Wednesday, February 5, 2014

Being Duped By Goldman Sachs Isn’t an Excuse: the Libyan Investment Authority

Being Duped By Goldman Sachs Isn’t an Excuse:  the Libyan Investment Authority

The Libyan Investment Authority (LIA), which manages $65 billion in assets created through Libya’s oil wealth, is suing Goldman Sachs for a series of trades that went awry.  According to the lawsuit filed in London, the LIA lost more than $1 billion, while Goldman Sachs made $350 million, on a series of derivative trades.[1]  Although the trades had a series of components, in the end LIA owned long-term options to purchase stocks like Citigroup, Electricite de France, and Banco Santadar as a result of the various derivatives. LIA expected healthy returns from the options if the underlying stocks appreciated modestly over several years.  The positions were put on in mid-2008, so the results were disastrous.  The stocks plunged and the options expired worthless.
Sketchbook # 3 (2001)
The LIA claims that they were unsophisticated investors who were duped and seduced by Goldman Sachs.   According to press reports, Goldman showered the LIA with gifts and chocolates and promised a strategic relationship.  Goldman also promised to train some of the members of the staff as part of the relationship.  Goldman’s tactics are familiar to me.  They marketed the same proposition to the North Carolina Pension Plan in 2002-2003 without the bonbons.  Needless to say, we passed on the opportunity.

What about LIA’s claim?  While I don’t like Goldman’s methods (and haven’t seen LIA’s legal filing), I have very limited sympathy for the LIA or any large pension plan or sovereign wealth fund that accepted Goldman’s proposition.  I realize that the average investor doesn’t readily understand derivative trades, but the Goldman derivative strategies weren’t that complex.  Even if the LIA staff was as ignorant as the lawsuits allege, the LIA certainly had the resources to hire a consultant or academic to explain the trade.  The LIA’s loss isn’t just the result of investment naivety.  The LIA failed to engage in common sense business practices.  An organization that makes billion dollar bets without having any idea of what they are doing deserves its fate, even if the perpetrator is Goldman Sachs.

One additional note.  Goldman Sachs and other financial institutions are under federal investigation under the Foreign Corrupt Practices Act because they may have hired intermediaries who made pay-offs to the Libyan government in order to get in front of the LIA.

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