Goldman Sachs Group Inc. had no standard contracts in place to protect itself when it made $1.3 billion in options trades for Libya's sovereign-wealth fund controlled by Col. Moammar Gadhafi, according to people familiar with the situation.
While such contracts aren't required by law, they are routine operating procedure at banks and securities firms around the world when structuring derivatives transactions in opaque markets such as credit-default swaps, futures and options.
The documents usually include crucial information such as the financial and pricing data each party must provide to the other, what happens if either side reneges on its obligations and the laws governing the contract in case of a dispute about a transaction.
"It is not legally sound to do something of value without a contract," said Katherine Darras, general counsel of the Americas for the International Swaps and Derivatives Association. In 1987, the trade group created the most widely used form to codify trading relationships, called the ISDA Master Agreement.
Most financial institutions would trade derivatives only within the terms of a contract agreed to by both sides, Ms. Darras said. The trade group's board includes a Goldman managing director.
The failure to sign contracts spelling out the relationship between Goldman and the Libyan Investment Authority deepened the conflict that erupted after the options sank in value by 98%, or $1.25 billion, just months after their 2008 purchase, according to people familiar with the matter and documents reviewed by The Wall Street Journal.
As reported by the Journal in May, Goldman conducted nine equity options trades and one option on a basket of currencies for the Libyan Investment Authority in 2008.
All of the options investments through Goldman were made without an ISDA Master Agreement, people familiar with the situation said.
In addition, Libyan officials never signed a separate form known as a "long-form confirmation," these people said. The document often is used as a contract for a single trade or placeholder agreement between two sides while a master agreement is being negotiated.
It isn't clear why the boilerplate contracts weren't used in Goldman's dealings with the Libyan sovereign-wealth fund. A Goldman spokesman declined to comment.
In 2004, the U.S. had lifted an earlier set of sanctions that had prohibited American companies from doing business with or investing in Libya. Goldman and other financial firms flocked to the Libyan Investment Authority after it opened its doors in 2007 with more than $40 billion in cash.
Some people familiar with the Libyan fund said its operations often were disorganized, with some executives conducting transactions without the knowledge of other executives.
The Libyan Investment Authority also had incomplete accounting, recordkeeping and compliance practices, internal documents show. No one at the Libyan fund's headquarters in Tripoli could be reached for comment Friday.
Some Libyan officials have said that managers at the Libyan Investment Authority didn't fully understand the trades that were being made on behalf of the fund by a Goldman trading desk in London, arguing they were done without proper authorization, these people said. Goldman officials disputed the assertions, saying the trades were properly executed and the Libyan fund fully understood them.
Goldman cited recorded phone calls, money-transfer records and communications with Libyan officials that showed the fund was aware of the trades it was doing, said people involved in the dispute.
Libyan officials threatened legal action against Goldman but never filed a lawsuit. In mid-2008, Goldman executives decided to look for ways to help the Libyan fund recoup its losses on the options, the Journal reported in May.
In 2009, Goldman offered the Libyan Investment Authority the chance to buy a $5 billion preferred stake in Goldman. The securities firm later hatched plans to help the Libyan fund create a special-purpose vehicle that would invest in corporate bonds and pay annual interest of 6% for 20 years.
Neither deal was completed, according to people familiar with the discussions. The sovereign-wealth fund splintered when violence broke out in Libya in February amid the so-called Arab Spring. The United Nations, U.S. and European Union have imposed new sanctions on Col. Gadhafi, family members and most of Libya's state-owned companies and assets.
Securities and Exchange Commission enforcement lawyers are examining documents detailing ties between the Libyan fund and other financial firms, according to people familiar with the situation.
Goldman began doing business with Libya shortly after executives from the firm met fund officials in 2007. The Libyan Investment Authority invested in two funds run by Goldman's asset-management division—and then bought options in order to bet on equities at a lower cost than buying individual stocks, people familiar with the matter said.
In 2008, the Libyan fund paid $100 million for an option on Citigroup Inc. shares, according to Goldman and fund documents. Options investors pay a premium for the right to buy stock at a specific price at a future date.
The Libyan Investment Authority soon bought eight more options on stocks, from Italian bank UniCredit SpA, German insurance giant Allianz SE and Italian energy company Eni SpA, according to Goldman and fund documents. The sovereign-wealth fund also bought an option on a basket of European currencies.
The financial crisis caused the value of the options to tumble. According to Goldman documents prepared for the Libyan Investment Authority, the trades were worth just $25.1 million as of February 2010.
