August 14, 2007
By David Litterick in New York, and James Quinn in London
Goldman Sachs has been forced to pump $2bn (£993m) into one of its flagship funds in one of the biggest rescue packages since the $3.6bn bail out of Long-Term Capital Management nearly 10 years ago.
The investment bank secured a further $1bn investment package from investors including former AIG boss Maurice Greenberg and billionaire Eli Broad after it said its Global Equity Opportunities Fund had slumped more than 30pc last week alone.
The fund lost more than $1.4bn in the process as its computer-driven investment strategies – known as quants – were sent off course by the turmoil in the financial markets in the past two weeks.
It is the highest-profile victim yet of the shake-out in the markets prompted by the crisis in the sub-prime mortgage market and will provide investors with an unwelcome reminder of the LTCM crisis, which was bailed out – by Goldman Sachs among others – after its own quant models failed to predict the Russian debt default.
Chief financial officer David Viniar said: “This is not a rescue. Given the dislocation in the markets, we believe that this is a good investment opportunity for us and the other investors that we have brought in.
“We believe the current values that the market is assigning to the assets under-lying various funds represent a discount that is not supported by the fundamentals.”
Nevertheless, Goldman accepted its fund was “under pressure” given the “significant market dislocation” and had led to a “disappointing performance”.
The bail-out will dramatically reduce the leverage ratio of the Global Equity Opportunities fund – from more than six times assets to about 3.5 times – and keep it in operation until markets return to equilibrium. Another Goldman hedge fund, the Global Alpha Fund, has lost 27pc so far this year, although Goldman said it was not injecting any more cash into that fund.
Analysts said it was a signal that a bank with the reputation of Goldman Sachs could not allow the funds, which operate as a kind of shop window, to fail, even though the $10bn of assets they control is a small sliver of the total $758bn Goldman Sachs manages.
As a result of the recent losses at Goldmans’ hedge funds, class action lawyers are waiting on the sidelines to see whether they might act for disgruntled investors.
Lawrence Klayman, of Klayman & Toskes, confirmed he is looking into the situation and had contact from numerous investors about bringing possible individual arbitration claims.
Goldman Sachs’ actions – along with a further $2bn injection of liquidity by the US Federal Reserve – helped stabilise the US markets yesterday. The Dow Jones closed almost unchanged at 13236.
In Europe stock markets regained some of the ground they lost last week. The FTSE 100 rose 180.7 points – or 3pc – to 6219, France’s CAC-40 gained 2.2pc to 5569.28 and Germany’s DAX Index 1.8pc to 7474.33.
Some analysts said the bounce could be a short one. “It would be naive to think the worst is behind us,” said David Jones, chief market analyst at CMC Markets.