ETHICAL REASONING MEMORANDUM

Dr. James Bachman

Jay Clayton, Chairman, United States Security and Exchange Committee

11/08/2018
Subject: Analysis of Goldman Sachs’s acquisition of Venezuelan Bonds in 2017

The purpose of this memo is to analyze and discuss the ethics under Goldman Sachs’s
2.8-billion-dollar acquisition of Venezuelan bonds in 2017. A thorough discussion will be
based on information gathered from a wide range of resources, including news articles
from the NY Times and Wall Street Journal, government legal documentation,
interpretative interviews to eminent economists and a critique letter directed to Goldman
Sachs’s CEO written by Venezuelan opposition leader, Julio Borges. The principal agent
analyzed in this paper is Goldman Sachs; nonetheless, for an event of this magnitude to
take place without any type of repercussions, other parties had to be involved. Hence, the
participation of the intermediary bond broker and the U.S. Security and Exchange
Committee will be briefly discussed. It is hoped that this evaluation can serve to improve
future decisions made by the SEC soon. Moreover, possible courses of actions that the
agents involved could have taken will be mentioned throughout the memo. Since this
event occurred over a year ago, the situation will be analyzed as a historical event;
actions during and after the incident will be considered.

Summary
On May 2017, the Wall Street Journal announced that Goldman Sachs had invested in
Venezuela’s national oil company PDVSA. The multinational investment bank had
bought approximately 2.8-billion- dollars’ worth of bonds at an outrageous discounted
price. More specifically the transaction was of 865 million-dollars. In fact, the bonds
were issued at 31 cents per dollar; a historical bargain for this type of investment. (1) The
company claimed that no interaction was ever made with the Venezuelan government, but
they were instead bought in the secondary market from an intermediator broker,
“Dinosaur Securities” that supposedly held these bonds since 2014. (2)
These events happened during what became to be the longest continued political protest
in Venezuelan history. For over a decade, this South American country has been forced to
live the aftermath of corrupt and incompetent leadership, which includes hunger, violent
crimes, extreme levels of poverty, prolonged electricity shortages, hyperinflation, denial
to humanitarian aid, and other consequences of a dictatorship full of hatred and cruelty.
(3) In addition to such a hostile environment, the Venezuelan government had been
responsible for months of violent repression against political protests; murdering dozens,
injuring hundreds and arresting thousands. (4) It had been evident that Maduro’s regime
was in a weaker position than ever. The downturn in the oil & gas industry along with the
international sanctions were starting to have huge repercussions in the government
stability. They were running out of money and a collapse was very much expected.
As soon as a confirmation statement was issued from Goldman Sachs, worldwide
criticism was triggered and scandal spread. Protests instantly commenced around the
bank’s headquarters in NY. Besides, eminent economists condemned the bank’s decisions
and Venezuela’s opposition leaders derecognized the purchase. Thus, Goldman Sachs’s
actions were seen by most as a lifeline granted to Nicolas Maduro’s government, and
oxygen to the brutal repressions against hundreds of thousands of Venezuelan citizens. (5)

Was this Legal?