Source: http://online.wsj.com
While such contracts aren't required by law, they are routine operating procedure at banks and securities firms around the world when structuring derivatives transactions in opaque markets such as credit-default swaps, futures and options.
The documents usually include crucial information such as the financial and pricing data each party must provide to the other, what happens if either side reneges on its obligations and the laws governing the contract in case of a dispute about a transaction.
"It is not legally sound to do something of value without a contract," said Katherine Darras, general counsel of the Americas for the International Swaps and Derivatives Association. In 1987, the trade group created the most widely used form to codify trading relationships, called the ISDA Master Agreement.
Most financial institutions would trade derivatives only within the terms of a contract agreed to by both sides, Ms. Darras said. The trade group's board includes a Goldman managing director.
The failure to sign contracts spelling out the relationship between Goldman and the Libyan Investment Authority deepened the conflict that erupted after the options sank in value by 98%, or $1.25 billion, just months after their 2008 purchase, according to people familiar with the matter and documents reviewed by The Wall Street Journal.
As reported by the Journal in May, Goldman conducted nine equity options trades and one option on a basket of currencies for the Libyan Investment Authority in 2008.
All of the options investments through Goldman were made without an ISDA Master Agreement, people familiar with the situation said.
In addition, Libyan officials never signed a separate form known as a "long-form confirmation," these people said. The document often is used as a contract for a single trade or placeholder agreement between two sides while a master agreement is being negotiated.
It isn't clear why the boilerplate contracts weren't used in Goldman's dealings with the Libyan sovereign-wealth fund. A Goldman spokesman declined to comment.
In 2004, the U.S. had lifted an earlier set of sanctions that had prohibited American companies from doing business with or investing in Libya. Goldman and other financial firms flocked to the Libyan Investment Authority after it opened its doors in 2007 with more than $40 billion in cash.
Some people familiar with the Libyan fund said its operations often were disorganized, with some executives conducting transactions without the knowledge of other executives.
The Libyan Investment Authority also had incomplete accounting, recordkeeping and compliance practices, internal documents show. No one at the Libyan fund's headquarters in Tripoli could be reached for comment Friday.
Some Libyan officials have said that managers at the Libyan Investment Authority didn't fully understand the trades that were being made on behalf of the fund by a Goldman trading desk in London, arguing they were done without proper authorization, these people said. Goldman officials disputed the assertions, saying the trades were properly executed and the Libyan fund fully understood them.
Goldman cited recorded phone calls, money-transfer records and communications with Libyan officials that showed the fund was aware of the trades it was doing, said people involved in the dispute.
Libyan officials threatened legal action against Goldman but never filed a lawsuit. In mid-2008, Goldman executives decided to look for ways to help the Libyan fund recoup its losses on the options, the Journal reported in May.
In 2009, Goldman offered the Libyan Investment Authority the chance to buy a $5 billion preferred stake in Goldman. The securities firm later hatched plans to help the Libyan fund create a special-purpose vehicle that would invest in corporate bonds and pay annual interest of 6% for 20 years.
Neither deal was completed, according to people familiar with the discussions. The sovereign-wealth fund splintered when violence broke out in Libya in February amid the so-called Arab Spring. The United Nations, U.S. and European Union have imposed new sanctions on Col. Gadhafi, family members and most of Libya's state-owned companies and assets.
Securities and Exchange Commission enforcement lawyers are examining documents detailing ties between the Libyan fund and other financial firms, according to people familiar with the situation.
Goldman began doing business with Libya shortly after executives from the firm met fund officials in 2007. The Libyan Investment Authority invested in two funds run by Goldman's asset-management division—and then bought options in order to bet on equities at a lower cost than buying individual stocks, people familiar with the matter said.
In 2008, the Libyan fund paid $100 million for an option on Citigroup Inc. shares, according to Goldman and fund documents. Options investors pay a premium for the right to buy stock at a specific price at a future date.
The Libyan Investment Authority soon bought eight more options on stocks, from Italian bank UniCredit SpA, German insurance giant Allianz SE and Italian energy company Eni SpA, according to Goldman and fund documents. The sovereign-wealth fund also bought an option on a basket of European currencies.
The financial crisis caused the value of the options to tumble. According to Goldman documents prepared for the Libyan Investment Authority, the trades were worth just $25.1 million as of February 2010.
Source: http://online.wsj.com
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