I tweeted recently about how I thought the 1MDB scandal in Malaysia is massively under-followed. In the interest of elaborating on why–and encouraging more private memos to be shared–below is email I sent to some others on why I found the 1MDB scandal important, and some adjacent topics it made me think about.

I’m not going to give full overview of 1MDB scandal. It’s an ongoing scandal in which the former Prime Minister of Malaysia, Najib Razak funneled billions of dollars into a government run fund 1Malaysia Development Berhad (1MDB) informally headed by a fellow conspirator and financier, Jho Low. Together they stole hundreds of millions of dollars from the fund, used it to buy votes in Malaysia and to party in Hollywood and NYC, and decided government projects based on their personal interests. And in their efforts to cover it up and not be held accountable, tried to subvert Malaysia’s democracy and government, shifted the geopolitical direction of the country, and perhaps had a government prosecutor killed.

If you want to learn more about it you can read books like Billion Dollar Whale or articles in the WSJ, Sarawak Report, Economist, or others. This is current news story–so at this moment new developments are still coming out.

When covered in the US, it’s usually covered because of the salacious details of Jho Low’s partying in the US. This is noteworthy, but just one small part of a much more interesting peek into how things happen. Much more interested in getting a view into worlds of business and politics we rarely get–then salacious fodder that can fit in tabloids at the supermarket cashier.

Email memo below

——-

Some notes and adjacent thoughts on 1MDB

Secular shift and Maturation of Sovereign wealth funds. The 1MDB scandal involves Malaysia’s sovereign wealth fund as well as Abu Dhabi’s Mubadala, but we should zoom out to see the bigger picture. Across the world sovereign wealth funds are changing how they operate and we are starting to see its impact. From Saudi Arabia’s $45B investment in Softbank’s Vision Fund to Singapore’s vertically integrated approach with Temasek, with it’s hundreds of employees across 10+ offices around the globe. These aren’t isolated events. Sovereign wealth funds are undergoing the same transition that foundations and endowments went through three decades ago. As they seek returns they are pursuing exposure to alternative asset classes, with the added strategic imperatives of their country. Bringing their hundreds of billions of dollars to market, they are the underlying force driving significant shifts across many asset classes. And their investments will have future geopolitical importance too. Yet few are discussing this macro trend.

High net worth family funds are also undergoing this shift. In both of these cases, the transition is typically being led by individuals within informal power structures with little oversight. This means that we’re seeing high variance in the approaches and outcomes of each experiment. What sectors and deals these funds do can be highly subject to the personal beliefs and whims of a tiny handful of people and the advisors around them.

Small Man Theory of History. Historian’s use to debate the Great Man Theory of History, Thomas Carlyle’s theory that history was shaped by the so called Great men or women that through sheer force of will changed the world. While this has been largely discredited, perhaps we were looking at it the wrong way. Perhaps it is not the Great Man Theory that is true, but the Small Man Theory of History. That history can be shaped by the personal failings and whims of one person.

The 1MDB scandal is a good case study on this in regards to Malaysia and its former prime minister, Najib Razak. During the latter part of his tenure he shifted Malaysia closer to China over the US, for example joining Xi Jingping’s Belt and Road Initiative and promising far closer economic and political ties. But in truth this wasn’t for Malaysia’s benefit. Instead it was because secretly he knew of the impending blow up of 1MDB. The US refused to halt its investigations into his involvement in the scandal, angering him and making him cut off ties. And he siphoned off money that was supposed to be spent in Belt and Road Initiative projects to pay down debts owed by 1MDB and keep it afloat. Because of his surprise loss and ouster from office, we have seen Malaysia reverse these positions, but if he had not lost we likely would have seen a significant political repositioning of Malaysia for no other reason than Razak’s personal scandals. That is insane and shows how fragile our political systems are.

Competence and Efficiency. When I was growing up, I worried that the world was too efficient. How could there be any room for me to improve on the world–surely every company and organization must be run in a highly competent fashion? After all, the world has had hundreds of years to improve at running companies and governments well.

Following 1MDB will put to rest any fears or hopes you had that the highest levels of finance and government are all highly competent. There are countless examples of the corruption and incompetence of the conspirators. Their brazen stealing of billions of dollars. Their profligate spending on partying and luxury goods. Their amateur use of fake email accounts. Their willful disregard for their fiduciary duty to their companies and people.

