Over the decades, global investments banks such as Goldman Sachs and Credit Suisse have enjoyed stellar reputations due to the trust placed by big investors, including institutional and sovereign funds, in managing their assets.
However, the reputation of these banks have been tarnished due to the number of scandals that have come to the fore since the Lehman Brothers crash set off the financial crisis.
Recently, the Libyan Investment Authority, which oversees the country’s sovereign wealth fund that was established in 2006, filed a law suit against Goldman Sachs in the London courts. The charges included deception and exploiting the lack of experience among the Libyan establishment’s officials by engaging in trade derivatives through nine deals which led to the loss of $1 billion (Dh3.67 billion) at a time when Goldman Sachs achieved profits amounting to 35 per cent of the value of the combined deals, i.e., $350 million.
Further raising eyebrows, the bank is said to have used bribery in the form of gifts and free trips to Europe to convince Libyan officials on the feasibility of the investments, which could mean it knew in advance about the dangers that surround complex financial derivatives. Yet, it persuaded the Libyan establishment to proceed with the investment.
As a result, compensation demands were raised due to the large losses that befell the Libyan sovereignty fund. However, the bribery charges are not unique cases, as the bank had tried to make similar offers to Chinese officials which caused a stir and almost toppled the heads of some of the large investment entities in China.
Toxic mortgages
The US Securities and Exchange Commission (SEC) had previously fined the bank $550 million as a settlement to drop charges against them regarding deceiving investors and driving them to buy bonds that turned out to be linked to toxic mortgages. In other words, such underhand approaches are innate to the work of large global investment banks which manage hundreds of billions of dollars for the benefit of investors.
And as many financial institutions in the region deal with the global banks either through asset management or investment advisory services, interacting with them must be on extremely cautious lines to avoid any losses that could result from bad advice.
Operations where big investors rely on foreign banks have shrunk in recent times since the crisis. Moreover, the region’s sovereign funds have built supremely efficient internal capabilities to assess investment decisions.
However, there will still be some level of dealing involved with the mega investment banks because of their dominance over the investment environment and their track-record in this.
Having said that, we have to stress that caution has to be the basis of the relationship to avoid the repeated failures as well as instances of exploitations such as the dealings with the Libyan Investment Authority.
Considerable experience
Unlike in the past, along with overseas professionals a good number of Emarati nationals who have gained considerable experience in wealth management have begun filling leadership positions in these institutions, especially in the GCC. Such associations would enhance confidence and blend foreign and local expertise for the benefit of the funds owned by investment institutions in the region.
Global investment banks have to reconsider past practices, simply because they are working today in entirely different circumstances in comparison to their roles earlier.
Investment awareness and the presence of locally qualified and trained teams has changed the equation and imposed new variables that can contribute to finding a fruitful and healthy co-operation between the global investment banks and institutions in the many countries of the world. Such heightened awareness when it comes to managing their own investments will, in the term, be beneficial to all parties.
Dr Mohammad Al Asoomi is a UAE economic expert and specialist in economic and social development in the UAE and the GCC countries.