More Tuesday, May 31, 2011 As of 12:00 AM New York 81º | 65º

News, Quotes, Companies, Videos

SEARCH

BUSINESS
U.S. Edition Home World U.S.
Asia Today's Paper Video Blogs Journal Community Subscribe Log In

New York
Europe

Business
Earnings

Markets
Health

Tech
Law

Personal Finance
Autos Management

Life & Culture
Media & Marketing
2 of 12

Opinion
Energy

Careers

Real Estate

Small Business

Economy

More Industries
3 of 12

1 of 12

TOP STORIES IN

Business
BUSINESS

Apple's Retail Secrets

Pandora Shares Soar After Its IPO

J&J Unit to Exit a Stent Business

Ford Profits to Dip Th

MAY 31, 2011

Libya's Goldman Dalliance Ends in Losses, Acrimony
Article
Stock Quotes Comments (97)
MORE IN BUSINESS »

Email

Print

Save This

+ More

Text

By MAR GAR ET C OKER And L IZ R APPAPOR T

In early 2008, Libya's sovereign-wealth fund controlled by Col. Moammar Gadhafi gave $1.3 billion to Goldman Sachs Group to sink into a currency bet and other complicated trades. The investments lost 98% of their value, internal Goldman documents show. What happened next may be one of the most peculiar footnotes to the global financial crisis. In an effort to make up for the losses, Goldman offered Libya the chance to become one of its biggest shareholders, according to documents and people familiar with the matter. Negotiations between Goldman and the Libyan Investment Authority stretched on for months during the summer of 2009. Eventually, the talks fell apart, and nothing more was done about the lost money. An examination of the strange episode casts light on a period of several years when Goldman and other Western banks scrambled to do business with the oil-rich nation, now an international pariah because of its attacks on civilians during its current conflict. This account of Goldman's dealings with Libya is based on interviews with close to a dozen people who were involved in the matter, and on Libyan Investment Authority and Goldman documents. Libya was furious at Goldman over the nearly total loss of the $1.3 billion it invested in nine equity trades and one currency transaction, people involved in the matter say. A confrontation in Tripoli between a top fund executive and two Goldman officials left the bankers so rattled that they made a panicked phone call to their bosses, these people say. Goldman arranged for a security guard to protect them before they left Libya the next day, they say.

Available to WSJ.com Subscribers

Apple's Retail Secrets

New Financial Rules Delayed No Fed Shift Seen at June Gathering
Fed officials are neither looking to tighten nor to ease monetary policy as they prepare for the meeting June 21 and 22 of the Federal Open Market Committee, the Fed's decision-making body.

GM's Change Agent Tackles Bureaucracy

View Full Image Agence France-Presse / Getty Images

Video

Col. Gadhafi's son, Saif al-Islam Gadhafi, on left, with Mustafa Zarti, a former executive at Libya's sovereign-wealth fund.

Discussions inside Goldman about how to salvage the fractured relationship included Lloyd C. Blankfein, the company's chairman and chief executive, David A. Viniar, its finance chief, and Michael Sherwood, Goldman's top executive in Europe, according to documents reviewed by The Wall Street Journal and people involved in the negotiations. All three executives declined to comment.

digits: The First Tablet Thinner Than iPad 2 5:16

digits: Nintendo 3DS Taps into Social Gaming 2:42

digits: Betting Big on Bendable Electronics 3:49

Goldman offered the fund an opportunity to invest $3.7 billion in the securities firm. Between May and July of 2009, Goldman executives made three proposals that would have given Libya preferred shares or unsecured debt in Goldman, according to documents prepared by Goldman for the fund. Each proposal promised a stream of payments that would eventually offset the losses. At the time, U.S. banks were under pressure from the U.S. government about their capital Deal Journal: Goldman's 'Rock Star' in Libya levels, among other things. In September Deal Journal: Libya Fund's Players and Deals 2008, Warren Buffett's Berkshire Hathaway MarketBeat: J.P. Morgan Upgrades Goldman Inc. had made a deal to invest $5 billion in Goldman, giving Berkshire a stream of cash and potential ownership of roughly 10% of Goldman. By May 2009, the Federal Reserve had told Goldman it had passed its "stress test," meaning that the firm wouldn't be required to raise additional capital. Goldman repaid Berkshire this April.

Finance & Accounting Jobs
Operational Risk Reporting Analyst - Citigroup Inc. Financial Advisor - our company has been named one of “FORTUNE 100 Best Companies to Work For®” - Edward Jones Full Desk Recruiter w/ Banking/Financial Services Background - Mergis Group Healthcare Billing/Reimbursement Manager - Robert Half Management Resources

More

keyword

city, state, zip

FIND JOBS

MORE JOBS AND CAREER NEWS

Technology Jobs | IT Jobs | Sales Jobs | Marketing Jobs FINS for Employers & Recruiters »
POST A JOB

View Full Image Glenn Copus

Efforts to reach Libyan officials for comment were unsuccessful. No one answered the phone at the sovereign-wealth fund's headquarters in Tripoli, and its website and email aren't working. In February, the United Nations, U.S. and European Union imposed new sanctions on Col. Gadhafi, family members and most of Libya's state-owned companies and assets.

