How high in an organization should deals be vetted?
TOPICS: Due diligence
Even Goldman Sachs, which is known for buttoned-up due diligence procedures, can fail to put senior-enough eyes on a risky deal. That possibility arose in the firm’s dealings with the especially corrupt Nicolas Maduro regime in Venezuela, which recently floated bonds to finance its state oil company.
Goldman purchased $2.8 billion worth, paying 31 cents on the dollar because of the default risk. Human-rights groups and critics of Maduro, whose security squads are shooting protestors, denounced Goldman’s and other firms’ investments. Ordinarily such a controversial investment would have been studied by layers of committees inside the risk-averse bank – but not this time.
“Internally, the purchase didn’t receive heightened scrutiny,” the Wall Street Journal reported. “The two co-heads of the unit [that bought the bonds, Goldman Sachs Asset Management] were informed only after the trade had been completed, the people said. The trade didn’t reach Goldman’s firmwide standards committee, which often vets deals that carry potential blowback, they added. “An ensuing uproar over that trade, which critics say extends a financial lifeline to Venezuela’s embattled government, caught top executives at Goldman off guard, the people familiar with the matter said.”
In part, this was because asset management is viewed as a straightforward business not prone to controversy.” Dealbreaker.com pointed out that in 2012, in the wake of the financial crisis, Goldman CEO Lloyd Blankfein had established more stringent internal risks to protect the firm’s reputation.
“If you’re going to set up an internal group specifically devoted to ensuring that major transactions don’t step afoul of public norms,” Dealbreaker said, “one would expect that group to know about a multibillion-dollar transaction tied to one of the world’s most hated governments.”