Goldman Sachs managed to lose nearly all of the money it had been given to invest by the Libyan Government, which eventually led the bank to offer shares as compensation that would have effectively made Colonel Gaddafi one of its largest single investors.

The Libyan Investment Authority, a sovereign wealth fund worth tens of billions of dollars into which the Gaddafi Administration poured the money it made from oil sales, handed over US$1.3 billion ($1.58 billion) to the bank in 2008 with a mandate to invest in foreign currency markets and other structured products.

The deal was struck months before the onset of the financial crisis, and sources close to the bank yesterday claimed that the LIA had initially been uninterested when Goldman told it that the investment had lost several hundreds of millions of dollars.

But by early 2009, Goldman Sachs had lost 98 per cent of what it had been given, according to a report in the Wall Street Journal.

It is believed that senior Goldman Sachs officials were then summoned to Tripoli, and were told that, after losing the cash in just a handful of complex trades, the bank would need to offer some sort of compensation.

The bank alleges that its officials were physically threatened during meetings in Tripoli, but denies that it hired bodyguards for its staff.

An offer of compensation was eventually made to the regime in Tripoli to take preference shares, a complicated financial instrument that pays a fixed dividend, but which does not necessarily give the holder an equity stake in the bank.

Along with several other Western companies, Goldman Sachs was eager to get its hands on some of the newly available Libyan wealth after international sanctions were lifted against the country in 2004.

When Colonel Gaddafi's security forces were ordered to put down pro-democracy demonstrations that began in February, the LIA's assets were frozen. Goldman Sachs is understood to still hold at least three different accounts containing LIA money.

- Independent

By Alistair Dawber