The Dim-Post

February 20, 2015

Ah, global capitalism

Filed under: finance — danylmc @ 8:00 am

The Wall Street Journal has the details of the $1 billion dollar loan Goldman Sachs made to Banco Espírito Santo which just cost the New Zealand taxpayer $200 million:

Goldman and Espírito Santo eventually settled on the creation of a company, Oak Finance Luxembourg SA, to raise $835 million for Espírito Santo from Goldman and outside investors. Goldman Sachs International co-heads in London, Michael Sherwood and Richard Gnodde, were briefed on the large transaction, according to a person familiar with it.

Oak Finance’s purpose—providing vital funding for a project aimed at increasing Venezuela’s refined-oil output—also checked off a box for Goldman as it tried to expand its relationship with the Venezuelan government, people familiar with the matter said.

Before the money was raised, Espírito Santo’s problems started intensifying. Its parent company was struggling to repay billions of euros to its creditors, including the bank and its clients. Facing potential losses, the bank was having trouble raising money from traditional market sources.

Goldman, meanwhile, was buying Banco Espírito Santo shares. Regulatory filings show Goldman amassed 2.27% of the bank’s shares as of July 15. It looked like a vote of confidence in the Portuguese bank, whose shares rallied 20% on July 23, the day the holdings were disclosed.

So the New Zealand Super Fund loaned money through a Luxembourg shell company created by a US investment bank to a Portuguese bank to fund the Venezuelan state oil company. Awesome.

The Super Fund gets pretty good returns so we don’t want to second-guess them too much, but related third party loans through tax shelter countries to banks that collapse amid accusations of fraud and tax evasion don’t seem like an appropriate way for a state investor to conduct itself, even if the money doesn’t get wiped out.

22 Comments »

  1. It’s off topic, but a big thumbs up to Danyl for getting the Dim Post back to a regular posting schedule.

    Comment by Bill Bennett — February 20, 2015 @ 8:14 am

  2. Agree BB.

    But Danyl, don’t buy the Herald beat up. The reason the NZSF makes good returns is because it takes risks and spreads those risks massively around the world. As the Herald report points out (at the very end, after hundreds of shock-horror words: “The fund’s expected annual return rate has been calculated to drop from 10.01 per cent to 9.98 per cent.” A one-off $200 million loss is ultimately not all that material to them (not that we would want too many more of them).

    Comment by Matthew Hooton — February 20, 2015 @ 8:25 am

  3. I didn’t think Danyl’s comment was so concerned about risk and profit and loss as it was about the ethics and example of the government investing in an alleged giant tax evasion and fraud scheme.

    Comment by izogi — February 20, 2015 @ 8:36 am

  4. This is a risk control failure that I hope/expect they’ll fix, ’cause seriously….mix Goldman Sachs, Portugal, Venezuela together and thats a smelly cake no matter how much sugar the pin-stripe boys sprinkled on.

    Comment by KiwiCarlos — February 20, 2015 @ 8:54 am

  5. @Matthew

    Everyone understands that NZSF makes investments some of which pan out and some of which don’t. The issue is more the ethics of this particular investment. Even if it had made money is this the sort of investment we expect NZSF to be making?

    Comment by RJL — February 20, 2015 @ 9:02 am

  6. …denied the investment was high-risk…It was risk-free with insurance….unusual retrospective rule change…insurance being voided…

    Yeah, right.

    Comment by richdrich — February 20, 2015 @ 9:30 am

  7. @KiwiCarlos – my thoughts exactly when reading the article last night.
    I an ideal world if you uttered the words Luxembourg, Portugal, Goldman Sachs, and tax vehicle you’d be send straight to jail, without collecting $200.

    Comment by Gregor W — February 20, 2015 @ 9:58 am

  8. http://t.co/O0w7ZPkO7m

    Not strictly related, but Matt Taibbi’s latest anyway.

    Comment by Pascal's bookie — February 20, 2015 @ 10:12 am

  9. The NZSF would be worth a lot more if the NZ government hadn’t suspended payments in order to build roads with negative BCRs.

    Comment by George — February 20, 2015 @ 10:32 am

  10. to banks that collapse amid accusations of fraud and tax evasion

    doesn’t that judgement entail a bit of hindsight?