In many ways realizing this is very liberating. We should not be afraid of our ability to do good work. As long as we have good intentions and are willing to work hard, we’re already in a very good spot. The bar is lower than we think. The world is not at 80% competence, it’s at 20%. There is so much for us to collectively improve on.

Quacks. Lately we have had notable scandals like 1MDB and Theranos, where charismatic individuals talk their way into millions and billions of dollars from others. And perhaps we are all just a few good conversations away from a billion dollars. Of course, the tough part is having real ways to deploy that amount of capital and get a true return on it. And this is where these schemes all unravel.

We’ve abstracted Finance so much we think it’s efficient. Many people hate finance, but few think of it as sloppy and inefficient. We think of finance as a sophisticated and efficient process. This is in large part because of how we’ve abstracted it into a clinically clean and precise High Finance. But this isn’t the case. Finance has so much waste and corruption in it. It moves such magnitudes of capital that this loss is factored into the cost of doing business. Scandals like 1MDB give us a peek into this world. Into how easy it is to move money illegally. To bypass compliance teams with limited resources and scope of authority. When we talk about startups working to improve finance. Or crypto replacing parts of finance. We should remember we’re not talking about a some highly performant system with perfect accountability and legibility. We are often talking about very human systems trying their best but unable to have the legibility possible to live up to our goals. Encoding these systems in software will allow us far greater visibility and accountability into these systems.

Economics of Dirty Money. Our intuitions of the economics of dirty money, whether money laundering or corruption, are typically miscalibrated. We are too used to understanding economics from the lens of normal businesses, where companies must focus on their margins. One thing that’s hard to appreciate is how different your considerations are when unit economics aren’t what drive the business model, but instead making the money ‘clean’. For example, there’s a reason once they reach a certain scale, all p2p transactional businesses get approached by the FBI about money laundering. The best customer is the one who doesn’t care about your 20% take rate, they view it as a cheap cost for laundering their money.

Similarly, I hadn’t appreciated the degree to which natural price dispersion in markets are fantastic for money laundering. I wonder how much of real estate markets in many cities are propped up for these purposes. And let’s not even talk about the entire art market. All the strategies not possible in pubic markets are much more possible in these less regulated markets.

Money and Politics. Malaysia’s Prime Minister, Najib Razak may have thought they’d make money on 1MDB’s investments. Him and his wife certainly wanted to personally benefit from siphoning off money from the fund. But there was also an important political purpose to the fund. The fund doubled as a piggy bank he could draw on for political purposes. It was the equivalent of a virtually unlimited Super PAC that could be spent however to help his party get votes. So it wasn’t just personal greed that drove his involvement, but very rational political calculi. Without meaningful regulation and enforcement of money in politics we will always make environments that welcome this kind of attack profile.

Burning the Commons and the Metastasization of Corruption. Jho Low definitely abused even what his co-conspirators thought he would do with the money. But to be clear, for conspirators it is a *feature* of the system that he pocketed massive amounts of money from the fund. After all, for anyone involved, if you want to criminally benefit from the system (whether for money, political purposes, etc) you want to make sure everyone else is *also* criminally benefitting so you know they are in the same boat with you. Corrupt systems metastasize because of this property. It’s why it’s so important to be vigilant in destroying them. They aren’t harmless, they make it impossible for honest people to thrive. We need stronger cultural and legal norms around punishing people who burn the commons

Hostages to Fortune. Jho Low’s downfall was precipitated by his inability to hold back his frivolous and ostentatious spending. It was not enough to make incredible sums of money. He needed to throw the largest parties and become friends with celebrities. Yes, there were some business reasons for doing so, but it was primarily for his enjoyment. And drawing attention to himself was certainly terrible for his endeavors–as many of his co-conspirators warned him of.

In this case I like it because it helped him get caught, but in general am always surprised by people who let their personal failings constrain their ability to achieve their maximal work and impact. And this is not unique to Jho Low. So often we see politicians, founders, and all manner of people who cannot help themselves from giving ‘hostages to fortune’.

Lee Kuan Yew has multiple speeches on this topic as it relates to the early days of the PAP. When they were fighting for the hearts and minds of Singapore against the communists, if they’d had corruption, sex scandals, or any other number of missteps the Communists would have used it to break the country’s trust in them. It is hard enough to do important work, without getting in your own way. Independent of what we think of others decisions, we should judge them where they let their personal issues constrain their, and our, ability to do important work. Time and time again in history we see people hand others the rope with which to hang themselves.

