
Goldman Buys $2.8B Worth of Venezuelan Bonds, and an Uproar Begins - gaius
https://www.nytimes.com/2017/05/30/business/dealbook/goldman-buys-2-8-billion-worth-of-venezuelan-bonds-and-an-uproar-begins.html?action=click&contentCollection=Politics&module=Trending&version=Full&region=Marginalia&pgtype=article
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bhouston
Goldman bought a lot of Greece debt that it knew wasn't great and made tons:

[https://www.thenation.com/article/goldmans-greek-
gambit/](https://www.thenation.com/article/goldmans-greek-gambit/)

Goldman Sachs was also very involved in selling subprime mortages to unwitting
investors. Goldman Sach has had to deal with lawsuits that it wasn't acting in
its clients' best interests:

[http://articles.latimes.com/2010/may/16/business/la-fi-
hiltz...](http://articles.latimes.com/2010/may/16/business/la-fi-
hiltzik-20100516)

If Goldman Sachs is involved, you are likely getting fleeced in some fashion,
you probably just do not realise it yet.

~~~
cm2187
If they go long these bonds they are nasty speculators who are betting on the
fact that Venezuelans will bleed themselves to repay. If they go short the
bonds they are nasty speculators who are trying to make money on a country
going bust. At this game it doesn't matter what they do, they will get this
sort of reaction.

~~~
Bartweiss
It's true that any involvement with Venezuela will make someone angry, but I
don't think it's the same someone.

Would shorting them really have angered the opposition? It seems like a move
that would mostly have outraged the Venezuelan government, and having them
angry at you is hardly a moral failing.

~~~
rmah
Yes, because heavy action on the sell side means Venezuelan debt prices would
go down, which would raise the yield. Which means that future bonds issued by
their gov would have to pay a higher coupon. This would definitely anger them.

------
TorKlingberg
It looks like Goldman Sachs is betting that Venezuela will sort it self out by
2022, and getting a good discount. I'm not sure how that is “making a quick
buck off the suffering of the Venezuelan people”, or how the people would
benefit if nobody buys the bonds.

~~~
DarkKomunalec
As happened in Greece, such purchases result in pressure applied to the
country to pay off its debts, rather than help its people. It's good in the
short term, but in the long term, government debt ends up as a massive
transfer of capital to the lenders.

~~~
bobcostas55
>As happened in Greece

Greece had the largest default in history[0], virtually all private debt
holders were forced to take a ~70% haircut.

[0]:
[https://en.wikipedia.org/wiki/Private_sector_involvement](https://en.wikipedia.org/wiki/Private_sector_involvement)

~~~
Retric
That 'haircut' is based on interest assumptions not actual costs. The actual
haircut was only _53.5% of the face value_ so if you bought it from someone
else at a higher discount you made significant profit. Assuming you sold it or
there will be no second default.

~~~
Spooky23
I'm all for knocking on predatory bankers, but that's not a very compelling
argument.

The borrower sold a bond at par -- so they got their $1. As the entity who
bought that bond, you're fucked... the borrower isn't making interest payments
and the debt is looking like a bad debt. So you sell it at a distressed value,
in your example $0.53, losing half your principal investment + interest, to
cut your losses.

The entity buying the distressed asset knows it's junk, which is why they buy
it at a steep discount. The fact that they may make a significant profit if
the borrower starts making payments is irrelevant.

At this point people start whining about predatory Goldman Sachs, etc. Notice
that there was no outcry when places like Greece and Venezuela were happily
borrowing and squandering money based on German credit (Greece) or temporarily
inflated oil revenues (Venezuela). In the case of Venezuela, they managed to
also kill the golden goose by deferring critical investments in oil
infrastructure and making dumb political decisions.

~~~
Retric
Goldman Sachs has not and is not lending Venezuela any money. So, if they buy
a bond from someone else at less than face value they have zero room to
complain about an agreement that was not made with them. At best they are
trying to make a quick buck off the person that sold them the bond and again
have no room to talk with the issuer.

~~~
Spooky23
That's not really accurate. Goldman bought the bond from the original owner
and is now a creditor.

They can and will talk to the issuer about payment and have every right to
demand full payment -- the obligation to pay is not diminished by the
secondary market value.

In my personal case, I had an opportunity to buy tax exempt New York General
Obligation bonds at a discount during the 2008 financial crisis. I did so,
although New York isn't Venezuela and the discount wasn't 50%, the interest
payments are based on the originally issued amount and if I hold the bond to
maturity I will get the full principal.

As an individual with 1 bond I don't have the leverage of an investment bank,
but I'm still a creditor and will be get paid in the event of some serious
financial crisis.

~~~
Retric
The idea that debt is transferable like this is a specific rule under a
specific system. You can also loan debt so the recipient has right of first
refusal on all transfers and then they could have simply bought that debt at
that same discount.

I am not saying the second system is universally better, but there is a
reasonable argument for and against it.

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mark_l_watson
This article and a similar one about India are on the HN front page right now.
In addition to simply taking advantage of people in countries with political
problems, there is also probably a trend of wanting to divest some investments
to alternatives out of the USA, England, etc., to smaller countries with huge
natural assets. I don't think it will happen in the short or medium term
future in the USA, but someday our economic system will pop due to the debt of
government and individuals.

I took my assets out of the US stock market in 2007 and avoided some pain, and
a few years later when I wanted to start investing again, I diversified a bit
more to international funds. I understand the desire to do that now also.