It appears so. Up to this day, there has not been prosecutions nor demands raised against
Goldman Sachs. At the time being, the company performed the entirety of this business in
the eyes of the law. Or so it seems. In 2015, President Obama declared Executive Order
13692 in relation to the political situation in Venezuela. This EO authorized U.S law
enforcement to target persons with direct relation to the violation of human rights in the
South American country. This includes financing any use of violence inside the country’s
premises. (6) It could be alleged that the transaction served as immediate liquidity for the
Venezuelan government to continue with its protest’s repression. On the other hand,
Goldman Sachs’s defendants argue that the business was negotiated in the secondary
market with a European intermediary. They stated that the company owned the bonds
since 2014 and therefore the money did not benefit Maduro’s regime. (2) However, if this
is the case; why had this company been sanctioned for not having a minimum of 250
thousand dollars? why does the public know close to nothing about this financial agency?
why did Venezuelan reserves escalated immediately after the transaction took place?
Many questions arise and make the legality of this purchase questionable.
All previous concerns take us to discuss the involvement of the SEC in such issue. With
so many raising red flags, why was this transaction not taken into investigation? It is
argued that there was no legal action that could be taken against the multinational bank.
Yet, for a transaction of this magnitude to occur, the SEC had to be made aware of it. It is
the SEC responsibility to regulate this type of actions; and their regulation is based on
their professional judgment. This course of action makes us question the SEC’s
competency to handle banks investment activities, and surely leaves room for
improvement. Since then, a lot has changed. In fact, four executive orders regarding
Venezuela have been issued since the incident. These include EO 13808 which “prohibits
transactions by a United States person or within the United States related to: certain new
debt of Petroleos de Venezuela, S.A. (PDVSA); certain new debt or new equity of the
Government of Venezuela; existing bonds issued by the Government of Venezuela prior to
August 25, 2017 …”. (7) On one hand, if Goldman Sachs’s actions are repeated either by
them or another agency, they will be prosecuted by U.S law enforcement. On the other
hand, it clearly legitimizes the bank’s purchase for occurring months prior to the
resolution release. How convenient was this for Goldman Sachs. An example of an action
that shows favoritism to large corporations and protects them from justice.

Was this Ethical?

That something is legal does not assure it being ethical. It has been demonstrated over the
years that these two criteria are not dependent to each other. In this case, the legality of
the action has been previously agreed on. Now, it is imperative to determine if the
purchase of Venezuelan bonds for personal economical benefit is ethical. When an action
is ethical, it signifies to be morally correct in the eyes of the clear majority. To make this
decision, the known facts have been defined., now these should be analyzed while
determining how did the course of actions affected the primary agents involved. Knowing
this information will permit to evaluate the ethical legitimacy of each action. The
question was this ethical will be answered based on consequence, principle and identity-
based factors.
By this point, the course of action is very clear. Goldman Sachs took opportunity of the
political & economic situation of Venezuela to buy bonds at historical discounted prices.
Truly, 31 cents for every dollar is a bargain that investors hardly find. Besides the
discounted deal, they secure presence inside the Venezuelan economy. Furthermore, if
there is a change of government or any show of a much secure investment environment in
Venezuela, the bonds could be sold at their original value, that is a billion dollar return on
investment for the multinational bank. A great deal that will cost the quality of life of the
entire population. To pay back, Venezuelan government would ignore the moans of
millions of starving children. The Washington Examiner labeled the bonds as “hunger
bonds” (8) In addition, many renowned economists have shared their point of views
through interpretative interviews. Ricardo Hausmann, former Venezuela planning
minister stated, “Venezuelan is borrowing money at a yield of 46%, there is no business
that can give you these numbers. These are cocaine bonds. The only way to pay these
today is with hunger tomorrow.” (9) Craig Copetas, editor at large is confident that this
whole transaction is based on ethical egoism. He responded in an interview with TRT
World, “This is a sweet deal for Goldman Sachs, there is no risk at all. Venezuela is one
of the richest countries in the world when it comes to naturals resources and when the
Maduro regime vanishes, that it will; Goldman Sachs will have access to its entire
economy.” (10) In addition, the Venezuelan opposition pronounced itself against the
situation. Julio Borges, president of the general assembly at the time, directed a letter to
Goldman Sachs’s CEO, Blankfein, condemning the company’s lifeline to a suffocating
dictatorship. In this letter, he concludes with the following: “the people of Venezuela and
its future democratic government will not forget where Goldman Sachs stood when it had
to choose between supporting the Maduro dictatorship and democracy for our country.”.
Making it clear that a change of governments will have no beneficial consequences for
them.
After analyzing numerous sources, it is evident that the decision made by Goldman Sachs
was purely intended to maximize self-interest. As Craig Copetas portrayed in his
interview, an example of clear ethical egoism. It disregards the consequentialism that it
may have to others and ignores all principle-based ethics. An ethical based decision often
requires time to consider all possible outcomes and weigh the impact that it can have on
others. In this example the main factor to consider are the violation of human rights in
Venezuela, while comparing it to the economic benefits of the deal. It is evident how
poorly are these factored are considered by leaving all identity base principles behind.
Although it was clear that to the eyes of the public Goldman Sachs was going to be
portrayed as a supporter of a dictatorship regime, the bargain seemed to be worth it. This
is an example of an organization that ignores the importance of having a respectable
identity. Moreover, when the situation is analyzed based on a principle-based approach, it
is still considered as an unethical behavior. As stated throughout the memo, the
motivations are very clear; to profit at all costs. When considering business ethics, it is
always important to see how cash flow of the company being study changes with the
course of action. In this case, Goldman Sachs’s portfolio diversified at very low prices;
which supports the belief that there were no ethical principles behind this decision. In
conclusion, Goldman Sachs makes a selfish decision that falls into all unethical
standards. They ignore the consequences it will have in both other people as in their own
reputation; giving all importance to how it can economically benefit the company.

