Goldman Buys $2.8B Worth of Venezuelan Bonds, and an Uproar Begins | Hacker News Reader

Goldman Buys $2.8B Worth of Venezuelan Bonds, and an Uproar Begins

nytimes.com

86 pointsgaius109 comments

Goldman bought a lot of Greece debt that it knew wasn't great and made tons:

https://www.thenation.com/article/goldmans-greek-gambit/

Goldman Sachs was also very involved in selling subprime mortages to unwitting investors. Goldman Sach has had to deal with lawsuits that it wasn't acting in its clients' best interests:

http://articles.latimes.com/2010/may/16/business/la-fi-hiltz...

If Goldman Sachs is involved, you are likely getting fleeced in some fashion, you probably just do not realise it yet.

Also realize that the biggest factor in buying bonds at a discount is having the ability to force the borrower to pay you back in full (the reason people are selling at discount is because people don't think they will be paid back). Goldman Sachs is one of the few organizations with the political clout to make sure that happens with Venezuela.

Been going on for a while - this is from 2007:

Vulture funds buy up sovereign debt issued by poor countries at a fraction of its face value, then sue the countries in courts - usually in London, New York or Paris - for their full face value plus interest.

https://www.theguardian.com/business/2007/oct/17/debt.law

As they have every right to do. Taking out a loan is making a legally enforceable promise to pay back the money, and enforcement actions like that are the only reason that people make the loans in the first place. I sure as hell wouldn't buy a Venezuelan bond.

I think the issue is that the enforcement happens in the West, and not so much that it happens. There are big law firms that stand to make a lot of money from the litigation. Furthermore there is likely a contractual obligation that this be litigated in the West. All of which incentivises buying up dubious debt that needs to be run through the legal system, basically it pays twice... see (mjfl's comment above)

Furthermore, in the context of western exploitation/interference with these countries' economies, many of whom have not had recourse to a judicial process for reparations - your notion of what is rightful or fair is perhaps too narrow.

> I think the issue is that the enforcement happens in the West, and not so much that it happens.

Well face it, it either happens in the West or is not happening at all. And it's not like some obscure footnote, the arbitrage conditions are fully disclosed beforehand.

>> and enforcement actions like that are the only reason that people make the loans in the first place.

And also that delicious interest. You forget that the lenders already intend on getting something out of it. The reason they are getting interest at all is that there is a risk. If there was zero risk, there would be no need to pay interest.

Only a part of the interest comes from risk.

One important part is that if I were to give you 10$ in 10 years, it has less value to you than me giving you 10$ now (which is the difference between lending you lending to me and you not lending to me if you were 100% sure I would pay back).

The part that comes from risk in this case is the biggest chunk of the interest though. If we assume that AAA-rated have "no risk".

Interest is because of the time value of money and risk, not just risk.

Time value of money is also based on risk. You are betting that there is an alternative sure thing at which you could earn some expected rate.

Mostly on need, though. If I'm hungry, I'm hungry now, not 10 days from now.

Isn't it shocking that people dare ask for their money back? Surely, this is some kind of scam. /s

The interesting bit is that the debt buyers are making money from some advantage they seem to have in enforcing repayment relative to the original lenders.

Under proper rule of law, the original lenders would have exactly the same chance of getting money back as Goldman, eliminating all need to sell the debt at a massive discount.

There is nothing illegal in this, if that's what you are suggesting.

There are different reasons why somebody might decide to sell debt at a discount. One reason, for example, is that bankruptcy proceedings, especially international ones are super messy and expensive. If you are not dealing with these things on a regular basis, it might be better to book a small loss now and get and immediate cash flow instead of waiting for decades.

I don't think our poor sons and daughters should be involved in a military that will be used to enforce things like this

If they go long these bonds they are nasty speculators who are betting on the fact that Venezuelans will bleed themselves to repay. If they go short the bonds they are nasty speculators who are trying to make money on a country going bust. At this game it doesn't matter what they do, they will get this sort of reaction.

It's true that any involvement with Venezuela will make someone angry, but I don't think it's the same someone.

Would shorting them really have angered the opposition? It seems like a move that would mostly have outraged the Venezuelan government, and having them angry at you is hardly a moral failing.

Yes, because heavy action on the sell side means Venezuelan debt prices would go down, which would raise the yield. Which means that future bonds issued by their gov would have to pay a higher coupon. This would definitely anger them.

It looks like Goldman Sachs is betting that Venezuela will sort it self out by 2022, and getting a good discount. I'm not sure how that is “making a quick buck off the suffering of the Venezuelan people”, or how the people would benefit if nobody buys the bonds.

