Made for each other?

Few days ago, Bloomberg had a fascinating story of how the Libyan Investment Authority had lost more than a billion US dollars on wrong investment advice from Goldman. It is a riveting read. Some paragraphs that are important, in my view, of course:

The talk at the LIA, Kabbaj learned, was that Qaddafi wanted to emulate the leaders of Qatar, who’d invested in the shares of troubled banks. One target was Citigroup, which Abu Dhabi’s sovereign wealth fund had put $7.5 billion into less than two months before. On Jan. 15, Kabbaj texted the head of the LIA’s equities team to note that Citi shares were down, creating a buying opportunity: “It is time to do the trade!!!”

The Libyans made two trades later that month, totaling $200 million. But this wasn’t a simple purchase of shares—it was a complex derivatives deal, or as Goldman Sachs described it later, “a cash-settled forward purchase agreement for Citigroup shares with downside protection in the form of a put option at the same price as the forward.” More simply, if Citi shares rose, as the LIA was betting, the fund stood to gain many times its initial investment. If the shares fell by a certain amount, the fund could lose everything. The structure was potentially more lucrative than a conventional purchase of equity and also significantly riskier—while resulting in far higher profits for Goldman.

Whether the LIA understood it wasn’t actually investing in Citi is disputed. Whatever the case, the fund proceeded a few weeks later with another large deal, a similar wager on the French utility EDF Group that cost it almost €120 million (then $175 million) in premiums…..

…. Like the Citi and EDF deals, they were “synthetic”—the LIA wasn’t actually buying shares in the companies concerned, in this case Banco Santander, Allianz, Eni, and UniCredit. Kabbaj later called it “one of the biggest orders that GS has ever been given on single names.” [Link]

Bloomberg has updated the story to reflect the development that a US court has dismissed the claims brought by the Libyan Investment Authority against Goldman Sachs.

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