majalla
Late last month, Libya’s sovereign wealth fund sued the global
investment bank Goldman Sachs at London’s High Court. It is alleged that
the fund lost in excess of 1 billion US dollars in 2008 through poor
investments advised by Goldman, which denies the allegations.
Prior to the 2011 uprisings, the Libyan Investment Authority (LIA)
was often portrayed by the international media as one of the few
instances of true modernization occasioned by Gaddafi’s détente with the
West. It had offices in London and its chairman, Mohamed Layas, was
about as seasoned a technocrat as the Libyans had to offer. The
country’s longstanding dictator, Colonel Muammar Gaddafi, created the
LIA in 2006 as part of the Monitor Group-inspired New Economic Strategy.
It was a vehicle to invest the proceeds of the country’s oil wealth,
but it was also part of the Libyan glasnost orchestrated between the
colonel and Western powers to reintegrate Libya into the international
community, swapping business opportunities in Libya in exchange for
regional security.
During the rush after Gaddafi’s détente with the US in 2003, the LIA
was courted by successive Western companies and invested in assets as
diverse as the Dutch–Belgian bank Fortis and the Italian football club
Juventus. Previous reports and court documents paint a picture of an
inexperienced management team at the LIA wowed by sophisticated Western
financiers. This, however, is a vast oversimplification.
The LIA was a vehicle for a different kind of corruption: the
corruption of the so-called free market reformer, as practiced by Saif
Al-Islam Gaddafi and his allies, Shukri Ghanem and Mustafa Zarti. The
traditional corruption of the hardline faction within Libya—including
figures such as Mutassim Gaddafi and Baghdadi Mahmudi—was predicated on
tightly regulating Libya’s access to outside expertise. The reformists’
corruption was about selling preferential access to Libya’s institutions
to various foreign entities and, frequently, squandering the Libyan
people’s money on deals that involved kickbacks for Zarti and his
buddies. In addition to sophistication in carrying out corrupt schemes,
the LIA turned out to lack basic knowhow in investing and due diligence.
The LIA’s investment strategy included bets on the international
capital markets. According to LIA documents, Goldman arranged for the
investment of a total of 1.2 billion US dollars in complex derivative
trades, effectively placing bets on a basket of currencies and a rise in
the share price of six companies: Citigroup, EDF, Santander, Allianz,
Eni and UniCredit. This left the LIA heavily exposed to financial
shocks, which meant the fund lost virtually all of its initial
investment during the aftermath of the 2008 financial crisis. According
to the Wall Street Journal, the LIA’s deputy chairman, Mustafa
Zarti, summoned Goldman’s director in North Africa, Youssef Kabbaj, and
berated him “like a raging bull,” apparently swearing at and threatening
Goldman employees.
The LIA now claims the deal was clouded by opaque structures and
misleading advice. This, however, seems unlikely to be the full
explanation despite how convenient it would be for the post-Gaddafi
Libyan authorities. Given Zarti’s endorsment of other bad trades for
the LIA on which he stood to gain personally, it is far more likely that
Zarti and those around him were involved in various side actions with
Goldman surrounding the losses. However, Zarti and Goldman would have
been very careful to avoid leaving any sort of paper trail.
For Libyan politicians, the pending case represents an opportunity
for the country’s new leaders to claw back losses incurred during
Gaddafi’s reign, as well as to expose the corruption of the former
regime and its nefarious and unscrupulous dealings with the Libyan
people’s money.
Beyond the Goldman case, the murky dealings between the LIA and
Western funds remain to be uncovered. There is much anecdotal
information from Libyans in the banking sector suggesting that the LIA
may have just as easily taken advantage of Western firms as the reverse.
It was recently reported that the US Department of Justice has now
joined the Securities and Exchanges Commission in investigating
allegations that Libyan banks and other financial institutions may have
violated anti-bribery laws prior to the 2011 revolution. The saga of the
rebels and the bankers looks set to run on and on. The popular press
is quick to blame predatory Western companies for defrauding the Libyan
people. Although this may describe part of the reality, it is certainly
not the whole truth. Given the patterns of the Gaddafi regime and some
information uncovered by Margaret Coker of the Wall Street Journal in 2011, it is not impossible that the LIA, Goldman, and the political echelon in Gaddafi’s Libya were all in on it.
All views expressed in this blog post are those of the author and
do not necessarily represent the views of, and should not be attributed
to, The Majalla magazine.