More in Business
Apple's Retail Secrets Pandora Shares Soar After Its IPO J&J Unit to Exit a Stent Business Ford Profits to Dip This Year French Banks' Shares Slide on Warning

In 2004, the U.S. government had lifted an earlier set of sanctions that had prohibited American companies from doing business with or investing in Libya, after Col. Gadhafi pledged to abandon weapons of mass destruction and paid reparations to families of the airline bombing over Lockerbie, Scotland. That opened the door for dozens of U.S. and European banks, hedge funds and other investment firms to pile into the North African nation.
Michael Sherwood, Goldman's top executive in Europe.

Most Popular
Read Emailed Video Commented

1. 2. 3. 4. 5.

Spelling Mansion Sells
Students Stumble Again on Basics of History High Hopes at Miracle-Gro in Marijuana Field Apple's Retail Secrets Opinion: Rivkin and Casey: Why ObamaCare Is Losing in the Courts

The Libyan Investment Authority set up shop on the 22nd floor of what was then Tripoli's tallest building and launched in June 2007 with about $40 billion in assets. Libya approached 25 financial institutions, offering each of them a chance to manage at least $150 million, recalls a person familiar with the fund's plans. Soon it was spreading chunks of the money to firms around the world. In addition to Goldman, those institutions included Société Générale SA, HSBC Holdings PLC, Carlyle Group, J.P. Morgan Chase & Co., Och-Ziff Capital Management Group and Lehman Brothers Holdings Inc., according to internal fund records reviewed by the Journal. HSBC, Carlyle, J.P. Morgan and Och-Ziff declined to comment. Société Générale said it "complies with all applicable rules and regulations" in its dealings with "many sovereign-wealth funds." "The country made a conscious decision to join the major leagues," says Edwin Truman, a senior fellow at the Peterson Institute for International Economics and former assistant Treasury secretary. Until then, the investment fund's money was held in Libya's central bank, earning ho-hum returns on high-quality bonds. Goldman seized the opportunity. In May 2007, several Goldman partners met with the Libyans at Goldman's London office. Mustafa Zarti, then the fund's deputy chairman, and Hatem elGheriani, its chief investment officer, invited the Goldman partners to see the fund's Libyan headquarters for themselves. Mr. Zarti was a close associate of one of Col. Gadhafi's sons, Saif al-Islam Gadhafi, and reported to a longtime friend of the Libyan ruler. When they arrived in Tripoli that July, the Goldman partners got a warm greeting from senior fund officials and a cadre of inexperienced employees who hoped to make the fund one of the largest of its kind in the world. Goldman's team included its head of fixed-income sales in Europe and its executive in charge of clients in northern Africa. To the Libyans, though, the main attraction was Driss Ben-Brahim, Goldman's Arabicspeaking emerging-markets trading chief, who ran one of its most profitable trading desks and was rumored to be among its

Most Read Articles Feed

Latest Headlines
Payroll-Tax-Cut Idea Joins Debt Talks Agents Resisted Weapons Tracking Family of Slain Agent Seeks Answer at Hearing Missouri Floodwaters Near Iowa Town House Republicans Push to Expose Amtrak to Rivals Democrats Choose Not to Punish Weiner Chicago to Rescind Teacher Raises Kissinger Donates His Papers to Yale Fire Expected to Become Arizona's Largest Spending Drops as Car Sales Decline
More Headlines

highest-paid employees. "We were in awe of Driss," one former Libyan Investment Authority executive recalls. "He was like a rock star…while we were making peanuts. We felt honored by his presence." Goldman subsequently offered the Libyans the opportunity to invest $350 million in two funds run by Goldman's asset-management unit, according to people involved in the transactions. Access to the funds usually is offered only to the firm's best clients, along with Goldman partners. The Libyans accepted. Youssef Kabbaj, the Goldman executive in charge of North Africa, became a frequent presence at the Libyan Investment Authority View Full Image as the investment bank worked to expand the relationship. He worked with the fund's management on investment ideas and encouraged younger employees to deepen their financial knowledge by attending Goldman training sessions, these people said. Goldman soon carved out a new business with the Libyans, in options—investments that give buyers the right to purchase stocks, currencies or other assets on a future date at stipulated prices. Between January and June 2008, the Libyan fund paid $1.3 billion for options on a basket of currencies and on six stocks: Citigroup Inc., Italian bank UniCredit SpA, Spanish bank Banco Santander, German insurance giant Allianz, French energy company Électricité de France and Italian energy company Eni SpA. The fund stood to reap gains if prices of the underlying stocks or currencies rose above the stipulated levels. But that fall, the credit crisis hit with a vengeance as Lehman Brothers failed and banks all over the world faced financial crises. The $1.3 billion of option investments were hit especially hard. The underlying securities plunged in value and all of the trades lost money, according to an internal Goldman memo reviewed by the Journal. The memo said the investments were worth just $25.1 million as of February 2010—a decline of 98%. 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, Mr. Zarti, the fund's deputy chairman, summoned Mr. 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 Mr. Zarti was "like a raging bull," cursing and threatening Mr. 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. Mr. Zarti declined to comment about his work at the investment fund or his relationship with Col. Gadhafi. He quit in February and now is in Austria. Mr. Kabbaj and emerging-markets trading chief Mr. Ben-Brahim left Goldman later in 2008 to join hedge-fund firm GLG Partners Inc. and were not part of later negotiations. Following the showdown in Tripoli, the fund demanded restitution and issued vague threats of legal action. After an internal investigation, Goldman disputed Libya's claims about the trades, citing recorded phone calls, documents signed by Libyan officials and money-transfer records, according to people involved in the dispute. Still, Goldman executives wanted to make amends because of Goldman's business ties to Libya and worries among some officials that the mess might become public, potentially damaging its reputation with other sovereign-wealth funds, according to people involved in the discussions. Over the ensuing two years, Goldman made six different proposals designed to generate returns sufficient to offset the nearly $1.3 billion in losses. In May 2009, Goldman proposed that Libya get $5 billion in preferred Goldman shares in return for pumping $3.7 billion into the company, according to fund and Goldman documents. Goldman offered to pay the Libyan Investment Authority between 4% and 9.25% on the shares annually for more than 40 years, which would amount to billions of dollars more. Libyan officials prodded Goldman to recoup their losses faster. They also worried about whether it was wise to invest in Goldman given the collapse of Lehman and the resulting panic that swept global financial markets, the fund documents indicate.

