How Goldman Sachs Lost Over $1 billion of Libyan Money

In 2008, Libya’s sovereign-wealth fund invested $1.3 billion in Goldman Sachs (NYSE:GS), of which they lost about 98%. Then, in an attempt to make up for their losses, Goldman offered Libya the chance to become one of their biggest shareholders by investing $3.7 billion. In the summer of 2009, Goldman made three formal offers of preferred shares or unsecured debt, with negotiations going on for months, though nothing came to fruition.

At the time of Libya’s original investment, the U.S. government had been pressuring banks about their capital levels. U.N. sanctions against doing business with Libya had recently been lifted, and the Libyan Investment Authority, with about $40 billion of assets when first established in 2007, offered 25 financial institutions the opportunity to manage $150 million or more, and ultimately had money invested in a multitude of firms around the world, including HSBC Holdings PLC (NYSE:HBC), Carlyle Group, J.P. Morgan Chase & Co. (NYSE:JPM), and Lehman Brothers Holdings Inc. (PINK:LEHMQ).

Ultimately Goldman (NYSE:GS) offered Libya the opportunity to invest $350 million in two funds run by their asset-management unit, access to which is typically restricted to the firm’s top clients. Libya accepted the offer, following up with a $1.3 billion investment in currencies and stocks that stood the chance of reaping significant gains if their prices rose. However, when the financial crisis hit, Libya’s $1.3 billion in option investments was especially hard-hit, dropping to just $25.1 million by February 2010.

While officials at Libya’s sovereign-wealth fund accused Goldman (NYSE:GS) of misrepresentation, the firm denied any wrongdoing on their part. Still, whether to avoid sullying their reputation should news of Libya’s losses get out, or simply to maintain a working relationship with the Libyan government because of business ties within the country, Goldman tried to make amends with their $3.7 billion offer. But with the deal nearly set, Goldman backed out, instead offering investment opportunities in other U.S. financial firms, which the Libyan Investment Authority deemed too risky. Ultimately no deal was made, and in February, U.N. sanctions against doing business with Libya were re-instated as $37 billion of the Libyan Investment Authority’s $53 billion in assets (as of 2010) were frozen by U.S. officials.