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Libya's LIA provides another sharp reminder to banks to play it straight

Libya's ILA provides another sharp reminder to banks to play it straight Anthony Harrington

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It is all too easy for international banks who do business with dictators for decades to fall into the trap of believing that their sins, assuming they commit any, will never return to haunt them. The brutal truth, however, is that dictators have a habit of eventually toppling and their corrupt dealings, all of which have to be routed through the global banking system one way or another, suddenly start to come under forensic scrutiny. Nothing about this scrutiny is going to be pleasant or make for good publicity for any bank involved.

This lesson is being brought home in spades to the likes of Societe Generale, France's second largest bank, and Goldman Sachs, both of whom were happy to provide services to Muammar Qadaffi's Libyan Investment Authority (LIA), the Libyan Sovereign Wealth fund. The charge against them now appears to be that they were making merry, selling the LIA a string of duff derivatives trades that made the banks significant sums and lost the LIA billions.

Whether there is any truth in such suggestions may well be tested in court at some point since the new governor of the US$66 billion LIA, a well respected Libyan banker, Abdulmagid Breish, has taken to his duties with relish and enthusiasm. His early actions have included launching court cases against Goldman Sachs in January, and against Societe Generale in March. Goldman is being sued in connection with US$1.3 billion of losses allegedly incurred by the LIA through equity derivative dealings by Goldman Sachs in 2008.

The claims launched by Breish against Societe Generale are said to exceed US$1.5 billion, involving derivatives transactions that took place over the period from 2007 to 2009. The case was lodged in London on 7 March. The LIA was founded in 2006 by Gaddafi's second son, Saif Al Islam Gaddafi. Much of its assets remain frozen, but Breish has said that he intends to model a new look LIA on the Norwegian Sovereign Wealth Fund, with the highest standards of transparency and governance.

Saif Gaddafi is said to have had a taste for intervening in the direction of the fund, ordering the purchase of a string of dubious assets. In a biting article on the LIA's chequered history in Forbes, Chris Wright notes that "foreign banks and fund managers [...] sold (the LIA) extraordinary duds that soured during the financial crisis". The actions against Goldman and Societe Generale are Breish's attempt to recover some of those losses.

Wright quotes him thus:

"It was very clear and evident that there was a breach in trust [with respect to Goldman Sachs]. They abused that confidence that was built, and the inexperience of individuals.

“I wouldn’t say it was a con job, but it was very near to it, where people were taken on holidays and bought gifts and things. The trust element was there and they totally took advantage of it and sold LIA complicated transactions with complicated documents that they couldn’t understand, at a moment when the whole world was going south, and they knew that.”

Free translation: Saif was a mug and so were the people around him, and Goldman played them for such, but investment banks can find themselves running foul of the law when they play those games. Goldman, not surprisingly, has asked for the case to be dismissed, saying that it is misconceived. On prior form with cases brought against Goldman, I really do not rate Breish's chances of getting change for a fiver out of Goldman for his efforts. Trying to reclaim money from a bank by arguing that it didn't do its job sufficiently well has not been a winning formula so far.

The SocGen case looks like it is shaping up to be a bribery case, which puts it in a different category to the Goldman case and time will tell if Breish and his legal team can make that stick. Prior to the 2008 global financial crash one might have argued that the LIA would at least have had the satisfaction of causing some reputational damage to the banks in question. However, post the 2008 crash, the reputations of global banks are so damaged by past iniquities that the LIA's actions are likely to raise very few eyebrows. Perhaps the most heartening thing to come out of the whole affair is the sense that Breish and the LIA really do intend to chart a new and better path, one that, like the Norwegian SWF, really will build a legacy for the people of Libya.

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Further reading on banks in emerging markets:

IPOs in emerging markets by Janusz Brzeszczynski
How Fragile are Emerging Markets by Kenneth Rogoff
The Trouble with Emerging Markets by Nouriel Roubini

Tags: Adbulmagid Breish , damages , derivatives , Gadaffi , Goldman Sachs , Libya , Libyan Investment Authority , litigation , Sociéte Générale
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