HOW BROKERAGE HOUSES INFLUENCE SOVEREIGN FUNDS : THE WOOING OF LIBYA'S GHADAFI WON GOLDMAN SACHS 300 MILLION PROFIT IN A WORTHLESS DEAL

 

Most people think of brokerage houses as enterprises that invest for the public in one country or another, but the real money for these powerful companies has lately come from deals struck with foreign governments and foreign municipalities.  

One of the most flagrant examples of how brokerage houses can make fabulous profits from deals that ultimately are worthless to the investor, is a deal that Goldman Sachs struck with the Libya Investment Authority, a deeply pocketed fund worth billions of dollars that was manipulated and ultimately under the control of deposed, assassinated leader Muammar Ghadafi. 

Goldman Sachs sent a crack team in the mid 2000's, from the Fleet Street office, to hammer out a deal that would give them access to more than 60 billion dollars held in the Libyan Investment Authority.  The fund collected the profits from the lucrative oil production controlled by Ghadafi.

 

The news of this deal became public domain once the present Libyan government sought to recover funds that were misappropriated during Ghadafi's rule, in a complaint presently before the Court in England.  

In the claim, now in the British High Court, the Libyan government alleges that the administrators of the Lybia Investment Fund were lured into a deal with Goldman Sachs through the use of perks and goods that plied the managers of the fund into agreeing to a very un-lucrative deal.  

Through a labyrinthine network of connections that finally and always led to one of Ghdadafi's family members, the person who won control of the fund was a man with close ties to Saif al-Islam, one of Ghadafi's sons.

In the end, Goldman Sachs gained access to the multi billion dollar fund, and was allowed to invest part of the large fund in a deal that made Goldman Sachs 350 million dollars in profit in a deal worth on paper 1 billion dollars, but which in the end proved to be utterly worthless to the fund and its investors. 

The allegations in the complaint detail how Goldman Sachs apparently manipulated naive and inexperienced Libyan Investment Authority personnel to gain access to the money.  

At stake, as has been before in international brokerage transactions, are sovereign wealth funds, which is exactly what the Libyan Investment Authority was, were the unusual, and in the complaint outlined as highly unethical transactions.  Just like Greece, whose sovereign funds were wiped out by the dumping of worthless mortgage derivatives, so the Libyan fund was used to invest money that netted Goldman Sachs a hefty commission but lost nearly all the value of the fund.

Things were so irregular in the Libyan fund deal, that Goldman Sachs employees were able to gain free access to the offices of the fund.  Most of the people who were manning the Fund office had little expertise and did not even have a computer to follow trades. One could say that Goldman Sachs took over, and no one at the fund even understood what they were doing.

That's when Goldman Sachs put half a billion dollars in deposit and begun, just like in Greece, to 'dump' derivatives that were originated by banks such as Citigroup, Banco Santander, and EDF Energy, with an investment total of 1 billion dollar value on paper into the fund.

The administrators of the Libyan Investment Authority who were dealing with Goldman Sachs did not even question the deal or have private counsel peruse or oversee the deal or the investments.  Not long after, the fund sunk, wildly underperfoming and taking with it almost all its value.  By 2008, the 1 billion dollar deal was nearly worthless.  

The investigation into the deal also brought to light the fact that the standard legal documents usually employed in such high stakes brokerage deals were not even signed.  

An Australian lawyer investigating the deal, noted how the lack of proper documentation probably prompted Goldman Sachs to invest the fund in a very high risk manner, transacting highly speculative mixes of derivatives and synthetic financial instruments that were - and are - considered amongst the most volatile instruments in the market.  

The claim now seeks to gain back monies from the deal, since it alleges that Goldman Sachs used unsavory practices, such as plying inexperienced personnel and investing in notoriously risky derivatives to obtain the huge commission.  It also seeks a refund of all the commission fees expended with interest, and the capital lost in the bad investments. 