As happened in Greece, such purchases result in pressure applied to the country to pay off its debts, rather than help its people. It's good in the short term, but in the long term, government debt ends up as a massive transfer of capital to the lenders.

Yeah. But don't bet on the current government doing that. Quite the contrary

Or even the next

This is pure speculation

Banks control western politicians who will put who ever is in power under pressure to pay of the debt. I used to think people that talk like that are same as the ones that wear tin foil hats. But the last 6-7 years has made me realise that they are not completely bat shit crazy. And the world of power is power is most corrupted and the least in the news.

"And the Weak Suffer What They Must?" by Yanis Varoufakis (former Greek finance minster) has an interesting view on the mess that Greece (and indeed Europe and the rest of the world) is in. I don't think it's without flaws but it is certainly interesting - particularly his view of EU/ECB bureaucrats:

"a clueless, inefficient bureaucracy... working tirelessly for politicians with an infinite capacity to recite unenforceable rules"

On a sidenote (but likely interesting to HN readers):

Varoufakis worked as an economist for Valve[1]

[1] http://blogs.valvesoftware.com/economics/it-all-began-with-a...

That works if:

- The concerned politician has a slight sense of responsibility (even though paying banks first is less responsible to the people but has long-term goals)

- The concerned country has a minimal ability to pay

Venezuela has neither at this moment

Venezuela does have a minimal ability to pay. Eventually, default is likely, but they have paid all of their bond obligations so far. (The story you hear is that many of the bonds are held by political allies, so the payments transfer money to them.)

https://www.nytimes.com/2017/04/12/business/venezuela-oil-de...

For a second I read that as "western politicians who will put in power whoever ..."

>As happened in Greece

Greece had the largest default in history[0], virtually all private debt holders were forced to take a ~70% haircut.

[0]: https://en.wikipedia.org/wiki/Private_sector_involvement

That 'haircut' is based on interest assumptions not actual costs. The actual haircut was only 53.5% of the face value so if you bought it from someone else at a higher discount you made significant profit. Assuming you sold it or there will be no second default.

I humbly suggest reading the book "Debt: The First 5000 Years"

Sorry, are you saying that if a bond is supposed to pay a certain interest which isn't actually paid, that this isn't a partial default because the interest is only an "assumption"? And we should only count the face value of the bond?

I think the point is more that by the time the default happened, the market already considered the bonds to be worth less then what they ended up being worth.

The fact that the market priced in the haircut does not mean there was no haircut. It just distributes the loss between different creditors. The bonds are just as much in default, representing a net transfer from creditors to borrowers.

I'm all for knocking on predatory bankers, but that's not a very compelling argument.

The borrower sold a bond at par -- so they got their $1. As the entity who bought that bond, you're fucked... the borrower isn't making interest payments and the debt is looking like a bad debt. So you sell it at a distressed value, in your example $0.53, losing half your principal investment + interest, to cut your losses.

The entity buying the distressed asset knows it's junk, which is why they buy it at a steep discount. The fact that they may make a significant profit if the borrower starts making payments is irrelevant.

At this point people start whining about predatory Goldman Sachs, etc. Notice that there was no outcry when places like Greece and Venezuela were happily borrowing and squandering money based on German credit (Greece) or temporarily inflated oil revenues (Venezuela). In the case of Venezuela, they managed to also kill the golden goose by deferring critical investments in oil infrastructure and making dumb political decisions.

Goldman Sachs has not and is not lending Venezuela any money. So, if they buy a bond from someone else at less than face value they have zero room to complain about an agreement that was not made with them. At best they are trying to make a quick buck off the person that sold them the bond and again have no room to talk with the issuer.

The bond indenture kinda disagrees with your whole premise here.

Suppose, I buy a bond at 5% interest over 1 year and it defaults after making most of the payments. If I effectively only get 1% interest the IRS says I still owe taxes on that 1% as profit.

I don't understand what that has to do with your original premise.

Profit and loss should be calculated from the actual investment not what you should get on paper.

Just because Goldman Sachs would make an amazing profit if Venezuela actually made good on their debt doesn't mean they don't own Venezuela debt, right? "Goldman Sachs has not and is not lending Venezuela any money" is patently false.

GS is buying debt that someone else had. That other group loaned Venezuela money and is now selling the debt at a discount.

Critically if GS did not buy the debt Venezuela would have exactly the same money and exactly the same obligations so the fact GS 'owns' the debt or bob the accountant owns the debt is only important in so far as GS can apply more pressure.

That's not really accurate. Goldman bought the bond from the original owner and is now a creditor.

They can and will talk to the issuer about payment and have every right to demand full payment -- the obligation to pay is not diminished by the secondary market value.