After four all-day meetings in July 2009, the two sides agreed to a rejiggered deal that would make back Libya losses in 10 years. Such a deal, which also could have left the fund with a Goldman stake, would have needed to be run past the Federal Reserve. That left both Goldman and fund officials worried about its viability. Goldman changed its mind a week later, having second thoughts about the terms, according to a person familiar with the situation. That August, Goldman proposed some other options to Libya, including investing in other U.S. financial firms and in a "special-purpose vehicle" tied to credit-default swaps, a form of insurance against losses on loans and bonds. The Libyan Investment Authority decided that those options were too risky. Fund officials said they wanted to put the $3.7 billion into high-quality bonds. So Goldman devised another specialpurpose vehicle in the Cayman Islands that would own $5 billion of corporate debt, according to a Goldman document prepared for the fund. The deal would pay Libya an annual return of 6% for 20 years, while also promising a $50 million 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. As of last June, the Libyan Investment Authority had assets of about $53 billion, according to a document reviewed by the Journal. This year, U.S. officials froze about $37 billion in Libyan assets, including some funds still managed by Goldman. Write to Margaret Coker at margaret.coker@wsj.com and Liz Rappaport at liz.rappaport@wsj.com
MORE IN BUSINESS

Email Share:

Printer Friendly

Order Reprints

Add a Comment
We welcome your thoughtful comments. Please comply with our Community rules. All comments will display your real name.

JOURNAL COMMUNITY

Want to participate in the discussion?
REGISTER FOR FREE

Or log in or become a subscriber now for complete Journal access.
Track replies to my comment CLEAR POST Share articles and post your comments on Facebook What's this? Go to Comments tab Login with Facebook

Editors' Picks

Apple's Retail Secrets

Slender Tablet With Widescreen Ambitions

BofA's Overlooked Treasure

Lawyers Settle... for Temp Jobs

Jim DeMint: Why Are Taxpayers Paying for Wine Tasting?

BACK TO TOP

WSJ.com Account: My Account Subscriber Billing Info Create an Account: Register for Free Subscribe to WSJ.com Sign up for WSJ Professional Help & Information Center: Help Customer Service Contact Us Global Support New on WSJ.com Take a Tour Print Subscriber Services

About: News Licensing Reprints Advertising Classifieds Advertise Locally Conferences About Dow Jones Privacy Policy - Updated Subscriber Agreement & Terms of Use - Updated Copyright Policy Jobs at WSJ.com

WSJ.com: Site Map Home World U.S. New York Business Markets Market Data Tech Personal Finance Life & Culture Opinion Autos Careers Real Estate Small Business Student Journal Corrections SafeHouse - Send Us Information

Tools & Formats: Today's Paper Video Center Graphics Columns Blogs Topics Guides Alerts Newsletters Mobile Tablet Edition Podcasts RSS Feeds Journal Community WSJ on Twitter WSJ on Facebook WSJ on Foursquare My Journal Portfolio WSJ Digital Downloads

Digital Network
WSJ.com Marketwatch.com Barrons.com SmartMoney.com AllThingsD.com FINS: Finance, IT jobs, Sales jobs BigCharts.com Virtual Stock Exchange WSJ Radio Professor Journal WSJ U.S. Edition WSJ Asia Edition WSJ Europe Edition WSJ India Page Foreign Language Editions: WSJ Chinese WSJ Japanese WSJ Portuguese WSJ Spanish

Copyright ©2011 Dow Jones & Company, Inc. All Rights Reserved

Sign up to vote on this title
UsefulNot useful