Not Making Bank on Banks

ATMSovereign wealth funds – bankrolled by oil revenues or foreign currency reserves – are the next best thing to actual power projection, short of building an aircraft carrier. (China has one on the way). Or at least so the critics fear: SWFs could buy strategic assets such as ports and oil companies, and even banks – which are not so strategic unless they’re too big to fail.

Still, SWF investments in banks have largely lost money. Think of Lehman Brothers. What could be worse is having the bank manage your  SWF assets.

Consider The Libyan Investment Authority. The U.S. has already frozen $32 billion of Libyan state funds. The EU, another 45 billion euros. Even for a country running a $30 billion a year trade surplus, that’s a lot of money.

But what about the SWF itself? Well, it lost $300 million on Lehman.

According to the New York Times, the $64 billion fund suffered dual losses up to September 2010, based on an accounting made by the London office of KPMG. First, like every other investor, it lost money during the financial meltdown. But on top of that were the fees paid to investment managers.

“’To date, we have paid in excess of $18 million in fees, for losing us $30 million,’ the report says at one point, referring to a fund reportedly managed by the son-in-law of the head of Libya’s state oil company.”

Among the fees: a 40% loss on a $300 million hedge fund investment with Legg Mason generated $27 million in fees. Similarly, “[d]espite producing low returns, the Dutch firm Palladyne received $19 million in fees, the French bank BNP Paribas earned $18 million, Credit Suisse took $7.6 million and the Swiss firm Notz Stucki had $5 million. KPMG analysts also warned that the Libyan Authority’s investment in such funds was too high compared with other types of investments.”

Still, at least 60% or so of the assets were intact. Not so with $1.3 billion invested with Goldman Sachs in a series of currency and equity option trades. There the loss was 98%. In recompense, Goldman Sachs offered “to finance a $3.7 billion investment that would give LIA $5 billion in stock and a payment of 4% to 9.25% annually for 40 years.”

That’s interesting. Options are a zero-sum game; dividend growth isn’t. Too bad Goldman Sachs was late to the dividend party.