Goldman Sachs Group said it will contest Bank of Portugal’s latest decision about the $835 million loan it provided to Banco Espirito Santo prior to its collapse, according to a new article by Margot Patrick And  Patricia Kowsmann of The Wall Street Journal.

The Bank of Portugal stated last week that the transfer of the $835 million loan to Banco Espirito Santo to Novo Banco was a mistake. Novo Banco was the good bank created out of Espirito Santo after it was rescued by the Bank of Portugal to amid allegations of accounting irregularities.

The Bank of Portugal decided to break up Banco Espirito Santo into a good bank and bad bank as an “urgent solution to guarantee deposits and safeguard the financial institution.” Banco Espirito Santo as the bad bank is composed of toxic and non-performing assets. Its shareholders and debtholders also stayed with the bad bank.

goldman sachs logo

Goldman Sachs’ clients poised to suffer millions of losses

Goldman Sachs arranged a four-year loan for Banco Espirito Santo through Oak Finance Luxemboaurg SA, a finance vehicle. The Bank of Portugal transferred that loan to Novo Banco last August, but last week; the central bank said the loan must remain under Banco Espirito Santo.

Goldman Sachs created Oak Finance to help Banco Espirito Santo to cover a financing deal with Wison Engineering, company and Petróleos de Venezuela SA (PdVSA).

The finance vehicle provided $835 million loan to Banco Espirito Santo, and then it issued notes of the same amount against the loan. Goldman Sachs, some of its clients including hedge funds and pension funds bought the notes.

The decision of Bank of Portugal to keep the four-year loan to the bad bank means the clients of Goldman Sachs are poised to incur hundreds of millions of dollars of losses from their investments in Oak Finance notes. The assets of the bad bank were estimated to less than $100 million.

A spokesperson for Goldman Sachs said the decision of Bank of Portugal is harmful not only to their clients, but also the financial market in general. The spokesperson said Goldman Sachs plans to pursue solutions to the problem.

“The BoP’s unexpected public announcement…to retroactively return these obligations contravenes market expectations and damages multiple investors, including pension funds, who were offered these investments in reliance on these prior representations,” according to Goldman Sachs’ spokesperson.

Bank of Portugal previously confirmed the loan transfer to Novo Banco

“Four months ago, when Novo Banco was created, we sought confirmation from the Bank of Portugal that debts such as the Oak Finance obligations would be transferred to NB,” according to the spokesperson of Goldman Sachs in an email to the Wall Street Journal.

The spokesperson added that a senior representative of the Bank of Portugal explicitly confirmed to Goldman Sachs in writing that the transfer of the loan to the good bank.

Furthermore, the spokesperson said, “Novo Banco also confirmed in writing that Oak Finance had been transferred as one of its liabilities.”  Novo Banco was scheduled to make its first payment of $52.9 million to Oak Finance on December 25 based on the prospectus of the finance vehicle. Oak Finance intended to use that money to initially pay its noteholders.