------
troydavis
Matt Levine's take on this is thoughtful and nuanced, as usual:
[https://www.bloomberg.com/view/articles/2017-05-30/airlines-...](https://www.bloomberg.com/view/articles/2017-05-30/airlines-
stock-splits-and-voting)

Scroll to the section titled "Venezuela."

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throwaway43243
Does this anyway mean that Goldman will have its hands in the oil can once
Venezualan Govt. bites the dust ?

~~~
dagw
Basically. Either the govt. uses it's oil money to keep paying Goldman or
Goldman can attempt to seize every Venezuelan oil tanker that enters waters
where the US has jurisdiction.

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dmix
It's interesting to think how the Venezuelans nationalized so much industry
and used it to fuel socialist economic experiments under the pretext that it
was an affront to "globalist western capitalism". Chavez announced that
capitalism was a dying economic system. Yet their own failed economic policies
only caused further dependency on it.

It's not something that is enjoyable to watch and rub in as the people there
are starving and have resorted to mob justice such as lynching in order to
have some rule of law.

Hopefully they get a proper change in rule soon.

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isubkhankulov
goldman's asset management arm bought the bonds for client portfolios- not
goldman itself. I don't see any controversy here.

~~~
jevgeni
I agree with you, but also your comment made me think about the absurdity of
how most people perceive banking. I.e. "if a bank does it to be profitable,
it's bad; but if somebody else does it, it's OK".

~~~
isubkhankulov
if it reads that way, then know also that the bonds already existed. the IOU
shifted from one entity to another.

------
kolbe
We are approaching the point where helping the Venezuela is akin to helping
North Korea. I suppose Goldman was able to squeeze in some business a few
days/weeks before we start officially sanctioning support for their corrupt
and inept government, but it's 100% fucked up that anyone would offer support
for this regime. And every dollar that Maduro gets to help sustain himself is
a dollar that will functionally be used to kill another civilian through
starvation/malaria/etc.

And do not mention the secondary market. The Fed buys off the secondary
market, but that doesn't mean it's not the one providing liquidity.

[https://www.nytimes.com/2017/05/30/opinion/venezuela-
needs-i...](https://www.nytimes.com/2017/05/30/opinion/venezuela-needs-
international-intervention-now.html)

------
aecorredor
I've been reading a lot on the deal (I'm Venezuelan, so yes, I'm pretty
concerned) and I am trying to find out how exactly is Dinousaur Group (the
original lender) tied to the Venezuelan government. Because the only way that
the Maduro regime can actually obtain more money than the 2.8 billion it first
got in 2014 is for it to be tied in some way to Dinosaur Group and get the GS
deal money from them, correct?

------
devoply
Goldman is not betting Venezuela will sort itself out. Goldman is betting it
can extort the future government of Venezuela out of money it does not have if
it wants funding from IMF or the World Bank. The justification they are giving
is that they bought it off a secondary market...

~~~
shaqbert
With the government owned oil co being the issuer, this looks like a pretty
smart bet by Goldman.

If oilco does not default, great, you get a ridiculous discount and a high
coupon.

If oilco does default, great, you have ample of collateral in tankers and
other tangible assets you might be able to recover, so the recovery rate will
be higher than the 30 cents that Goldman paid on the dollar. Also, whatever
happens with the venezuelan government, the new government will also want to
have a functional oilco.

~~~
dkrich
> If oilco does default, great, you have ample of collateral in tankers and
> other tangible assets you might be able to recover, so the recovery rate
> will be higher than the 30 cents that Goldman paid on the dollar. Also,
> whatever happens with the venezuelan government, the new government will
> also want to have a functional oilco.

I don't think that's the case simply because if it were that safe a bet the
bonds wouldn't be trading at such a huge discount. It's the inherent risk that
the government won't pay the bonds that enable them to trade at a discount.
The bet is that the government won't default because if they did they would
have a very hard time convincing people to buy bonds again in the future.

------
neves
They just see that the oil price will go up. Since Venezuela is a monoproduct
economy, they will get better and be able to pay their debts. No politics
here.

~~~
dkrich
Then why not buy oil?

~~~
neves
Where would you stock it?

------
conanbatt
Damn, this is argentina all over again.

And this was a HUGE bet also, they must think the government is going to come
down any moment.

~~~
jevgeni
No, they are betting for either the government to survive, or the new
government to honour its previous debts.

~~~
conanbatt
I would find it hard to believe that GSachas believes that this government
will have an economic recovery. Specially considering the maturity of the
debt, its surely a bet that the next government will honor the debt.

But that is pretty terrible for the next government, that today would like no
new debt to be issues, since it will all be spent today against them, and they
will have to pay it in the future.

~~~
jevgeni
It is a difficult situation, but then again, revolutions are tough.

I'm not sure about this debt package, but I'm betting this was issued by the
Venezuelan government to fund some real assets, like oil rigs or whatever. If
that's the case, then the capital is still there, one just must make sure it
generates profits.

A worse situation would be if the gov't loaned out the money, put it in
suitcases and ef'ed off.

~~~
conanbatt
The latter is what happens on an unstable government that thinks its going
down. Poeple scramble to get the last piece and get out.

IT might not happen with this, but it might and being south american, its
likely.

~~~
jevgeni
This might happen, if the government can issue the debt immediately. That's
highly unlikely in an unstable situation like in Venezuela.

I couldn't find anything in the article, but I bet the debt was issued way
before the unrest began. If there was any embezlement, it had to be way
earlier.

~~~
conanbatt
The article mentions that the sellers were a government group, and the payment
got to government accounts, if i read correctly.

