In a growing list of Over The Counter (OTC) derivatives trades gone bad, Libya’s sovereign investment fund sued Goldman Sachs Group Inc (NYSE:GS) in London’s High Court last week, saying it lost more than $1 billion on now worthless derivatives while Goldman walked away with a profit of $350 million, according to a report in the New York Times.
Unlike exchange traded derivatives, which are standardized and clearly describe the risk and contents of the derivative package in question, OTC derivatives, long unregulated and one reason for the 2008 global stock market crash, have been accused of being opaque and confusing by design.
Investment bank abused its relationship of trust and confidence, according to report
Derivatives are typically used as a type of “insurance” to assist in risk management, but have become a popular method to trade in recent years. To anyone but a derivatives industry professional, much explanation of the risk and loss variables are often required. The lawsuit claims that Goldman Sachs Group Inc (NYSE:GS) abused its relationship “of trust and confidence” and didn’t keep accurate records of the trade, according to the New York Times report.
Offer to hire relative of Libya’s official
The bankers offered to train Libyan officials and told them they were interested in a long-term relationship, not short-term profits, a claim now in dispute. The Libyan government says the most prestigious investment bank in the world, whose alumni populate nearly 50% of top government finance ministries in the western democracies, took advantage of Libya’s young and inexperienced staff. The lawsuit also alleges that Goldman Sachs Group Inc (NYSE:GS) agreed to hire as an intern the brother of the sovereign fund’s deputy executive director, but it is unclear if this actually took place. When JPMorgan engaged in alleged questionable hiring practices of relatives of Chinese government officials it was conducting business with, it created a media uproar.
Goldman denies wrongdoing, will “vigorously” defend itself
“While Goldman Sachs Group Inc (NYSE:GS) was orchestrating these unjustly exploitative transactions, it repeatedly told the L.I.A. that it sought a long-term relationship with the L.I.A. as a strategic partner. This was untrue,” Abdul Magid Breish, the recently appointed chairman of the Libyan Investment Authority, said in a press statement.
“We think the claims are without merit and will defend them vigorously,” a Goldman Sachs spokesman was quoted as saying.
While the exact details of the derivatives trade were not made public, it appears the Libyan position may have bought an insurance option with limited time duration on some event. In a fashion similar to purchasing a regulated options on a derivatives exchange, when the time duration of the contract expired it became worthless, is informed speculation.
Under former Libyan leader Muammar el-Qaddafi, the oil rich nation began instituting a policy of selling oil for a currency other than the US dollar approximately four years ago. Soon there after a bloody civil war to unseat Qaddafi ensued, sanctions were placed on doing business with the North African nation. The suit claims that the investment in question was by then worthless.