Goldman Sachs and Venezuela

President Maduro blasted President Trump for all Venezuela’s problems.  Of course, the US caused none of the problems.  Now, for those looking for a scapegoat, they have Goldman Sachs and what is perceived to intervention by the US to support Maduro.  It isn’t.

Venezuela’s people are suffering from a lack of food and medicine.  The national oil company (PDVSA) is (or was) the lifeblood of the economy.  As the political situation deteriorated,  the bonds of PDVSA became worth less, because the possibility of non-payment (default) or partial payment on the bonds was very high.  If this were an American company,  and they defaulted on their bonds, the investors would seek relief through the bankruptcy courts.  Generally, when immediate liabilities exceed the assets of the company, the company is likely to collapse.  This is the situation with Venezuela with 17 billion in debts to pay in 2017 and only 10 billion dollars in reserves,   Something has to give.

Goldman Sachs entered the fray by buying 2.8 billion dollars of PDVSA bonds on the secondary market.      The bonds were bought at a huge discount (70%) to the market price.  Why?  Because the market wasn’t working, it was in free fall.  Nobody had confidence in PDVSA, and that’s why the bonds sold at the huge discount.     Investors always try to buy at the bottom, and sell at the top.  That’s capitalism, and the only way to stay in the game.

Julio Borges, the opposition lawmaker who heads the National Assembly, wrote the CEO of Goldman Sachs, accusing him of making “a quick buck off the suffering of Venezuelan people.”   Opposition leaders have threatened to cut off  payments on the bonds,  but this is likely just rhetoric.  The covenants with the bonds prevent the issuer from favoring one bondholder over another, so paying just Goldman or JP Morgan or another holder would set off lawsuits.    It would be like hanging from a cliff by a thread and then cutting the thread.   The institutions that sold the bonds, were part of the government, so there was a gain of hard currency in exchange for IOU’s from Maduro’s government.

There were protests yesterday at the Goldman Sachs headquarters in NYC, with signs saying Goldman Sachs supports  Maduro’s  dictatorship.    It is a dictatorship, and the people of Venezuela are suffering.   You can’t get rid of a political leader through destroying the financial system.  Without the flow of some hard currency, the country financial system either collapses, or PDVSA gets chopped up in small pieces and sold (by the way, this is not going to happen).

Stay tuned,

Dave