In my personal case, I had an opportunity to buy tax exempt New York General Obligation bonds at a discount during the 2008 financial crisis. I did so, although New York isn't Venezuela and the discount wasn't 50%, the interest payments are based on the originally issued amount and if I hold the bond to maturity I will get the full principal.

As an individual with 1 bond I don't have the leverage of an investment bank, but I'm still a creditor and will be get paid in the event of some serious financial crisis.

The idea that debt is transferable like this is a specific rule under a specific system. You can also loan debt so the recipient has right of first refusal on all transfers and then they could have simply bought that debt at that same discount.

I am not saying the second system is universally better, but there is a reasonable argument for and against it.

Except, it has not defaulted to the ECB, Eurozone or IMF... these institutions are insane, when asked "We owe you x billion dollars at the end of the month. We can either pay you or pay our pensioners. What should we do?", the answer was, "Well, pay us!".

The purchases happened at the secondary market. This means that this bond are already issued... this means that what you say above is not true.

Where the bonds were purchased does not affect Goldman's ability or motivation to pressure Venezuela.

Or any creditor's motivation for that matter. Debt must be paid back, regardless of who the creditor is.

Most legal systems disagree. See https://en.wikipedia.org/wiki/Default_(finance)

Society does not exist to serve contracts - it is the other way around.

I'm sorry, what? Most legal system recognize default as a breach of contract.

Also, contracts are between at least two parties. Which of these parties don't you consider being a part of society?

Most legal systems have procedures in place for when debt cannot be repaid. That is why I take issue with the statement that it 'must' be repaid.

"Which of these parties don't you consider being a part of society?" - This is a strawman. Both are part of society, but the contract between them may do more harm than good in total. And blindly holding contracts sacred quickly leads to bad outcomes (non-competes, EULAs, some NDAs, etc.)

This is the same as taking issue with the statement "one mustn't steal" because there are mechanisms for dealing with theft.

Man, the straw man fallacy on HN is like the proverbial hammer... You are talking about externalities of private contracts. Thing is, this also is subject to specific legal regulations in most Western countries. It is not subject to whichever moral judgement you are trying to fit in here.

Construction, industrial emissions, things like that are when the state can limit the civil rights of contract parties. Buying and selling bonds is generally considered not to have externalities that endanger the common good.

The original letter has more detail as to why Borges believes that. I'm no expert, so I have no idea if it's plausible. On the other hand, if I were a citizen suffering under Maduro's regime, I'd be pissed at any sort of foreign investment that Maduro could spend as he wanted.

In short, "provides a financial lifeline to his authoritarian regime" and "desperate desire to gain resources needed to secure weapons and other instruments of oppression..."

Page 1: https://pbs.twimg.com/media/DBAqsdZXkAEVKgF.jpg

Page 2: https://pbs.twimg.com/media/DBAqtrDXYAABc9H.jpg

It's not directly useful for Maduro. They bought the bonds in the secondary market for a seventy percent discount. Maduro made no money off the sale. And at that large of a discount I don't think he'll have an easy time selling new bonds to anyone either.

Makes sense, but I still see the reason oppressed people would make a stink.

If only to broadcast that it will be bad optics for any foreigner to support the current regime...or even appear to. Propaganda is likely going on both sides.

The only reason why this is even made public is because Goldman is a big and easy target. There are mutual funds that I wouldn't be surprised a bunch of people here hold that easily dwarf GS in this space.

Sure, but that seems logical. If you want to make a deterrent, use a big name that will get press coverage, even if they bought on a secondary market.

For example, I'd be loath to buy Sudanese investments, even if I could prove it was a secondary market buy. The association just has bad optics.

I agree, but GS appears to be resilient against bad optics so far. Some negative stories are written about them, some people on the internet call them 'criminal banksters', but no matter what happens they continue to make vast amounts of money and ex- (and likely future) employees seem to reliably find their way into top offices of government, central banks and other powerful institutions.

It isn't much of a deterrent, if you know that only a single competitotor of yours or just a few companies will be singled out for the outrage. Time and time again. There are fund managers, pharma companiess, and industrial conglomerates that acted way more shitty than most banks, but people tend to ignore that or forget that very quickly.

Well, it did give the opposition a podium that they didn't otherwise have. I would guess many of us wouldn't have thought about Venezuela today otherwise.

I like this idea. Although the economic arguments aren't particularly strong, they give the opposition an opportunity to be noticed.

"but people tend to ignore that"

You mean it doesn't get much media attention.

Yes. :)

70% of par, 30%~ from where they were trading throughout the month.

