‘Risk-free’ loan wiped out just weeks after money deposited when bank collapses

Almost $200 million in taxpayers' money invested through the New Zealand Superannuation Fund has been lost after the collapse of a Portuguese bank where the money was invested - supposedly as a "risk-free" loan.

The fund, set up with public money to partly cover the retirement costs of Baby Boomers, revealed yesterday it had been caught up in the collapse of Banco Espirito Santo (BES), and a US$150 million investment made in July had been wiped out.

Read how the Super Fund lost $200m

The investment was a contribution to a Goldman Sachs-organised loan to the bank, but only weeks after the money was injected it imploded. President and founder Ricardo Salgado was arrested as part of a criminal investigation into tax evasion.

After disclosing billions of euros in losses, and facing a run on funds by depositors, the bank collapsed in a heap and was broken up in August.

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Goldman Sachs, described by Rolling Stone as "the great vampire squid" for its business practices in the run-up to the global financial crisis, yesterday said it would "pursue all appropriate legal remedies without delay" in an attempt to recover the loans to BES.

The firm also announced that, with the Super Fund, it was suing the Central Bank of Portugal over its loans being excluded from a bailout of BES.

According to the Wall Street Journal, Goldman Sachs executives learned of the exclusion on Boxing Day - the news came from Portuguese media.

This sparked crisis calls involving Finance Minister Bill English.

Despite the legal action, Super Fund chief executive Adrian Orr conceded yesterday that the entire investment had been written off as a "conservative" precaution.

Finance Minister Bill English. Photo / Duncan Brown
Finance Minister Bill English. Photo / Duncan Brown

Mr English, the minister overseeing the Super Fund, declined to comment on the loss.

But Green Party co-leader Russel Norman said the minister should be demanding answers from the fund leaders on "why they gambled US$150 million in this case, and why it's come unstuck".

The episode also illustrated what the Super Fund should try to avoid.

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"For a fund operating on behalf of the New Zealand taxpayer, taking these high-risk investments is probably not appropriate."

Mr Orr denied the investment was high-risk and said the Super Fund had been covered in the event of BES defaulting. "It was risk-free with insurance."

However, an unusual retrospective rule change in Portugal had resulted in the insurance being voided.

Labour Party leader Andrew Little said the Auditor-General should investigate the process around the investment.

"The Super Fund has got a pretty good track-record of investing but I think we're entitled to know whether the proper due diligence and steps required for an investment of that magnitude were taken."

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The pathway to mega-losses

How is the New Zealand Superannuation Fund (NZSF) connected to collapsed lender Banco Espirito Santo (BES)?

The NZSF invested US$150m with Goldman Sachs vehicle Oak Finance. Oak Finance invested this - as part of a US$784m investment on behalf of clients - with BES.

Why did NZSF invest in Oak Finance bonds?
As part of a broader strategy, the NZSF lent to banks where it received more interest than it cost to buy credit protection insurance.

Why did Oak choose BES?
At the time the Oak Finance loan was taken out, BES was Portugal's largest commercial listed bank and had managed to raise €1 billion in a share issue last June. The Bank of Portugal also stated that BES was solid after the shares were sold.

What happened to the loan?
While the Bank of Portugal stepped in to manage the collapse of BES, it found that Goldman Sachs' shareholdings were not covered by Portugal's insolvency regime. The loan has not been transferred to the newly formed bridge bank Novo Banco, and is currently irrecoverable. NZSF and Goldman Sachs are challenging in court the Bank of Portugal's decision.

How does this affect the performance of NZSF?
The Oak Finance investment represented 0.7 per cent of the NZSF. Fund returns this financial year are expected to be 0.69 per cent pa lower as a result of the Oak loan. The fund's expected annual return rate has been calculated to drop from 10.01 per cent to 9.98 per cent.