The Fungibility of Money and Celebrity. Much of the coverage around 1MDB in the US has been focused on the celebrities caught in the orbit of Jho Low. Though I don’t think it’s anywhere close to the most important things of note from the scandal, it’s not surprising the media and consumers in the US focus on who’s partying or dating who. That said, books like Billion Dollar Whale that cover how Jho Low converted his money into friendships, relationship, and business partnerships with celebrities is an indictment in–at least some part–of our celebrity society. In which the rich and the famous desire each other’s social and financial capital respectively–and create a more fungible market between than two than one would guess could be done. At least that would be the polite way of describing it.

The US is Global News. Few in the US know about this scandal, yet it (and its downstream impacts) are the most important thing to shake Malaysia in decades. Nothing of this import could happen in the US without everyone globally knowing. Always striking to be reminded of this. And do wish more in the US would care.

The US is an Important Arbiter of Global Norms. On the other hand, despite little attention domestically, it’s striking how much the US is the arbiter and one of main checks on these scandals in other countries. It was the WSJ that could break open much of the scandal because it was not subject to oversight by Malaysia’s government. It was the FBI’s Kleptocracy department that investigated and would not fold under pressure to Malaysia’s pressure. And it was the US as the center of the finance world that was able to help resolve this. It’s easy to forget the positive roles the US plays internationally, ensuring fair markets and responsible governments. This is not selfless of course, but out of self interest. But an America that cares about functional governments and markets so that it’s interests can be represented is an America that can be a check for people who cannot themselves check their governments.

Those enforcing the Foreign Corrupt Practices Act and working at government units like the FBI’s anti-Kleptocracy team have a thankless job. And many businesses argue these rules make it hard for them to do business in countries where bribery and corruption are the expected norms of business. But these are important for setting and maintaining international norms that allow for a healthy and functional market. If the US no longer cares or is able to be a check on the abuses of those in power in other countries, it would be unfortunate.

Malaysia and the UMNO. With Mahathir coming back to unite with rival Ibrahim to pull off an upset victory against the UMNO in the last election, reasonable heads are hopefully back in power in Malaysia. Lost in this return to normalcy is just how close Malaysia came to being set back decades if not a century by Najib Razak and the other 1MDB conspirators’ actions. It was only because of the turnout and overwhelming action by citizens voting that it was stopped. With recent elections and referendums in the US, the UK, Brazil, and others it is easy to get disenchanted with democracy. Malaysia is a good example of how close it can come to disaster, and also the power and importance of voting and citizens caring and demanding better from their government.

It is also hard to calibrate on just how unlikely this was. Since its independence, Malaysia has been governed by a coalition (Barisan Nasional) led by one party, the UMNO. Seeing the UMNO’s six decades of dominance brought to an ignominious end by a crisis like this is striking. And to be done by a former Prime Minister allying himself with the former disciple he jailed for years is even more so.

Common Knowledge and Hacking. Hacking and leaks had a significant role in bringing this scandal to light and keeping pressure on the Malaysian government, and other governments across the world, to hold the conspirators responsible. The original primary documents proving 1MDB’s guilt were hacked by a disgruntled former associate. And many of the leaks to reporters were by government investigators working on the case, frustrated by the Malaysian government’s attempts to cover up the scandal rather than actually bring its perpetrators to justice.

In the US we’re bombarded by all the ways hacking can be used to subvert democracy and justice. But it is important to remember, that hacking and leaks have also, in the background, been an important force for shedding light on scandals. Hacking at its best, is a tool that can hold the powerful accountable. And make common knowledge the the harms they try to keep in the shadows and their burning of the commons.

These are not Black Swans. It may be nice to hope that scandals like this are freak occurrences by inordinately outlier villains. This would be naive. This is not some black swan event. Rather, we are getting a view into the type of corruption that happens regularly across the world–but few are ever brought public and punished.

I remember talking to my father about 1MDB, and him reminding me that this isn’t surprising at all. And telling me many stories about similar schemes those working in the guts of Asian finance and business all had front row seats to over the last few decades. While these aren’t rare, hopefully we are seeing increasing trend of them being exposed and made common knowledge. We have much more work to do.

Credits

Thanks to Sam Hinkie, Jeff Lonsdale, Arjun Narayan, Dave Petersen, Dan Wang, and Eugene Wei for their shaming me into sharing more blog posts and thoughts on this topic and post.