Venezuelan opposition leaders accused Goldman Sachs, an investment bank, to prop up the government of Nicolás Maduro and to make a quick profit at the expense of suffering Venezuelan citizens. Goldman Sachs’ asset management arm bought USD 2.8 billion of bonds, issued by Petróleos de Venezuela (PDVSA), Venezuela’s state-owned piggy bank, for a price of 31 cents on the dollar. Goldman seems to have found a pot of gold as these bonds (maturing in 2022 and with a 6% coupon) were trading at around 45% at the time of the purchase. The bonds were bought from the central bank, which habitually accepts newly issued bonds from the state or PDVSA in exchange for pesos or dollars to keep the government afloat.

Market leader in hunger bonds…

When confronted by criticism, Goldman said it bought the bonds as it believed “that life in Venezuela would get better”. This is a rather bold statement, witnessing the heavy death toll of about 60 people in political protests over the last 2 months and Maduro’s recent undemocratic overtures to rewrite the constitution so he can stay in power for longer. The investment bank also stated that it bought the bonds from a broker that “had no interaction with the government”. The broker in question reportedly was Dinosaur Group, a rather small outfit which impossibly could have held such a large block of bonds on its own balance sheet. Goldman also said that many other investors own and trade PDVSA bonds. Goldman, indeed, is not entirely on its own. Nomura, a Japanese bank, also bought bonds from the central bank (USD 100 million in their case). However, whilst many international institutional investors, better known as benchmark huggers, are buying and selling Venezuelan bonds, these bonds typically are traded amongst themselves and brokers and, therefore, do not provide new money to a despicable government. Nevertheless, Ricardo Hausmann, a respected economist at Harvard University, has asked J.P. Morgan to remove Venezuelan debt from its indices to prevent investors from having to buy “hunger bonds”.

Julio Borges, head of the National Assembly (or what is left of it), vowed to refuse to repay the bond that Goldman bought if and when the government of Maduro is defeated. We believe it would legally be difficult to treat Goldman differently from other investors, as the pari passu saga with respect to Argentine holdout debt proved. Anyway, we would not be surprised if Goldman already has locked in some profit by selling some of the bonds, as these bonds, although not part of J.P. Morgan’s benchmarks and therefore less sought after, can be freely traded.

Goldman is no stranger to entering into large questionable transactions to make a quick buck. Think of off-market derivatives, allowing the Greek government to window dress its balance sheet, synthetic CDO tranches on subprime mortages sold to unsophisticated investors, allowing the bank and hedge fund friends to go short, or the hastily arranged 1MDB transaction, again at an off-market price, partly used to secure the private wealth of Malaysia’s prime minister, Najib Razak (although Goldman probably was not aware of this).

We believe Goldman Sachs made a mistake by buying bonds from this government. Although we understand that investing in Emerging Markets means that you have to accept that (governance) standards sometimes may be lower than desired, Venezuela is in a deep political crisis where its repressive and corrupt government is using any means to stay in power, actually employing thugs to kill its opponents (see, for example, the revealing Financial Times video “Thug Nation: Venezuela’s broken revolution”). The OAS condemned the government for its undemocratic moves. Its secretary general, Luis Almagro, said a few weeks ago: “in Venezuela, the rule of law is dead”. Even the nowadays non-interventionist U.S. government sanctioned Venezuela’s vice-president in February of this year and said to consider new sanctions after Maduro declared his wish to rewrite the constitution on May 1st. This is not your average Emerging Market! Instead of trying to justify the trade, it would have been more graceful when the bank’s leadership would have said that it regretted the transaction and would shore up, yet again, its ethical standards. Longer term, this might be a more rewarding strategy for Goldman Sachs than taking PDVSA’s pot of gold.