Remediation and Reflection

It is important to recognize that issues of this sort happen every year. There will always
be an individual or organization that is willing to benefit over the suffer from others. To
change these people’s ethics so no intent in them is present is not in the power of the
SEC; yet lots of things can be done by your organization to prevent this from happening
again. First, group all countries where the government uses its economic power to violent
their citizen’s rights, and be much stricter when approving any transactions with them.
Second, consider disclosing the intent of high value transactions in controversial matters
to the public before they are approved. Knowing how the majority feels in respect to a
specific outcome will help deciding what is the right thing to do. Finally, in the case that
something is approved at first but later considered to be unethical or simply incorrect;
investigate the matter and determine if something can be done to remediate the initial
decision. Today is Venezuela but tomorrow it can be any other country, and there is no
need to wait for Executive Orders to do what is ethical and avoid what is not.

References
• Thomas, Landon. “Goldman Buys $2.8 Billion Worth of Venezuelan Bonds, and
an Uproar Begins.” The New York Times, The New York Times, 30 May 2017,
www.nytimes.com/2017/05/30/business/dealbook/goldman-buys-2-8-billion-
worth-of-venezuelan-bonds-and-an-uproar-begins.html.
• Smith , Bryan R. “Goldman Sachs Defiende La Compra De Bonos Venezolanos
Pese a Críticas De La Oposición.” Elnuevoherald, El Nuevo Herald, 30 May
2017, www.elnuevoherald.com/noticias/mundo/america-latina/venezuela-
es/article153378489.html.
• Graham-Harrison, Emma. “Hunger Eats Away at Venezuela's Soul as Its People
Struggle to Survive.” The Guardian, Guardian News and Media, 26 Aug. 2017,
www.theguardian.com/world/2017/aug/26/nicolas-maduro-donald-trump-
venezuela-hunger.
• Kohut, Meridith. “The Battle for Venezuela, Through a Lens, Helmet and Gas
Mask.” The New York Times, The New York Times, 22 July 2017,
www.nytimes.com/2017/07/22/world/americas/venezuela-protests-maduro.html.
• Borges , Julio. “Letter to Goldman Sachs from Julio Borges.” Received by Mr.
Loyd Blankflein, 200 West Street , 29 May 2017, New York , New York .
• Executive Order. No. 13692, 2015, p. 5.
• Executive Order. No. 13808, 2017, p. 5.
• Aguirre, Itziar, and Fernando Llano. “Yield-Starved Investors Pounce on Nicolas
Maduro's Hunger Bonds.” Washington Examiner, 8 Aug. 2017,
www.washingtonexaminer.com/yield-starved-investors-pounce-on-nicolas-
maduros-hunger-bonds.
• Hausmann, Ricardo. “Goldman Sachs Defends Venezuela Investment.” CNN
Business , Cambridge , Massachusets , 31 May 2017.
• Copetas, Craig. “Hunger Bonds .” TRT World , Paris , France , 1 June 2017.