“We absolutely wouldn’t do a transaction like that today,” Sherwood, 48, said in an interview posted on Channel 4’s website yesterday in London. “There have been transactions of that ilk that have been presented to us by other European sovereigns that we’ve turned down because we felt there wasn’t the appropriate transparency surrounding them.”
I cannot entirely agree -- I'm sort of of the school of "if it's legal1 and it pays you a lot, you should do it" -- but there's probably a reason Sherwood is giving interviews about reputational risk and I'm a blogger.
But a hedge fund reader points me to an intriguing modern parallel, or at least the rumor of one.2 Venezuela, it seems, has a problem.3 In its foreign currency reserves, where most countries keep foreign currency, Venezuela has a lot of gold, because its late President Hugo Chavez really liked gold and wanted to "move away from the 'dictatorship of the dollar.'" It has rather fewer dollars, and it turns out that if you want to buy goods and services in international trade, dollars are more useful than gold.4 Thus the problem.
The normal way to solve that problem is to sell some gold to someone who has dollars. Then you'll have less gold, but more dollars, and the dollars can be used to buy goods and services. But if you're Venezuela, there are problems with this too. For one thing, it seems like sort of a repudiation of your late president's policies. For another thing, spending down your gold reserves might suggest that you're in a bit of a tight spot financially, which though true is awkward.
Also, gold was worth $1,800 an ounce a year ago and is now worth like $1,240 an ounce, so it feels sort of crummy to sell a bunch now.
In comes, apparently, Goldman Sachs? Here is a thing that seems to be happening:
Venezuela newspaper El Nacional reported Tuesday that Venezuela’s Central Bank and Goldman Sachs are ready to sign an agreement to swap or exchange international gold reserves with a start date in October 2013 until October 2020.Do you know what this means? I do not (here's El Nacional's version, in Spanish but not significantly clearer), but it would seem to be a margin loan against the gold; i.e. something like:
The negotiated amount is equivalent to 1.45 million ounces of gold, valued at US$1.8 billion at today’s prices, which is to be deposited in the Bank of England with the transfers made directly to Goldman Sachs once delivery times are stipulated. Goldman Sachs will then pay U.S. dollars for the gold.
An adjustment of 10% will be made to the asset value as a hedge in case the international gold market price falls. The annual interest rate will be a combination of dollars with the call BBA Libor equivalent to 8%.
So is that a good deal for Venezuela? It depends how you count but it's hard to imagine the answer is yes. I mean: Why would Goldman do it if the answer was yes? There are some other arguments below but that is surely the main one.7
- Venezuela is borrowing about $1.6 billion from Goldman for seven years.
- Venezuela is collateralizing that borrowing with gold worth $1.8 billion at today's prices (i.e. it's 90 percent of the value of the gold; that's the 10 percent haircut), and it's posting that collateral somewhere Goldman can get it (the BoE).
- The collateral will be subject to margin calls as the price of gold increases or decreases.5
- Venezuela is paying about 8 percent a year for this loan.6
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