Of course Goldman is rebuffing the accusations in the complaint as lies, with the accusation of Goldman Sachs' alleged predatory practice of basically taking over the fund in a fiduciary capacity repulsed as unfounded.  The brokerage firm insists that it was the Libyan Investment Authority which eagerly engaged its services, and even suggested the bad trades in question. 

As far as Goldman Sachs is concerned, the claim is just another small bump on the road.  Notwithstanding a long history of questionable practices, which have been the subject of numerous lawsuits against Goldman Sachs, the large investment corporation will not see its activities curbed anytime soon, whether or not the British court finds the complaint with cause and awards the Libyan government the award. 

Muammar Ghadafi's death, and the annihilation of his family and base of power, afforded the broker who linked the Libyan fund to Goldman Sachs, Mustafa Zarti, a new life.  After the fallout of the investment deal, he was dragged before the fund principals and excoriated, so much so that he feared for his life.  After all, he was the man 'suggested' by Ghadafi and friend of his son Saif, to be the link, and he was responsible in some way.  Knowing how Ghadafi dealt with people who wronged him, prompted him to hire bodyguards.

However, Mustafa Zarti is now working at GLG partners after leaving Goldman Sachs.  

Business is, and remains, as usual.

Source : the Independent/ 1.31.14

 

ARGENTINA'S SHIFT : OPPOSITION IS GAINING ON PROJECTED ELECTIONS RESULTS

It increasingly looks as if de Kirchner's rule might come to an end.  A populist ruler, De Kirchner preyed on the gullibility of those that thought that free markets and capitalist ideals could finally right the constantly sinking ship that is the Argentine economy even though those reforms were made under the banner of the Peronist party. 

For a while Cristina de Kirchner was the darling of both the Argentines and the south american economists.  Her 'reforms' however, soon turned into a power grab.  Many remember how she took control of pension funds that had been privatized in order to show a positive balance in what otherwise would have been a bankrupt year for Argentina.  

Increasingly, De Kirchner became the paladin of big business, but her actions did not seem to diminish Argentina's instability.  In fact, her aggressive tactics backfired woefully earlier this year, when she threatened the few, large foreign investors, with expropriation and even incarceration if they pulled out of Argentina altogether.  The outcome, of course, was dismal.  Not only did foreign investment grind to a halt, but the move caused the fragile Argentine currency to spiral out of control. 

Argentines would like nothing more than stability. The country is not without resources, but exploitation, graft, nepotism and corruption have kept it from becoming a major player in the world economy, the way that Brazil and Chile have managed to do. 

Although the runoffs are a prelude to the elections, the actual voting is not slated to take place until 2015.  A long time, for a country on the brink. 

But the primaries have at least put a damper on the ruling party to which de Kirchner belongs.  The result of the primaries mean that she can no longer represent the nation at will, and she no longer pass legislation at will, either. 

The opposition leader, Sergio Massa, is gaining more and more followers at each rally.  Although he too, is a business friendly candidate, he seems to be more in touch with the needs of the people.  De Kirchner, on the other hand, seemed to become more and more autocratic and insular after her re-election in 2011. 

Argentina, furthermore, is no longer just an agricultural powerhouse. And although grain is seen as it most valuable output, many have lamented that De Kirchner is in the pocket of giant agribusiness Monsanto, from which some have rumored she had taken 'incentives'.  But in many regions of Argentina, the use of Monsanto crops has created illness and even suspicion of birth defects. Yet, de Kirchner's approach to the adoption of Monsanto seeds is almost authoritarian.  And many see this kind of attitude from a would be Peronist, as an example of the type of corruption that has always been present in Argentine politics. 

But the news is that Argentina is developing the Patagonian range for exploration of gas and shale oil, something that could devastate the pristine lands, but which could lift the country out of its economic quagmire.  Whether or not the newly elected president will be able to do such exploration without exploitation, personal or otherwise, remains to be seen. 

Partial data Source : al Jazeera/ 10.28.13

THE MIRAGE OF HONESTY: BITCOINS SHOW A DARKER LEGACY THAN PREVIOUSLY THOUGHT.

