Judge Rose: Libya’s SWF Heads Knew What They Were Doing

Judge Rose: Libya’s SWF Heads Knew What They Were Doing

The economic historians of posterity have their work cut out for them here. There are doctoral dissertations in the works already, no doubt. And in time several scholarly careers will hang on this.   Those scholars will have to make sense of the political developments in late-Qaddafi Libya, of the role of the Libyan Investment Authority in that period, and of the tactics of western broker-dealers such as Goldman Sachs in their dealings with the LIA.

They should also try to understand the macro picture here. But then, so should we. It’s about the integration of SWFs with the private investment world.

But this autumn, the task of making preliminary sense of it all fell to the presiding judge in a courtroom in London, the Honorable Vivien Rose.

Some History

Let’s back up a bit. Oil reserves were discovered in Libya in 1959. The nations and industries of western Europe were delighted that there were oil reserves on their own side of the Suez canal, so the country immediately attracted investment, to the benefit of a monarchy and (as is so often the case) to the benefit of a small elite around that monarch.

Muammar Al-Gaddafi overthrew this monarchy in 1969. The ideas he cited as justification for the new regime weren’t new at all. The nationalization of the foreign oil companies doing business within Libya was one of the early self-defined duties of the Revolutionary Command Council. The RCC developed a guiding ideology of “Jamahiriya,” the details of which need not concern us, especially since we discussed it here in mid-September.

So let’s skip forward a couple of decades. In 1988, Libyan agents planted explosives on Pan Am Flight 103, destroying that airplane in the air over Lockerbie, Scotland. This resulted in international sanctions against Libya, sanctions that were repeatedly enhanced throughout the 1990s.

The sanctions had bite. By 2003, Gaddafi’s government (which had by this time lost the freshness of its original revolutionary vigor) decided that it had to make a deal with the industrialized world of petroleum buyers. It formally accepted responsibility for the Lockerbie bombing and agreed to pay compensation to the victims’ families. This gesture led to the relaxation of many of the sanctions, and Libya’s coffers began to fill up again with oil money.

The Libyan government decided then to create a sovereign wealth fund of its own to handle this money. Thus was born the Libyan Investment Authority.

The Case Before Judge Rose

Libya argued, in the lawsuit at issue, that the LIA wanted to make secure equity investments by buying the stock of sound western companies. It wanted Goldman Sachs to help with that, so GS honchos went to Tripoli, and LIA honchos came to London, in 2007 and early 2008 for summits that have been described by some witnesses as wild parties. During the course of wining and dining their Libyan customers, the GS bankers allegedly persuaded them to agree to risk the country’s money on a series of complicated derivatives positions. Almost immediately, a global financial crisis was upon them, the LIA lost $1.2 billion in these positions, and GS earned roughly $200 million in fees.

Here are the first 120 pages of the decision by Judge Vivien Rose. She was an appropriate juris for the task. Before taking a position on the bench, for several years starting in 1995 Rose had advised Her Majesty’s Treasury on financial services regulation.

The short version: Goldman Sachs won. Rose could not find that the evidence before her “necessarily shows any special relationship” between GS and LIA. As for the partying: “[T]he perceived need to keep providing expensive entertainment in order to maintain the relationship rather negates the idea that the relationship  had grown into one where Goldman Sachs could exercise undue influence.”

The LIA in this litigation has portrayed itself as a bunch of hayseeds, unused to the ways of the wicked financial world, trying to get into the swing of things, and naively trusty of the suggestions of Goldman Sachs.  Thus, LIA has contested certain trades executed in the first four months of 2008, asking that Goldman Sachs be required to make them whole for their losses in these trades.

The court refused to accept that account of what happened. They were not the easily wined-and-dined hayseeds that they made themselves out to have been.

The decision is a positive sign. Though given the tremendous losses of 2008 there is an understandable desire to find scapegoats, and though Goldman Sachs, the “vampire squid” itself, has become the default scapegoat, the functioning of markets requires that SWFs be regarded as grown men and women capable of making rational decisions on behalf of their various sovereigns.

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