Oops, Goldman fails to shift Pdvsa debt to Portuguese taxpayers

From National Geographic. Click for more vampire squid beauty.A tweet by the Devil alerted me to this remarkable WSJ story.

It says Goldman Sachs, via an entity called “Oak Finance Luxembourg SA,” loaned $835 million to Banco Espírito Santo just weeks before the Portuguese bank collapsed. That is remarkable because Goldman also owned more than 2% of the bank.

The loan was meant to cover a risky loan that Espíritu Santo had made to Wison Engineering of China and Venezuelan state energy company Petróleos de Venezuela SA, as they upgraded the Puerto la Cruz refinery.

When Espíritu Santo collapsed, Portuguese authorities broke it up into a good bank and a bad bank. The bad bank kept the bad name and the bad assets. Goldman’s loan had gone over to the good bank, where it could have been repaid in full. But

The Bank of Portugal decided … the loan should … remain at the “bad bank” that kept the Banco Espírito Santo name and its worst assets… Goldman Sachs and its clients could lose hundreds of millions of dollars from investments in Oak Finance notes backed by the loan…

Apparently, the Portuguese didn’t even know that Oak Finance was a Goldman entity until recently. Once they found out that it belonged to Goldman, they had to change plans.

A Bank of Portugal spokesman said Monday that the Oak Finance decision was made to comply with European rules forbidding a rescued bank from taking on obligations to shareholders owning 2% or more of the entity. Goldman Sachs owned more than 2% of Banco Espírito Santo at the end of July, according to the spokesman and a filing that month by the U.S. investment bank…

What’s most interesting for me about this all is how this is a case of how big money tries to use corrupt deals to paper over its earlier corrupt deals, and eventually pass along the costs to the public.

First, Espírito Santo decided to make the near-billion-dollar financing available to PDVSA and Wison. We don’t know why that decision was made but it quite likely involved “commissions” — PDVSA is a web of corruption, and as the Journal says,

Both Wison and PdVSA were themselves under strain as the deal was being put together. Wison warned this year that it could go out of business after its founder and controlling shareholder was caught up in a broad corruption probe by Chinese authorities.

Given business as usual in Venezuela, it’s likely that people signing off on the PDVSA-Wison loan at Espírito Santo got some sort of kickbacks on the deal. But that left the owners of the bank on the hook for this risky loan.

Second, the partial owner of the bank comes in from New York and says hey, we need to get rid of this risk. So it creates a semi-anonymous entity, buys the loan, and sells the crappy risk to pension funds and hedge funds. Speculating again here, I imagine it told them that in a worst case scenario, Espírito Santo fails and gets bailed out in Portugal.

Third, the bank fails, and Portuguese authorities almost took on that bad debt. According to the article, it wasn’t until months after the bank collapse that they confirmed that Oak Finance was a Goldman entity.

But this time, Goldman and its clients may end up taking the loss.

In other news, it turns out that vampire squids don’t have blood funnels! Most of them, anyway.