 

Bitcoin currency was hailed as revolutionary not long ago.  But as time goes by, more and more uncertainty is clouding the ambitious project.

What is now more clear however, is how the formation of a parallel currency, unrecognized by the market, just like alternative banking venues, can quickly be seized by criminal organizations for use in laundering and moving money around the globe, 

A new operation just seized 28 million in the currency, from the owner of a company called Silk Road, a marketplace that was connected with narcotrafficking and criminal organizations and ordered closed by international crimefighters. 

The loot was seized from a private owner, who had acquired the bitcoins from the remains of Silk Road, a person known as Dread Pirate Roberts, who is now indicted for conspiracy to commit illegal actions and other counts. 

The Silk Road Site, now shuttered, had been employed by counterfeiters and all sort of criminal enterprises, including payment sites for professional hitmen.  

Many of the almost one million people employing the site were using the bitcoins to pay for illicit drugs.  

This seizure is part of a worldwide crackdown on bitcoin trades, with the loot so far up to 33 million in value.  

The total traffic of bitcoins in the past decade through Silk Road topped 1.2 billion, say police authorities.  The commission charged for each trade could top 10% of the trade value. 

Source : The Guardian/ 10.26.13

ITALY'S SLOW DESCENT INTO DEPRESSION : HOW FOREIGN COUNTRIES SEE THE BEAUTIFUL LAND OF ARTISTS AND POETS DECLINE

 

Do not ask for whom the bell tolls. The bell tolls for thee.   

If there is reckoning or an awakening, it seems to be long in coming. When it does, it will be later than needed to save what is left of the 'beautiful country.'

A country that was the most desired place of vacation for artists and poets for centuries is now in the grips of a persistent and malicious economic decline.  

For decades, Italy subsisted of large handouts.  It had, in short, gotten used to foreign aid and financing.  It also had gotten very used to bad economics.  Blessed with a strong industrial sector, and an equally rich and diverse artisan production, the country had been able to float along, if not hobble a bit, for decades.

A country with a labyrinthine bureaucracy, where many of the richest people skirt the law, both fiscal and civil, is now in dire need of funds.  But those funds have already evaporated.  

Almost a trillion dollars have vanished from the country's revenues from tax evasion.  Graft, corruption, scandals, too many civil servants and political parties, extraordinary privileges to politicians and their subordinates that cost the state billions, and not least nor last, the long hand of the mafia, have all but depleted the country of any ability to rise from its knees.  If it is a death, it is one that will be slow, under the eyes of everyone. 

To add to the woes of the place, are also inefficiencies that have existed for decades, and a social burden that is growing larger with each immigrant that lands on its shores. 

As Letta, its interim Prime MInister, struggles to put a brave face on his economic program, the economy is slowing coming to a halt. With the financial sector squeezed to the limit, there are no funds for small businesses to keep afloat.  Hundreds of small businesses are closing each month.  Thousands of people join the already swollen unemployment lines. 

Just today, Letta announced the most aggressive fiscal crackdown to date.  But who will be the target of such crackdown?  Most of the richest and smartest people have already taken their money out long ago. So the new victims of the fiscal austerity will be the small businesses, the corner grocery store, and the middle class.  That cost, by the way, will be passed along to the consumer. 

For decades, businesses in Italy have survived the almost 45-50% revenue tax burden by skirting taxes.  The only way to make a profit, they claimed was not to provide the client with the famous 'receipt', the proof of payment.  

Unfortunately, the previous Prime Minister, Silvio Berlusconi, had taken another tack.  Taking a page out of the Republican book of economics, a party he sought to emulate, for nothing else to help himself and his heirs avoid costly real estate and succession taxes, the wily Prime MInister had abolished both, or at least part of both.  But when he did that, he did it in a country where tax evasion is proof of intelligence and know how. No one, Italians used to say, pay taxes, only fools.  A country where there was already an haemorrhage of funds due to tax evasion on income and revenue, had no business taking out both real estate taxes and succession taxes.

