Have we learned nothing from the global financial crisis?

Saw this the other day – Couldn’t have put it better myself. Just shows you what really goes on.

Yes, $200 million has been picked from the pocket of our Super Fund by the apparently obtuse behaviour of Portugal’s central bank, but that’s not the big problem.

The big problem is that huge amounts of money continue to be loaned with no thought to the creditworthiness of the borrowers because someone else seems willing to insure the debt.

That’s what caused the financial crisis.

Yet the Super Fund relied on insurance to safeguard its US$150 million loan to Banco Espirito Santo, despite the obviously high risk of the Lisbon-based institution.

On June 26 last year, a week before Banco Espirito drew down the Super Fund’s loan as part of a US$784m deal organised through Luxembourg by Goldman Sachs, Moody’s put the bank’s already junk Ba3 credit rating on review for a downgrade.

Corporate governance – related party dealing – was Moody’s big concern.

But the Super Fund didn’t care. Or at least, not enough to back away from the smell. It just wanted to profit from the difference between how much interest it could earn from Banco Espirito, and how much it had to pay Goldmans for insurance against the bank defaulting on its senior unsecured debt.

Risk? What risk?

After Banco Espirito went bust and was bailed out by the Bank of Portugal, the fund now finds itself in the awkward position of having to sue Portgual’s central bank to get its money back.

The fund seems to have a good case. It appears to have been wrongly caught up in a bailout policy designed to ensure bank shareholders bore the brunt of the collapse, not its customers.

Since Goldmans appeared to have owned about 2.3 per cent of Banco Espirito and was involved in the Luxembourg loan vehicle, Oak Finance, the BoP effectively disallowed its claim to the remaining good assets of the bank.

Woops, the insurance didn’t work any more.

While the Super Fund is justifiably irate about its treatment, you have to ask why it was dabbling in such murky waters in the first place.

According to a Wall Street Journal report, Goldmans put together Oak Finance to help Banco Espirito raise US dollars for loan to Venezuela’s state oil company Petroleos de Venzuela, or PDV.

Months earlier, PDV contracted Chinese company Wison Engineering to build a refinery at Puerto la Cruz. The contract value was reportedly US$834m.

Coincidentally, last November Wison and its chairman were charged by Hong Kong authorities with bribery and conspiracy to commit fraud. No connection is suggested with the PDV deal.

Meanwhile, according to Reuters, on June 9 Banco Espirito’s CEO and family patriarch Ricardo Espirito Santo Salgado signed two “letters of comfort” to PDV.

Venezuela’s oil company had loaned US$365m to the Espirito Santo family holding company and was concerned about repayment. If correct, the reports suggest close links between Banco Espirito’s loans to PDV and the Venezuelan company’s loans to the Espirito Santo family.

It’s a dodgy-looking setup. Salgado is currently under investigation for alleged fraud, money laundering and tax avoidance, so there are many questions surrounding the whole affair.

Among them is what Goldmans thought it was doing. It bought a small equity interest in a junk-rated bank, then persuaded international investors to join it in providing a large foreign currency loan for it and arranged credit protection insurance on top.

How much Goldmans had at stake in Oak Finance is unclear.

The Super Fund has expressed concern that actions such as BoP’s will inhibit world money markets. Perhaps so, but it should be equally concerned that it relies on financial structures that were surely shown up as inadequate seven years ago.

 The Dominion Post (NZ)