From the article:

> While Goldman Sachs defended its trade by saying that it bought the bonds on the open market from a broker, bankers and traders say the money ultimately ended up in Venezuela’s treasury because the seller was an institution with ties to the government.

Good point.

Which still doesn't matter, if it's the secondary market. You can't borrow $100 and get more than that.

What stops Maduro from issuing a bond for $1000 and selling it for $100? After all he knows he'll be dead or in Switzerland when the bond matures. He just cares about the $100 now.

What's the difference between issuing a bond by Maduro and selling it?

When he issues a bond, he takes a piece of paper (perhaps not literally...) and stamps "Venezuela will pay bearer $1000 on 1 January 2025" (or whatever) on it. When he sells it, he gives the piece of paper to someone else and in return they give him money, theoretically the present value of the bond. The discount between the two amounts is mostly an indication of Venezuela's creditworthiness, but of course a portion of the difference is just a reflection of the discount rate for assets to be delivered in future. This is exactly the same as when any other entity issues a bond.

But you can be the Venezuelan central bank and buy $2.8 billion in PDVSA-issued bonds and later sell those bonds at a 70 percent discount (i.e. around 840$ million) to Goldman Sachs.

Until the moment of the sale to GS the money had only been transferred between two entities associated with the government.

Yeah, but how does that generate free money for the Venezuelan state?

It doesn't generate free money. On the contrary, it generates very expensive money.

For this operation, the central bank received about $840 million in cash from GS, and PDVSA must now pay back $2.8 billion plus interest to GS.

Whereas before this operation, PDVSA (owned by the Venezuelan state) had to pay back $2.8 billion plus interest to the central bank (also owned by the Venezuelan state).

But where did the central bank get the 2.8 billion USD? Venezuelan central bank can't print USD. So, net the country owes 2.8 billion USD + interest either way. It's just that the ultimate creditors have changed.

The 2.8 billion are PDVSA-issued bonds not USD, they only exist on paper and aren't worth a cent unless Venezuela can pay. Afaik Venezuela can print as many of those as it wants.

> So, net the country owes 2.8 billion USD + interest either way.

Venezuelas right hand owes money to Venezuelas left hand, both are Venezuela so Venezuela owes nobody. Now we have Goldman buying that dept from Venezuelas left hand and some more ( it can print as much as it wants of that ) for $5, Venezuela now owes 2.8 billion to someone else it has to pay back in the future in exchange for having $5 now. Those $5 benefit the current government and will affect any future government negatively.

Venezuela cannot print USD and needs USD to pay coupons/principal.

I may be missing something. They make USD by selling bonds, as long as they make more USD then the scheme has running cost they can increase the amount of USD they have right now by selling more bonds below value, leaving any future government in dept.

Venezuela cannot produce USD dollars out of thin air. If their monetary regime allows it, they may print Venezuelan bolivar at the cost of raising inflation in the country.

When we say "Venezuela issues a 2.8 billion USD bond" that means that the central bank sells new bonds denominated in USD on the international market (most likely an auction among bank players in London or NY).

What had happened here is that they did that and then unbeknownst to them one banker sold their bonds to another banker. The act of reselling that debt on the secondary market does not magically increase that debt. It just changes whom you have to repay it to.

The first one would be just like a transfer between accounts while what op suggest is that now they're receiving the money from Goldman.

Yeah, but they are not. If I sell you a car for $5000, I get the $5000 and you get the car. When you then resell the car to someone else, I am not involved in the deal in any way.

According to the article the bonds where bought from a group with ties to the government.

At that quantity, I expect they just set a new price for them.

I agree with you in general economic concepts but begin from argentina, I tell you, that all the money coming in for this will be poached by the current government in its corruption, and the next government will have to deal with that debt.

Exactly what happens in Portugal and Greece with most of the money from the EU and the IMF, sadly...

This article and a similar one about India are on the HN front page right now. In addition to simply taking advantage of people in countries with political problems, there is also probably a trend of wanting to divest some investments to alternatives out of the USA, England, etc., to smaller countries with huge natural assets. I don't think it will happen in the short or medium term future in the USA, but someday our economic system will pop due to the debt of government and individuals.

I took my assets out of the US stock market in 2007 and avoided some pain, and a few years later when I wanted to start investing again, I diversified a bit more to international funds. I understand the desire to do that now also.

Matt Levine's take on this is thoughtful and nuanced, as usual: https://www.bloomberg.com/view/articles/2017-05-30/airlines-...

Scroll to the section titled "Venezuela."

Does this anyway mean that Goldman will have its hands in the oil can once Venezualan Govt. bites the dust ?

