The KISS Principle and Losing $1.2 Billion

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Do you have any idea what this is? “A cash-settled forward purchase agreement for Citigroup shares with downside protection of a put option at the same price as the forward.” No? Neither do I and I have been in the investment business for more than 20 years.


As it so happens, this is what Goldman Sachs sold the LIA (the Libyan Investment Authority) in January 2008 when they started investing with Goldman. Unfortunately, in very short order it blew up and went to zero.  If you want to know more, read the unbelievable article in Bloomberg Business Week “Hot Mess: How Goldman Sachs Lost $1.2 Billion of Libya’s Money” (or just “Google” it as they say).  It reads like a crime thriller.


Why did they sell this to the LIA? If the LIA wanted to invest in Citigroup, why didn’t Goldman just invest them in Citigroup shares? “The structure was potentially more lucrative than a conventional purchase of equity and also significantly riskier—while resulting in far higher profits for Goldman.”  There’s the rub - nothing like “far higher profits” as a motivating factor.  Unfortunately the profits weren’t for the client, but for the “advisor”.


I am not picking on Goldman here. As we speak, there is an ongoing lawsuit in London over whether or not the LIA was a “sophisticated” investor and knew what they were buying or not. The courts will decide. The point I am trying to make is my title; Keep It Simple, Stupid – the KISS Principle. If Goldman had simply facilitated a straightforward purchase of Citigroup shares, there would be no lawsuit and $1.2 Billion of Libya’s money wouldn’t have gone up in smoke.

According to Wikipedia, the KISS Principle is a design principle noted by the US Navy in the 1960’s. Systems work best if they are kept simple; unnecessary complexity should be avoided.


What does this have to do with investing? A lot. I doubt you have “cash settled forward purchase agreements” in your portfolio at the moment, but do you know what you do have? And, most importantly, do you know how much your advisor is getting compensated?


Please, please, please make sure you don’t hold overpriced, overly complex, financial products in your portfolio, and above all else, make sure you know how much your advisor is getting paid. If you are unsure, drop by or contact us and we would be happy to do a “KISS” evaluation for you.


Mike Hayhoe, Canaccord Genuity Wealth Management


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