Financing narcos the Goldman Sachs way
Goldman Sachs is not the best example of running an ethical business. In 2006–2007 the investment giant peddled $40 billion in securities backed by at least 200,000 risky loans. Then turned around and bet against those same securities, passing along the losses of the 2008 crash to pension funds, labor unions, insurance companies and financial institutions around the world.
To make it worst, they knew exactly what they were doing. A spokesman for Goldman Sachs, Michael DuVally, stated that in 2006 the institution decided it needed to reduce its mortgage risks. It did so by selling sub-prime related securities and betting against them with credit default swaps but “had no obligation to disclose how it was managing its risk, nor would investors have expected us to do so…”
At the end, when the dust settled, Goldman Sachs and other financial institutions that followed the same practices were bailed out by the American tax payers. With a commitment of $16.4 trillion dollars in loans by the Federal Reserve that were not completely disclosed until Congress forced a one-time audit in November of 2011.
Almost a decade after, there are no criminal charges and the investment bank keeps doing whatever it wants. Which leads me to their latest endeavor, giving a life line to a narco-state that needed some quick cash at any cost.
On Sunday, May 28th, 2017, the Wall Street Journal reported that Goldman Sachs purchased $2.8 billion dollars in Venezuelan bonds at 31 cents on the dollar. The bonds are issued by the state run oil company PDVSA and mature in 2022. Effectively giving the cash strapped authoritarian government more than $800 million dollars.
Most people might think there is nothing unethical about taking advantage of a potentially lucrative deal. But once you understand who they purchased the bonds from, you might think you are watching a new Netflix crossover of Narcos and The Big Short.
The oil rich country located on the northern tip of South America has been under an authoritarian and populist government since 1998, when the now dead Hugo Chavez won the elections promising the socialist revolution of the 21st century.
With a strong anti-American stance and economic policies that ended up sinking the country into one of the most tragic stories of ill-managed resources, Venezuela became a sanctuary for crime, terrorism and corruption at epic proportions.
To quickly explain the political scenario in Venezuela and understand the profound disregard for ethics at Goldman Sachs, here are some key facts about the country and the people that run it.
Venezuela is known as one of the largest drug bridges in the world. It is home to “El Cartel de los Soles”. drug ring run by government officials and high ranking officers in the armed forces, in collaboration the Colombian narco-terrorist organization FARC. The cartel gets its name from the the medals high ranking officers carry on their shoulders.
Important members of the military and government have been charged by the US for drug trafficking. Among the more prominent cases are the nephews of Venezuela’s first lady, convicted of conspiring to transport cocaine to the United States and the Venezuelan Vice President Tarek El Aissami who had $3 billion in assets frozen under the Foreign Narcotics Kingpin Designation Act.
What makes matters worse is the fact that even though Venezuela has carried out elections, there is no real separation of power. The judicial system has been used to silence political opposition and free press but has given a pass to corrupt politicians, drug traffickers, kidnappers & murderers. This has made the country one of the most violent and dangerous places in the world, with more than 25,000 reported murders in 2016 for a population slightly over 30 million. In comparison, war torn Afghanistan, that has a similar population size, had 3,500 civilian casualties in 2016.
Over the last 4 years the Venezuelan economy has been in free fall. With rampant inflation, food shortages, a failed currency control and low oil prices. The economy has now caught up to the incompetent administration, causing an uproar, with protests that have intensified in recent months.
Instead of finding solutions to the problems that plague the people of Venezuela, Nicolas Maduro and his political allies have decided to silence protesters, killing over 66 Venezuelans since mid April.
The human right violations and political abuses are no secret. The US sanctioned eight Venezuelan Supreme Court judges, freezing their assets and banning them from travel to the U.S. as punishment for stripping the Venezuelan Congress of all powers earlier this year. A decision the court later reversed amid widespread international outcry.
In the middle of all this chaos, Goldman Sachs seems to not care if they are in fact giving working capital to the authoritarian drug ring that runs the country so it can stay afloat. And before someone jumps in and argues that the bonds were purchased from Venezuela’s central bank and not these criminals, understand that these national organizations are run like personal businesses by the ministers, hand picked by Maduro. There is not oversight and the more than $800 million paid by the investment institution will be most likely used keep them in power.
On top of the immediate damage Goldman Sachs is doing to the Venezuelan people, in 2022 when the bonds mature, the country will most likely not be recovered from the economic disaster caused by the 21st century socialist revolution. They have sold off and bankrupted a large part of the country’s productive apparatus, failed to invest in infrastructure, created no alternative sources of income, amassed debt with China, Russia and international banks and is already at high risk to default.
But looking back at how Goldman Sachs operates, they most likely don’t care that Venezuela will not be able to be held accountable for the bonds. By that time they probably will have already packaged and sold the bonds to the American people and hedged against them, exactly like they did a decade ago.