
Take for example a very important and prestigious client, like 1MDB. 1MDB wants to raise US $3.5 billion in eighteen months. 1MDB has no assets to pledge, no proper business but hopes to use the money to invest in some energy and real estate assets (“kononnya”). This kind of deal cannot be done by local banks, it requires big international investment banks. At a time when there were few deals going around, Goldman Sachs actually managed to raise USD $3.5 billion for 1MDB by underwriting 2 bond offerings of US$1.75 billion each.
So how could Goldman Sachs do that? The answer is that the moment after they get a ‘mandate’ to do a deal, they will figure ways in which to make it happen, and how to sell the deal to the next party. In the case of 1MDB, the bonds were marketed to investors as bonds secured by the IPIC of Abu Dhabi. Their job was to make sure all the legal documentation was in place and to find buyers for the bonds that were to be issued by 1MDB.
Job done, they charged 1MDB USD $600m for their effort.
This is the interesting thing – Goldman Sachs never had to worry about having to ‘hold’ on to 1MDB bonds. Their job was to help with the legal documentation and then find buyers.
This is an example of what is called ‘Investment banking’.
There are very little assets of the bank involved, but involves a lot of expertise in knowing how to do deals, having the right relationships with the biggest companies in the world and being able to match people who need money with people who have money. In the case of 1MDB, the relationship was initiated at the World Economic Forum by YAB Dato Seri Najib Tun Razak, (Remember to ‘wala’ and ‘taat’) with senior Goldman Sachs bankers. Rembau people should understand that while they lepak at the warungs, Goldman Sachs bankers are mixing with the leaders of countries and large corporations.
To put into context, of the $US 860 billion of assets on Goldman Sachs balance sheet, only USD $1.8 billion, or 0.2% is allocated to the investment banking. This is because the process largely works like how we described it. Goldman Sachs is acting as a very expensive ‘adviser’ to structure the deal (which means to come out with the Terms and Conditions) and ‘middle man’ to sell the deal to investors
When times are good, investment bankers make a lot of money through fees by doing debt and equity underwriting. So far, I’ve yet to know of a Goldman Sachs investment banker from Rembau, but hopefully this article will motivate Rembau children to participate in banking and this will change in years to come. Maybe they can be involved in the 2MDB deal in 2050.
In the next article, we will explore a segment called ‘Institutional Client Services’. That will be more complicated , so stay tuned.