Wednesday, May 31, 2017

Goldman Sachs’ Venezuelan Bonds: Power Behind the Throne

Goldman Sachs paid about $865 million for $2.8 billion worth of bonds in May, 2017. This represents 31 cents on the dollar and translates into an annual yield of more than 40 percent.[1] The high yield is due to the high risk that is involved, for the bonds had been held by Venezuela’s central bank in what “the government’s opposition decried as a lifeline” to the regime then in power.[2] Indeed, the central bank’s foreign-currency reserves increased by $442 million to $10.8 billion the day the bond deal was completed, and the government needed to raise money it owed to key allies like Russia and China.[3] In indirectly aiding that government, Goldman Sachs risked the ire of the opposition. Writing to Goldman Sachs, Julio Borges, head of Venezuela’s opposition-controlled legislature, indicated that he would “recommend to any future democratic government of Venezuela not to recognize or pay on these bonds.”[4] Hence, the high risk, high return. Though I submit that the risk might have been considerably less than meets the eye on account of the influence of the bank on the U.S. Government.

Goldman Sachs had been “steadily increasing its Venezuelan holdings in recent months, betting that a change in government could more than double the value of the debt if the country, which sits atop the world’s largest oil reserves, reforms its economy.”[5] The American bank could arguably dismiss Borges’ ominous threat because of the bank’s formidable influence, or power, in the U.S. Government. Besides the lavish political-campaign contributions that the bank no doubt extended to members of Congress, prospective candidates, and to the sitting president at the time, the bank had an insurance policy of sorts in that one of its alums, Steve Mnuchin (formerly a partner at Goldman) was serving as U.S. Treasury Secretary and another, Gary Cohen (who had resigned from being the President at Goldman), was the U.S. President’s Chief Economic Advisor (i.e., head of the National Economic Council). Additionally, Steven Bannon, the chief strategist in the Trump administration, had worked in the bank. Ex-Goldman bankers thus held very senior positions in the U.S. Government as the bank was betting that future regimes in Venezuela would recognize the validity of the debt owed to the bank.

The expression, “power behind the throne,” expresses the underbelly of power that has existed without doubt since the dawn of human organization. The advent of the large corporation, whose astonishing accumulation of wealth stems from principles of the Industrial Revolution, meant that private power could trump publicly held power to an unprecedented extent. The governmental discretion of lawmakers and even heads of governments may actually be diminished because of the sheer power behind the strings. In spite of the dubious democratic legitimacy and the horrendous human-rights record of the regime in power in Venezuela when Goldman Sachs bought the bond that had been issued by the state oil company Petroleos de Venezuela, the policy of the U.S. Government could easily be to “look the other way” and even prop up that regime or support any prospective regime that agrees to “toe the line” on repaying the debt owed to Goldman. The power behind the American throne, in other words, might reduce to the bottom-line financial transactions of the large American banks, which, by the way, are too big to fail yet sufficiently powerful to vanquish even public debate on whether the banks should be broken up for the overall interest of the U.S. economies and financial system. In short, follow the money, not the ideals or even enlightened self-interest. The world, moreover, may be in a driverless ship—one whose route is simply a matter of large financial transactions. Those transactions themselves may be the true power, for not even the CEO at a major bank can realistically deviate from seeing them through; the shareholders would have his head.

The discretion, whether in the large corporations or in the halls of government, may really only reside at the point at which the decisions are taken to proceed with a given large transaction. Only an investment banker would know how much discretion is truly present in the decision of whether to commit funds to an investment. In the case of Goldman’s purchase of the Venezuelan state-related bonds, the anticipation of the artificial risk-reduction by means of financial-to-political power could mean the allure of a 40% return on investment is too much to resist (i.e., greed). Yet such a prospect being deemed realistic could mean that Goldman’s managers faced a de facto fiduciary duty to the stockholders to make the non-bet “bet.” The availability of alternative profitable uses of the funds available for a bank like Goldman Sachs could give the bank’s managers some leeway in line with not propping up a regime that suffers democratically and in terms of human rights. It is only on the margins, I suspect, that ideals can get a glimpse of sunlight in a political economy in which large financial transactions hold sway in terms of both financial and political power. Yet the greed leaning strongly toward the 40% return, which crucially is made so realizable only by the bank’s power over political power in the U.S. Government, is hard for human nature to resist, especially that which is well ensconced in the culture on Wall Street. Accordingly, large financial transactions may take on a deterministic hew.

In any case, once a transaction is committed to, power goes to the transaction itself, with its private and public defenders feeling they have little practical choice but to act in the transaction’s own interest. Indeed, bank managers can be fired and government officials can be turned out if they don’t “play along.” The logic of the existing financial transactions may be determinative for the ship of state as well as an economic system. It is no wonder, therefore, that the general public should fear the prospect of a distant iceberg coming unawares over the bow, and that ideals for a better world should fall off along the way like ice melting off the rails. 

1. Kejal Vyas, Anatoly Kurmanaev, and Julie Wernau, “Goldman Sachs Under Fire For Venezuela Bond Deal,” The Wall Street Journal, May 30, 2017.
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.