    Comment by NeilM — February 20, 2015 @ 10:46 am

  11. I an ideal world Luxembourg, Portugal, Goldman Sachs would have gone bust with Lehmann Brothers and Greece.

    Comment by unaha-closp — February 20, 2015 @ 11:21 am

  12. Wouldnt be surprised if the ‘retrospective law change by Portugal’ which put the Oak Finance deal at the back of the queue and thus disallowed collecting on the insurance was orchestrated by Goldman Sachs.

    They would have another division who were behind the insurer and pulled the strings so they werent stuck with the entire loss, and along with NZSF only lost a smaller amount

    Comment by ghostwhowalksnz — February 20, 2015 @ 11:26 am

  13. I’m with you on the “ah, global capitalism” but in an entirely unironic way. When batshit mad Venezuelan Government gains access – for a price that will factor in their stupidity – to global financial markets via an American investment bank and a Portuguese bank utilising, among others, NZ capital, that is a wonderful example of global connectedness. All the more so when the money is aimed at modernising the Venezuelan oil industry which has been run down badly by Hugo Chavez and his way of his depth successor. That the money would have been woefully mismanaged at various points in the chain is just part of the risk that gets priced into these deals.

    Comment by Tinakori — February 20, 2015 @ 3:35 pm

  14. I’m with you on the “ah, global capitalism” but in an entirely unironic way.

    Tinakori, how is that lipstick marketing campaign going for the swine market segment?

    Comment by Gregor W — February 20, 2015 @ 3:54 pm

  15. Someone want to explain the ethical problems here? I can’t see the specific issue?

    Comment by Swan — February 20, 2015 @ 9:28 pm

  16. So its true after all, the insurance that was supposed to be ‘castiron’ was done through Goldman Sachs. Yet it no longer applies. No doubt GS did some fast tricky maneuvering to get Portugal to make some last minute changes which make the insurance noncollectable so that they didnt take a bath on the entire Oak transaction.
    As though nobody knew that they run with hares and hunt with the hounds.

    Comment by ghostwhowalksnz — February 21, 2015 @ 10:38 am

  17. The NZ Super Fund promises a “risk free” rate of return of 6%. Given this fact, I am not sure why it needs to invest in debt riddled countries with less than impressive banking practices.

    Comment by Ross — February 21, 2015 @ 12:27 pm

  18. > “The fund’s expected annual return rate has been calculated to drop from 10.01 per cent to 9.98 per cent.”

    The only relevant money quote here.

    Comment by Ben Wilson — February 21, 2015 @ 4:48 pm

  19. “Someone want to explain the ethical problems here?”

    DIM thinks that the State’s shit doesn’t stink and is all confused hence the reference to capitalism.

    “The fund’s expected annual return rate has been calculated to drop from 10.01 per cent to 9.98 per cent.”

    Yep the world’s central banks have been printing massive amounts which bid up asset values to the moon. Hence the Super Fund having to chase crap like Portugal bank debt. Once the central banks have stopped printing to quote Warren Buffitt “Only when the tide goes out do you discover who’s been swimming naked”

    “fund the Venezuelan state oil company” the being the operative word. Only one Venezuelan oil company. Lol another state central planning failure.

    Comment by Simon — February 22, 2015 @ 8:47 am

  20. Simon heard of the Norwegian State Oil company? And talking of state central planning failure, well one example, you obviously have never heard of General Motors, the biggest bankruptcy in history

    Comment by ghostwhowalksnz — February 22, 2015 @ 10:19 am

  21. A one-off $200 million loss is ultimately not all that material to them

    Well, they’re pursuing legal action, so clearly it’s an issue. Besides, you’re missing the point. The return on this particular loan was a mere 3.5%, yet on the Super Fund website a rate of return of 6% is described as “risk free”.

    “Despite this relatively low rate of return, the risk involved was assessed by ratings agency Moody’s as ‘being speculative and a high credit risk’.”

    http://www.odt.co.nz/news/business/333805/crash-costs-super-fund-200m

    Comment by Ross — February 23, 2015 @ 7:40 am

  22. And, one might ask, which “risk free” loan will be defaulted on next?

    Comment by paritutu — February 23, 2015 @ 7:56 am


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