Wednesday, June 15, 2011

Gadhafi and Goldman

Goodness is the only investment that never fails.
—Henry David Thoreau, Higher Laws

Good news for investors whose investments have gone south comes from unlikely sources. Libya is one of them and Goldman Sachs another. The news is certain to convince many that there is no better manager of their money than that fabled institution that was saved from extinction by the taxes we pay that were given to Goldman Sachs when it was in distress. Its benevolence, when recognized by other investors, will certainly cause millions to begin investing with Goldman. Here, according to the Wall Street Journal is what happened.

In early 2008 Libya gave Goldman $1.3 billion to invest. (That was one year before Goldman received $12.9 billion of taxpayer bailout funds that it said it did not need because it was “always fully collateralized and hedged.”) It was before Gadhafi had begun publicly slaughtering his citizens and was, therefore, still considered a good friend by most western countries and by investment banks such as Goldman and other large financial institutions. Unfortunately for Libya (and Goldman as it turned out) Goldman was less successful in its management of Libya’s funds than its reputation led Libya to believe it would be. Goldman engaged in 9 equity trades and one currency transaction that led to the spectacular result that within a few months the $1.3 billion Libya had given Goldman had lost 98% of its value. By the first half of 2009 the fund was worth approximately $25 million.

Libya was distressed at its loss. According to the WSJ Libya was so disappointed that following a less than cordial meeting between the Libyan fund manager and two Goldman executives who had travelled to Libya to express the equivalent of their condolences, Goldman thought it prudent to hire armed guards to protect the executives until they could get out of town. The meeting had not, it would seem, gone well but it was not the end of Goldman’s attempts to make amends and subsequent efforts are what bode well for other Goldman investors.

Since Goldman did not want the Libyans to stay mad notwithstanding the unpleasant meeting in Libya, several proposals were made to Libya by Goldman’s chairman, Lloyd Blankfein and other executives. They hoped one of those proposals would be accepted by Libya, would smooth things over and would enable them to continue managing some of Libya’s funds. The best of the proposals, from a non-sophisticated observer’s point of view, would have given Libya a stream of payments that would, in the course of time, permit Libya to completely recoup the losses it had suffered as a result of Goldman’s management and, in due course, provide billions more. Although most disappointed investors would jump at such a proposal, for a variety of reasons no deal was ever struck between Goldman and Libya and, in all likelihood, relations between Goldman and Libya remain frosty. Of course Moammar now has other things to worry about and has probably spent little time focusing on financial investments gone sour. There is, nonetheless, a lesson in this for other investors.

Until Goldman’s efforts to placate Libya were disclosed, investors assumed that when they gave money to a financial manager which did a bad job, the investor’s recourse (absent criminal activity by the manager) was to swallow hard and select a different manager. It had not occurred to investors to suggest that the manager should make them whole, they believing that had things gone well they would not have shared their good fortune with the money manager. Goldman’s actions vis a vis Libya have set this notion on its head. Its customers should now examine their portfolios and decide if it is worth letting Goldman know of any disappointing results in performance. It would seem that if Goldman does not want Mr. Gadhafi, a singularly unsavory character, to lose money, it would be more than anxious to insure that good old upstanding American citizens who are not engaged in slaughtering their fellow citizens, not lose money because of Goldman’s poor investment strategies.

If any of my readers has investments with Goldman that have not fared well, the investor should call a Goldman representative, explain the situation and request the return of the original investment, together with an appropriate amount of interest or, alternatively, a chance to make an investment that will guarantee the kind of return offered Libya. It would, however, be advisable in making the request to be polite. The approach taken by the Libyans when meeting with Goldman representatives could well result in the investor being confronted with criminal charges and with Goldman’s unwillingness to make the investor whole. If the investor is polite, however, based on Libya’s experience I am confident the investor’s request will be favorably acted on by Goldman. It has its reputation to consider.