Tuesday, May 31, 2011

In May 2009, Goldman proposed that Libya get $5 billion in preferred Goldman shares in return for pumping $3.7 billion into the company, according to fund and Goldman documents. Goldman offered to pay the Libyan Investment Authority between 4% and 9.25% on the shares annually for more than 40 years, which would amount to billions of dollars more.

Libyan officials prodded Goldman to recoup their losses faster. They also worried about whether it was wise to invest in Goldman given the collapse of Lehman and the resulting panic that swept global financial markets, the fund documents indicate.

After four all-day meetings in July 2009, the two sides agreed to a rejiggered deal that would make back Libya losses in 10 years. Such a deal, which also could have left the fund with a Goldman stake, would have needed to be run past the Federal Reserve. That left both Goldman and fund officials worried about its viability.

Goldman changed its mind a week later, having second thoughts about the terms, according to a person familiar with the situation.

That August, Goldman proposed some other options to Libya, including investing in other U.S. financial firms and in a "special-purpose vehicle" tied to credit-default swaps, a form of insurance against losses on loans and bonds.

The Libyan Investment Authority decided that those options were too risky. Fund officials said they wanted to put the $3.7 billion into high-quality bonds. So Goldman devised another special-purpose vehicle in the Cayman Islands that would own $5 billion of corporate debt, according to a Goldman document prepared for the fund.

The deal would pay Libya an annual return of 6% for 20 years, while also promising a $50 million payment to be made to an outside fund adviser run by the son-in-law of the head of Libya's state-owned oil company. Officials from Goldman and the sovereign-wealth fund met about the deal in June 2010, but it was never completed.

As of last June, the Libyan Investment Authority had assets of about $53 billion, according to a document reviewed by the Journal. This year, U.S. officials froze about $37 billion in Libyan assets, including some funds still managed by Goldman.

(END) Dow Jones Newswires

31-05-11 0404GMT