Goldman Tries, Fails to Sell Soul With Libya Deal
It was hard not to be amused to see this story by CNBC’s John Carney the other day with the following provocative headline: “Goldman Dodges a Bullet.”
In the story an unnamed Goldman banker told Carney that there was a widespread feeling of relief within the walls of the bank after news broke that Goldman a few years ago offered to sell Moammar Qaddafi a $3.7 billion equity stake in their company. The relief, it seems, stemmed from the fact that the deal was never struck – and therefore Goldman doesn’t have to answer charges now of having funded repression in the Middle East. From the Carney piece:
“The last thing we need right now would be headlines reading ‘Vampire Squid Profits Funding Libyan Dictator,’” one senior Goldman investment banker told NetNet.
I appreciated the shout-out there, but I also had to laugh: only a Goldman, Sachs executive would fail to see that offering to sell yourself to a ruthless anti-Semitic dictator/terror sponsor is just as bad as actually completing the sale. If anything, it’s worse. There is no modern-day Goethe or Faust with the genius to even invent an anti-hero pathetic enough to not only try to sell his soul to the Devil, but fail! But apparently, this shameful episode is what counts as a PR win for the esteemed i-banking King these days:
"Finally, we dodged a bullet," another person at Goldman told Carney.
The Libya episode is classic Goldman. They made the equity offer in the first place after blowing a giant pile of Qaddafi’s money on a complicated series of option bets, made before the 2008 crisis. In this deal they pulled the standard White-God conquistador routine, sending in a smooth-talking "rock star" salesman to dazzle the aborigines with cuckoo clocks and shiny things. From MarketWatch:
Libya was eager to join the big leagues of finance, and its investors were “awed” by an Arabic-speaking Goldman executive who urged them into an options deal that bet on the fortunes of companies including Citigroup Inc. C +0.23% , Allianz DE:ALV -1.33% and Italy’s UniCredit IT:UCG +2.08% .
The LIA, Libya’s sovereign wealth fund, was charmed by the demonstration and decided to go all-in with a $1.5 billion bet. Goldman very quickly lost them 98 percent of that money.
I never knew it was even possible to lose 98 percent of an investment that quickly. If you sent a blind, three-legged donkey into Caesar’s palace with $1.5 billion in chips, it could probably stay solvent longer than this options package Goldman sold to Qaddafi.
How could the Libyans be enticed to take such a crappy deal? See if this sounds familiar: according to the Wall Street Journal, the Libyan fund manager felt that Goldman had "misrepresented" the fantastic investment opportunity Goldman sold to them, and also made trades "without proper authorization."
But unlike the Australian and South Korean hedge funds who bought into deadly deals like Timberwolf, or the Dutch and German banks who bought into Abacus, all of whom could safely be fucked with without fear of serious reprisal, the Libyans were a threat to do more than just file quixotic lawsuits in captured American courts over the giant losses. At least, Goldman officials thought they were:
Officials at the sovereign-wealth fund accused Goldman of misrepresenting the investment deals and making trades without proper authorization, according to people familiar with the situation. In July 2008, Zarti, the fund's deputy chairman, summoned Kabbaj, Goldman's North Africa chief, to a meeting with the fund's legal and compliance staff, according to Libyan Investment Authority emails reviewed by the Journal.
One person who attended the meeting says Zarti was "like a raging bull," cursing and threatening Kabbaj and another Goldman employee. Goldman arranged for security to protect the employees until they left Libya the next day, according to people familiar with the matter.
Having managed to get their bankers out of Libya with their heads still attached to their shoulders, Goldman decided to make up for losing $1.5 billion of Qaddafi’s money by offering the international pariah a $3.7 billion equity stake that would have made him one of the largest single owners of the bank.
In con-man parlance, this is called the reload. You beat someone in a Ponzi scheme for his life’s savings, and when he shows up at your door with an axe, you get him to mortgage his house to buy a stake in the Brooklyn Bridge. After blowing $1.5 billion of Libya’s money almost instantaneously, Goldman’s solution to the problem was to immediately get Qaddafi reaching back into his pocket for a cash sum over twice the size of the original losses. It’s really hard not to admire the sheer balls of the whole deal.
Goldman apparently spent much of the summer of 2009 trying to entice Qaddafi to bite on various deals. The main proposal involved Goldman giving Qaddafi $5 billion in preferred Goldman shares in return for $3.7 billion in stock. When that fell through, they tried other proposals, including, hilariously, a deal that would have invested the Libyans in credit default swaps. When the Libyans wouldn’t bite on that either, they tried to design a deal that would have had the Libyans investing in an offshore special purpose vehicle containing what are being characterized as “high-quality bonds.” Amusingly, Goldman sweetened this pitch with what I call a "Jefferson County Special," i.e. a fat consulting fee for a fund advisor signing off on the deal:
The deal would pay Libya an annual return of 6% for 20 years, while also promising a $50m payment to be made to an outside fund adviser run by the son-in-law of the head of Libya's state-owned oil company. Officials from Goldman and the sovereign wealth fund met about the deal in June 2010, but it was never completed.
This is classic modern investment banking. You pitch some kind of deal to a city, state, or country, and it may or may not be a good deal for the actual citizens/residents whose money is at stake. But you can make it objectively a great deal for the individual officials with the power to sign off on the deal by sending a big fat check either to the politician in question or to some local slimeball consulting firm of his or her choosing. Anyway, there is some reason why we journalists are not supposed to call things like Goldman's proposed “$50m payment” bribes, but I can’t remember what it is.
Goldman’s share price actually seemed to jump a little – upward – at the Libya news, getting into the 140-142 range for much of the day. So maybe this unnamed banker in Carney’s story was right about dodging a bullet, at least as far as that day went. But as I’m typing this post, Goldman’s shares are plunging again, thanks to yet another dose of bad news: the bank received subpoenas today from a New York prosecutor, who is apparently interested in Levin report matters. Given the avalanche of bad news hitting the bank of late, it’s actually a bit of a surprise that the market still reacts at all to such stories.
One other observation about all of this, and this was pointed out to me this afternoon by a government investigator familiar with the case. In this Libya deal, we see Goldman going through a lot of effort to placate a customer who lost a billion and a half dollars. Which begs the question: why was Goldman so worried about mending fences with Qaddafi, when it seemingly did nothing for the investors who lost $2 billion in the Hudson deal, or the Australian hedge fund that got beat for $100 million in the Timberwolf deal? I've talked to a lot of people who got on the wrong end of a bad Goldman deal, and I never heard any hint of Goldman coming back with flowers and chocolates after the date rape. What makes the Libyans deserve such special attention? One wonders if you get better service from an American investment bank if the threat of beheading is behind your business deals.
More on this later. I’m also scheduled to talk about the story with Eliot Spitzer tonight on In the Arena, so please tune in. It will be interesting to hear what he has to say about the Libya business.
UPDATE: Almost died laughing when I heard about Goldman's official reaction to the news of the Manhattan subpoenas:
“We don’t comment on specific regulatory or legal issues but subpoenas are a normal part of the information request process and, of course, when we receive them we co-operate fully,” Goldman Sachs said.
So subpoenas are a "normal part of the information request process"? If that's what they consider "normal" communication, how do they shake hands in the Goldman offices -- by beating each other with baseball bats? Instead of greeting cards, do they send each other hydrogen bombs on Christmas and Easter? For pure comic relief, these folks really can't be topped.
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