The hole created by the Berlusconi years have exacerbated the already crippling percentage between the country's GDP and its tax burden.  Just recently accusation were flying that Italy's politicians and bankers had colluded in converting some of their debt into longer term, and much riskier derivatives,o 'shrink' the debt burden just in time to qualify for the Euro Zone inclusion in 1998. 

That said, and it's a mouthful, what is Italy to do?  

The truth is there are not many choices.  Most countries in deep economic distress depend on some kind of stimulus from the government to kick start the economy.  But to do that, the country needs to inject money into the system, in some form of initiative or another.  And that is one thing Italy does not have : money. 

A famous Italian economist has compared the present situation as being worse than the devastating crisis that hit the country between 1929 and 1934.  

Growth is now at a gasping -1.3%.  The Bank of Italy furthermore, is forecasting a contraction of 1.9%. 

Negative growth by definition, if sustained, is the very definition of an economic depression. 

Another 'black sheep' of the Italian economy is the fact that its once powerful industrial sector has shrunk considerably.  15% of the country's industry has vaporized.  In some sectors, as in the automotive industry, that percentage is 40%.

The reason for this is that Italian manufacturers rely on element production overseas, chiefly in Asia, Turkey and Poland.  Many of the factories in Italy are merely assembly plants. 

One of the wealthiest mini-communities in Italy used to be the industrial zone around the quaint city of Fabriano, where a great number of appliances and furniture was produced, much of it for export.  Now the city is in dire straits.  The biggest industry, Indesit, once a factory with almost 10,000 workers, is down to 2,500.  That number will be halved by year's end, according to a new announcement by the company. 

Many cite the high wages. That's actually wrong. Italian wages are 15% those of their wealthier neighbors.  What the problem really is, is the enormous tax burden.  Unit labor costs are 30% higher than in Germany, its wealthiest neighbor. 

Banks have all but shut the spigot.  What is worse, state and government offices are not paying their bills. There are a good numbers of people who have retired recently who have not received their pensions for more than a year past the date in which they would have automatically come due. 

More than 8 million Italians are now living below the poverty line.  That's almost 20% of the population.  Many companies are also unable to meet payroll, and must dole out paychecks in installments. 

Monti, an experts in economics, whose plan was supposed to lift Italy out of the quagmire it finds itself in, failed in part, although some of the measures did slow down the freefall Italy was in at the time. But these measures are not nearly enough.  

To cap it all, the parliament is engaged in an almost year long game of Roman chairs.  That kind of chaos spooks willing investors.  Paralysis in the political arena translates to paralysis in the economic arena.  The judiciary is, as some say, out to lunch. Some trials last decades, all but ending long after the crime falls outside the limits of the period of prescription. 

The OECD, the Organization for Economic Cooperation and Development has among other suggestions, advised to reduce government spending, instead of constantly raising taxes, which are now at draconian levels.  An additional increase of the sales tax is also being bandied about. The current sales tax fluctuates between 20% and 36% depending on the item bought. 

The greatest affliction that afflicts Italy however, is the so called "casta", a large number of corrupt, entitled and ideologically selfish and pig headed politicians who are unwilling to compromise and who are receiving incredible salaries, some of which are only part of their income, since many of them hold other offices or occupations.  More than 800 members of Parliament receive almost 400,000 in salary yearly, more than the President of the United States, which do not include the incredible array of privileges, discounts, perks, and other expensive extras that define their office.

The country is destined for bankruptcy and quite soon, unless drastic measures are taken.  That measure, without a doubt, will have to be in the form of aid or handout.  Many fear that that is exactly the worse thing Italy could do, because it would reinforce the notion that no matter what its misconduct is, someone will always come to the rescue. That measure, a bailout, could shake the very foundations of the EU, since it would be the largest awarded yet.  And that too might not happen, since a bailout would imply disclosure.  Without such rescue however, Italy has almost no chance to save itself.  Unless......

The country, says Allen Sinai, a US economist, has great vitality and potential, but the only true solution to its imminent economic disaster is to exit the Euro. 

 

Partial Source :Spiegel Online/ 7.24.13