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.
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.
