News that Goldman purchased some $2.8 billion in Venezuela bonds issued by state oil company PDVSA and until recently held by Venezuela's central bank - at a 30% discount to market, paying 31 cents on the dollar or around $865 million in notional - quickly set off a firestorm of angry protests, in which Goldman was accused of making money from other people's misery (even though the story of Goldman's involvement in Venezuela's debt is hardly new, as we reported in 2014 in "How Goldman Sachs Became Broke Venezuela's Loan Shark"
Naturally, Goldman defended the investment, with Goldman Sachs Asset Management saying it had bought the securities from a broker and did not interact with the Venezuelan government. They will be held in funds and accounts managed on behalf of its clients.
“We recognize that the situation is complex and evolving and that Venezuela is in crisis,” it said in a statement. “We agree that life there has to get better, and we made the investment in part because we believe it will.”
The explanation did little to appease demonstrators who, according to the FT, protested outside the US bank’s headquarters in Manhattan as they attacked its purchase of securities, at a time when other foreign companies have largely stopped investing in the quasi-civil war ridden country. To fund bond repayments, Venezuela has been raiding its foreign reserves, which have dropped from $30 billion before Maduro was elected four years ago to about $10 billion; recently Venezuela's opposition beckoned Wall Street to beware Maduro's attempts to liquidate the country's gold reserves as it tries to procure much needed liquidity.
The demonstrators outside the bank’s New York headquarters Tuesday chanted, “No more hunger bonds, Goldman Sachs,” and the term was flying around the internet, appearing in scores of tweets and memes that featured images of malnourished Venezuelans scavenging for food, Bloomberg reported.
But will the attempt to shame Goldman succeed?
As Bloomberg correctly notes, "growing publicity doesn’t necessarily translate into greater success in implementing the boycott, and it isn’t entirely clear what it would achieve anyway, but Jorge Botti, a Venezuelan businessman who started the movement last year, is thrilled."
“I’ve had friends tell me I’m an idiot for talking about this, that capital has never had a heart and that’s why it works so well, but I think that world could find another way of functioning,” Botti said in an interview. “I think it’s going to start resonating a bit more.”
Botti was the first to use the term "Hunger Bonds" in October 2016 in a post to his 17,000 Twitter followers as part of his effort to raise awareness about suffering in the country. A former bondholder himself, he decided in 2015 that he couldn’t justify accepting the payments and sold his stake. “The bondholders know that they’re being paid at the expense of the country’s hunger,” said Botti, who runs a business importing hardware. “A lot of people tell me that the bonds don’t have anything to do with people, but I tell them it’s a moral issue.”
Harvard University professor Ricardo Hausmann, who gave the “hunger bonds” phrase a boost when he used it in an essay last week, argued that ethics can’t be ignored anymore.
Holding the bonds, most of which trade for about 50 cents on the dollar, risks incentivizing investors to root for payments to be made even as the populace suffers, he says. If there’s a default, bondholders will be agitating for the right to seize Venezuelan assets for payment -- assets that should belong to the Venezuelan people.
As we reported yesterday, Venezuela’s opposition parties also immediately criticized Goldman, with Julio Borges, president of the National Assembly, saying lawmakers will begin an investigation and evaluate whether “a future, democratic government of Venezuela should recognize or pay on this debt entered into against the interests of our people.”
Hausmann said Goldman bought the bonds at such a discount that it can expect a yield of 48 per cent.
"These are hunger bonds,” Mr Hausmann said. “Goldman Sachs has issued a set of principles regarding human rights that they commit to abide by. They violated their own commitments.”
Others, such as Francisco Ghersi, disagreed with the protesters' strategy. The managing director of the Venezuelan-dedicated hedge fund Knossos Asset Management said the shaming effort is misguided. Venezuela’s problems are caused by corruption and economic mismanagement, not the debt itself, he says. “What’s happening now is a tragedy, but it’s not the product of two years of paying off bonds,” Ghersi said. “It’s audacious to say that today people are dying of hunger because of the foreign debt.”
They may not be dying because of the debt, but they are certainly not being prioritzed above bondholders in Maduro's "priority" waterfall. As such, every payment made to creditors, is a few millions dollars less than can be used to the immediate needs of the population, especially since Venezuela's default is only a matter of time.
Botti says investors trying to guess exactly how long Venezuela will be able to keep making debt payments are being myopic. He wants the world focused on the humanitarian crisis in Venezuela, not the outsize returns on its bonds. “Among my fellow entrepreneurs and economists, there is no reflection on the subject,” he said. “But I think we must insist.”
Also, it is worth noting it wasn't just Goldman. Earlier today, WSJ reported that "Nomura Securities bought about $100 million worth of Venezuelan government bonds last week as part of the same transaction that has landed Goldman Sachs Group Inc. in the thick of a political controversy."
Nomura’s trading arm paid about $30 million for the debt, a steep discount to where the troubled country’s bonds trade in the market, according to people familiar with the matter. Those are roughly the same terms on which Goldman’s asset-management arm bought $2.8 billion worth of the same bonds in a transaction brokered by an intermediary, The Wall Street Journal reported this week.
Nomura was approached by the same intermediary, the London subsidiary of a small broker, Dinosaur Merchant Bank Ltd., some of the people said.
Of course, for the banks only one thing matters being profitable, the concerns of the protesters and the Venezuela population comes last, if at all. Then again, maybe this time is different: looking at the price of the PDVSA 6% bonds of 2022 today, shows that someone(s) was busy selling...
Did the blitz-mass media campaign actually succeed in "shaming" Goldman, forcing it to sell some of its "Hunger Bond" holdings (at a sizable profit)? If so, it would be the first time that social pressure has been a decisive factor in the bank's investing decisions, and could potentially unleash an overhaul in how "hunger" bonds issued by other "questionable" emerging market regimes are valued and funded.