Oppenheimer: Goldman Sachs should be ashamed for throwing a lifeline to Venezuelan regime

Oppenheimer: Goldman Sachs should be ashamed for throwing a lifeline to Venezuelan regime

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goldman sachs venezuela

By Andrés Oppenheimer

If there were a gold medal for corporate social irresponsibility, it should be awarded to the Goldman Sachs investment bank for its decision to extend a $2.8 billion lifeline to Venezuelan President Nicolas Maduro’s repressive regime.

According to a May 28 report in The Wall Street Journal, Goldman Sachs Group Inc. bought $2.8 billion in bonds from Venezuela’s PDVSA state oil monopoly, the government’s main — and virtually only — source of income. The New York-based firm paid 31 cents on the dollar for the 2014 bonds, which means it effectively paid $865 million.

The bond purchase, carried out through an intermediary, in effect means that — if Venezuela doesn’t default — the bonds could yield an interest rate of 19 percent a year, plus capital gains.

While it is not unusual for big investment banks to buy bankrupt countries’ debts, the latest Goldman Sachs purchase raised more eyebrows than usual because it came as Venezuelan President Nicolas Maduro’s regime is facing massive street protests, which have left nearly 60 dead in recent weeks, and amid growing international pressures for the restoration of democracy in that country.

Julio Borges, the president of Venezuela’s opposition-majority National Assembly, fired an angry letter to Goldman Sachs CEO Lloyd Blankfein on May 29, saying that the bank’s “financial lifeline to the regime will serve to strengthen the brutal repression unleashed against the hundreds of thousands of Venezuelans peacefully protesting for political change.”

Borges wrote that considering “the irregular nature” of the transaction and the “absurd financial terms of the deal in detriment of Venezuela and its people,” the Venezuelan Congress will open an investigation into the case. He added that he will recommend “to any future democratic government of Venezuela not to recognize or pay these bonds.”

Harvard University economics professor Ricardo Hausmann, a former Venezuelan planning minister and chief economist of the Inter-American Development Bank, says that what Goldman Sachs has done “is the equivalent of financing a dictatorship.”

“Goldman Sachs has in effect purchased ‘hunger bonds,’” he told me. “The reputational damage to Goldman Sachs will be greater than the financial benefits of this operation.”

Days before the report about the Goldman Sachs purchase, Hausmann had written a column criticizing JP Morgan’s Emerging Market Bond Index for its trading in Venezuelan debt. While Venezuela represents only 5 percent of that JP Morgan index, it accounts for a sizable part of its yield, because the possibility of a Venezuelan default raises its risk premium.

Hausmann says investors are deceiving themselves if they think they are not doing anything wrong and are just buying Venezuelan debt in hopes that Maduro will fall. Once Maduro falls or leaves power, those investors will be on the wrong side of democracy, because they will be rooting for preferential payment of the debt incurred by Maduro’s corrupt regime, instead of wanting a new government to start investing in the country’s reconstruction.

“If you are a decent human being, investing in Venezuelan bonds should make you feel ‘mildly nauseous,’” Hausmann said, borrowing a phrase recently used by former FBI Director James Comey in his testimony to Congress.

Hausmann conceded it would be unrealistic — and unfair to other emerging countries in that fund — to demand that investors stop buying them, because Venezuela accounts for only a tiny part of them. The solution is for people to press JP Morgan to drop Venezuela from its emerging markets funds, he said.

My opinion: Fortunately, a lot has changed for the better since some isolated voices started to preach for socially responsible investments in the 18th century, and the idea was embraced by growing numbers of people in the 1960s. Today, investors — especially millennials — are much more conscious about investing in companies and countries that respect the environment, and don’t suppress civil or political rights.

We cannot prohibit greedy investors without a social conscience from buying Venezuelan bonds if they want to gamble with their money and risk a Venezuelan default. But we can name and shame the banks that profit from rescuing repressive regimes like Venezuela’s. And we should do it until the banks realize that it’s not worth the headache.

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By Andrés Oppenheimer

If there were a gold medal for corporate social irresponsibility, it should be awarded to the Goldman Sachs investment bank for its decision to extend a $2.8 billion lifeline to Venezuelan President Nicolas Maduro’s repressive regime.

According to a May 28 report in The Wall Street Journal, Goldman Sachs Group Inc. bought $2.8 billion in bonds from Venezuela’s PDVSA state oil monopoly, the government’s main — and virtually only — source of income. The New York-based firm paid 31 cents on the dollar for the 2014 bonds, which means it effectively paid $865 million.

The bond purchase, carried out through an intermediary, in effect means that — if Venezuela doesn’t default — the bonds could yield an interest rate of 19 percent a year, plus capital gains.

While it is not unusual for big investment banks to buy bankrupt countries’ debts, the latest Goldman Sachs purchase raised more eyebrows than usual because it came as Venezuelan President Nicolas Maduro’s regime is facing massive street protests, which have left nearly 60 dead in recent weeks, and amid growing international pressures for the restoration of democracy in that country.

Julio Borges, the president of Venezuela’s opposition-majority National Assembly, fired an angry letter to Goldman Sachs CEO Lloyd Blankfein on May 29, saying that the bank’s “financial lifeline to the regime will serve to strengthen the brutal repression unleashed against the hundreds of thousands of Venezuelans peacefully protesting for political change.”

Borges wrote that considering “the irregular nature” of the transaction and the “absurd financial terms of the deal in detriment of Venezuela and its people,” the Venezuelan Congress will open an investigation into the case. He added that he will recommend “to any future democratic government of Venezuela not to recognize or pay these bonds.”

Harvard University economics professor Ricardo Hausmann, a former Venezuelan planning minister and chief economist of the Inter-American Development Bank, says that what Goldman Sachs has done “is the equivalent of financing a dictatorship.”

“Goldman Sachs has in effect purchased ‘hunger bonds,’” he told me. “The reputational damage to Goldman Sachs will be greater than the financial benefits of this operation.”

Days before the report about the Goldman Sachs purchase, Hausmann had written a column criticizing JP Morgan’s Emerging Market Bond Index for its trading in Venezuelan debt. While Venezuela represents only 5 percent of that JP Morgan index, it accounts for a sizable part of its yield, because the possibility of a Venezuelan default raises its risk premium.

Hausmann says investors are deceiving themselves if they think they are not doing anything wrong and are just buying Venezuelan debt in hopes that Maduro will fall. Once Maduro falls or leaves power, those investors will be on the wrong side of democracy, because they will be rooting for preferential payment of the debt incurred by Maduro’s corrupt regime, instead of wanting a new government to start investing in the country’s reconstruction.

“If you are a decent human being, investing in Venezuelan bonds should make you feel ‘mildly nauseous,’” Hausmann said, borrowing a phrase recently used by former FBI Director James Comey in his testimony to Congress.

Hausmann conceded it would be unrealistic — and unfair to other emerging countries in that fund — to demand that investors stop buying them, because Venezuela accounts for only a tiny part of them. The solution is for people to press JP Morgan to drop Venezuela from its emerging markets funds, he said.

My opinion: Fortunately, a lot has changed for the better since some isolated voices started to preach for socially responsible investments in the 18th century, and the idea was embraced by growing numbers of people in the 1960s. Today, investors — especially millennials — are much more conscious about investing in companies and countries that respect the environment, and don’t suppress civil or political rights.

We cannot prohibit greedy investors without a social conscience from buying Venezuelan bonds if they want to gamble with their money and risk a Venezuelan default. But we can name and shame the banks that profit from rescuing repressive regimes like Venezuela’s. And we should do it until the banks realize that it’s not worth the headache.

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