Goldman Sachs Sleeps With The Enemy
Dictatorships Make Unfaithful Bedfellows
By Fergus Hodgson,
Gold Newsletter’s Roving Editor
Dear Fellow Investor,
A sucker may be born every minute, but you don’t expect him to end up working for Goldman Sachs.
In late May, the financial intermediary bought $2.8 billion in bonds issued by Venezuela’s socialist regime — lured in by a 69 percent discount — and the foolhardy decision is going to come back to bite them you know where.
Not only do they stand little chance of seeing their money in 2022, when the bonds mature, the dictatorship can continue to murder innocent people and turn the oil-rich and once-rising nation into a Cuban satellite. Venezuela is exporting economic refugees by the millions, and the Chavistas have bolstered their authoritarian allies such as Bolivia, Ecuador, and Nicaragua.
What was the excuse for the financially reckless and immoral gamble? They bought the bonds “on the secondary market from a broker.” Well, that makes it all kosher.
There are many lessons in this story, for both the retail and institutional investor, beyond the simple need to do your homework before parting ways with your capital.
As noted by Forbes contributor Ellen Wald, when there is a revolution or coup, the new government is unlikely to honor prior debts. The case of Fidel Castro is illustrative, since he was a mentor to Hugo Chávez and a role model to many strongman rulers in the Western Hemisphere.
Castro paid no attention to past contracts and simply confiscated private properties outright. Then he borrowed and defaulted on those who thought lending to a communist regime was a bright idea. There are still people holding out hope that they will be paid back, decades later.
Despite the continuation of the military regime in Cuba and the Soviet economy — forget about a functioning legal system — some people still want to invest there. Those people are, in the words of exile José Azel, “absolutely nuts” (hear him on our podcast).
Technically, Hugo Chávez only led a soft coup over more than a decade, given his one clear electoral victory in 1999. However, the rogue regime he went on to create continues under his successor, Nicolás Maduro, and the likelihood of a mutiny in the police and/or armed forces is growing.
That means Goldman Sachs is stuck between a rock and a hard place.
The opposition has made clear that they plan to neither recognize nor pay this debt if, by some miracle, they retake the executive branch. The bonds happen to be with the state oil company (PDVSA), not the government itself, so they can be more easily cast aside. With low oil prices, PDVSA is staring down $8.5 billion in debt payments this year and $7.9 billion in 2018. The corrupt monstrosity that is about to fall deserves to be pushed.
So, inevitably, Goldman Sachs needs the Chavista regime to remain in power, whatever the financier’s statements are to the contrary. That is most likely at this point, but their policies go hand in hand with Venezuela’s economic death spiral, so what little PDVSA can pay will come from a starving nation.
This gamble, including the off-chance that it pays off, will be a loss for the continent and whatever integrity Goldman Sachs possesses. The seen outcome is a green light to big-spender authoritarians; the unseen is a slap in the face to the legitimate states and ventures on the continent that merit investment.
Goldman Sachs itself has shown better judgment in recent years, profiting handsomely from infrastructure and retail development in Colombia and Uruguay. After all, indexes of corruption are available to all, and Venezuela comes out last or near last across the board — even worse than Haiti and Zimbabwe.
Jayant Bhandari of India explains why one needs to be so careful in these so-called emerging markets of despotic regimes: When your investment makes money, governments and locals expropriate it. When your investment loses money, you just lose.
As large institutional investors place these misguided bets, you don’t have to. “In difficult situations, most people cry,” writes a Caracas-based journalist, “but there will always the ones who sell handkerchiefs.” In Venezuela and elsewhere, you can side with those who serve the market, rather than violate it.
Fergus Hodgson is an economic consultant and Gold Newsletter’s roving editor.