Venezuela doesn't exactly have the greatest reputation with foreign business interests; especially oil companies.

Basically. Either the govt. uses it's oil money to keep paying Goldman or Goldman can attempt to seize every Venezuelan oil tanker that enters waters where the US has jurisdiction.

It's interesting to think how the Venezuelans nationalized so much industry and used it to fuel socialist economic experiments under the pretext that it was an affront to "globalist western capitalism". Chavez announced that capitalism was a dying economic system. Yet their own failed economic policies only caused further dependency on it.

It's not something that is enjoyable to watch and rub in as the people there are starving and have resorted to mob justice such as lynching in order to have some rule of law.

Hopefully they get a proper change in rule soon.

goldman's asset management arm bought the bonds for client portfolios- not goldman itself. I don't see any controversy here.

I agree with you, but also your comment made me think about the absurdity of how most people perceive banking. I.e. "if a bank does it to be profitable, it's bad; but if somebody else does it, it's OK".

if it reads that way, then know also that the bonds already existed. the IOU shifted from one entity to another.

also, how would GSAM look if they didn't let their clients buy this? they may lose those clients and their own reputation.

We are approaching the point where helping the Venezuela is akin to helping North Korea. I suppose Goldman was able to squeeze in some business a few days/weeks before we start officially sanctioning support for their corrupt and inept government, but it's 100% fucked up that anyone would offer support for this regime. And every dollar that Maduro gets to help sustain himself is a dollar that will functionally be used to kill another civilian through starvation/malaria/etc.

And do not mention the secondary market. The Fed buys off the secondary market, but that doesn't mean it's not the one providing liquidity.

https://www.nytimes.com/2017/05/30/opinion/venezuela-needs-i...

I've been reading a lot on the deal (I'm Venezuelan, so yes, I'm pretty concerned) and I am trying to find out how exactly is Dinousaur Group (the original lender) tied to the Venezuelan government. Because the only way that the Maduro regime can actually obtain more money than the 2.8 billion it first got in 2014 is for it to be tied in some way to Dinosaur Group and get the GS deal money from them, correct?

Goldman is not betting Venezuela will sort itself out. Goldman is betting it can extort the future government of Venezuela out of money it does not have if it wants funding from IMF or the World Bank. The justification they are giving is that they bought it off a secondary market...

With the government owned oil co being the issuer, this looks like a pretty smart bet by Goldman.

If oilco does not default, great, you get a ridiculous discount and a high coupon.

If oilco does default, great, you have ample of collateral in tankers and other tangible assets you might be able to recover, so the recovery rate will be higher than the 30 cents that Goldman paid on the dollar. Also, whatever happens with the venezuelan government, the new government will also want to have a functional oilco.

> If oilco does default, great, you have ample of collateral in tankers and other tangible assets you might be able to recover, so the recovery rate will be higher than the 30 cents that Goldman paid on the dollar. Also, whatever happens with the venezuelan government, the new government will also want to have a functional oilco.

I don't think that's the case simply because if it were that safe a bet the bonds wouldn't be trading at such a huge discount. It's the inherent risk that the government won't pay the bonds that enable them to trade at a discount. The bet is that the government won't default because if they did they would have a very hard time convincing people to buy bonds again in the future.

They just see that the oil price will go up. Since Venezuela is a monoproduct economy, they will get better and be able to pay their debts. No politics here.

Then why not buy oil?

Where would you stock it?

Damn, this is argentina all over again.

And this was a HUGE bet also, they must think the government is going to come down any moment.

No, they are betting for either the government to survive, or the new government to honour its previous debts.

I would find it hard to believe that GSachas believes that this government will have an economic recovery. Specially considering the maturity of the debt, its surely a bet that the next government will honor the debt.

But that is pretty terrible for the next government, that today would like no new debt to be issues, since it will all be spent today against them, and they will have to pay it in the future.

It is a difficult situation, but then again, revolutions are tough.

I'm not sure about this debt package, but I'm betting this was issued by the Venezuelan government to fund some real assets, like oil rigs or whatever. If that's the case, then the capital is still there, one just must make sure it generates profits.

A worse situation would be if the gov't loaned out the money, put it in suitcases and ef'ed off.

The latter is what happens on an unstable government that thinks its going down. Poeple scramble to get the last piece and get out.

IT might not happen with this, but it might and being south american, its likely.

This might happen, if the government can issue the debt immediately. That's highly unlikely in an unstable situation like in Venezuela.

I couldn't find anything in the article, but I bet the debt was issued way before the unrest began. If there was any embezlement, it had to be way earlier.

The article mentions that the sellers were a government group, and the payment got to government accounts, if i read correctly.

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