In early 2008 â€" months before the financial crisis began â€" Goldman Sachs put $1.2 billion of Libyan money into leveraged bets that six stocks would rise over the next three years.
None of them did. Libya lost every dollar that was invested. In a lawsuit filed against Goldman in London, the Libyan Investment Authority said that Goldman made at least $350 million from putting the country’s sovereign wealth funds into investments that the investment banking firm did not explain and that Libya did not understand.
The suit provided, for the first time, details on the investments that were made.
Had the Libyans understood them, they would have known that the fund was effectively buying long-term call options on the six stocks. As with all options, they could expire worthless if the shares failed to gain over the period. On the other hand, if the stocks rose substantially, the Libyan fund could have profited.
The companies whose shares Libya bet on were Citigroup, an American bank; Électricité de France, a French government-controlled utility; Banco Santander, a Spanish bank; Allianz, a German insurance and investment company; ENI, an Italian oil company; and UniCredit, an Italian bank.
The investments generally involved both a forward contract and a put option. Economically, the suit says, they amounted to long-term call options on the shares, giving the fund the right to profit if the shares rose, but limiting its possible losses to the amount invested. Part of the Électricité de France investment had an additional provision that would have limited Libya’s profit if the stock rose by more than 40 percent before the contracts expired in early 2011.
The Citigroup transactions were the first entered into in January 2008. There were two transactions, with similar terms, and they are combined in this analysis.
Essentially, the Libyan fund had options to buy 22.3 million Citigroup shares, then worth $5.7 billion. But it would profit only if the value of those shares rose to at least $5.9 billion by early 2011, since it paid $200 million up front to acquire the investment. If the value was less than $5.7 billion when the options expired, Libya would get nothing and lose the entire initial investment.
There was a sweetener. The exercise price of the option could be reduced by up to 10 percent if Citigroup shares fell over the following nine months. That did happen, but that meant only that Libya’s investment would have value if the shares wound up being worth at least $5.1 billion.
In fact, they were worth about $100 million when the option expired.
All the other investments cited in the suit also expired worthless, although none of them appear to have expired as far out of the money as did the Citigroup transaction. While many stocks did badly during the three years, financial stocks, the ones in which about 75 percent of the fund’s money was invested, performed particularly badly.
Had the Libyan fund bought the shares instead of options, it would have lost money but not nearly all of its investment.
By the Libyan fund’s account, Goldman did not explain the disputed transactions until well after they were made, and did not provide confirmations of the trades until weeks, or in some cases months, after they were made. It says Goldman did not require it to sign the normal agreement required to trade in derivatives.
The suit adds that as the value of the investments deteriorated, “Goldman had to be chased on a number of occasions before it provided the L.I.A. with account statements†regarding the trades.
