A tweet by the Devil pointed me to this interesting WSJ article.
It mentions that Goldman Sachs, through an entity named “Oak Finance Luxembourg SA,” lent $835 million to Banco Espírito Santo just weeks prior to its collapse. This is notable because Goldman also held over 2% of the bank’s shares.
The loan was intended to settle a risky agreement made by Espírito Santo with Wison Engineering of China and the Venezuelan state energy firm Petróleos de Venezuela SA for upgrades at the Puerto la Cruz refinery.
When Espírito Santo failed, Portuguese officials split it into a good bank and a bad bank. The bad bank retained the unfortunate name and the troubled assets. Goldman’s loan moved to the good bank, where it could have been repaid completely. But
The Bank of Portugal decided that the loan should stay with the “bad bank,” which held onto the Banco Espírito Santo name along with its worst assets. Goldman Sachs and its clients faced potential losses of hundreds of millions from their investments in the Oak Finance notes tied to that loan.
Interestingly, the Portuguese authorities were reportedly unaware that Oak Finance was linked to Goldman until recently. Upon discovering this connection, they had to alter their approach.
A spokesperson for the Bank of Portugal stated on Monday that the decision regarding Oak Finance was made to align with European regulations that prohibit a rescued bank from assuming responsibilities towards shareholders holding 2% or more of the bank. Goldman Sachs owned more than that percentage of Banco Espírito Santo as of the end of July, according to both the spokesperson and a filing from the U.S. investment bank.
What intrigues me about this situation is how it illustrates the lengths to which large financial entities go to obscure their corrupt practices, ultimately shifting the financial burdens onto the public.
Initially, Espírito Santo opted to provide nearly a billion dollars in financing to PDVSA and Wison. The rationale behind this choice remains unclear, but it likely involved some sort of “commissions.” After all, PDVSA operates within a corrupt framework, and as highlighted in the Journal,
Both Wison and PdVSA faced significant challenges while the deal was being negotiated. This year, Wison cautioned that it could go bankrupt after its founder became embroiled in a sweeping corruption investigation by Chinese authorities.
Given the prevailing conditions in Venezuela, it’s plausible that the individuals approving the PDVSA-Wison loan at Espírito Santo obtained kickbacks from the agreement. However, this left the bank’s owners responsible for this hazardous loan.
Next, a partial owner from New York intervenes and suggests that the risks need to be offloaded. Thus, they establish a semi-anonymous entity which purchases the loan, consequently selling the poor-quality risk to pension funds and hedge funds. Speculating here, I’d guess they reassured investors that in a worst-case scenario, Espírito Santo would be bailed out in Portugal.
Eventually, the bank collapses, and Portuguese officials nearly absorbed that bad debt. Remarkably, it wasn’t until months after the bank’s breakdown that they acknowledged Oak Finance as a Goldman entity.
This time around, however, Goldman and its clients may be the ones facing the losses.
In other news, it appears that vampire squids actually lack blood funnels! At least the majority do.