Libya bet $1bn on SocGen shares

Société Générale structured a $1bn bet on its own shares for Libya’s sovereign wealth fund after the Jérôme Kerviel fraud, the Financial Times has learnt.

Documents seen by the FT show the transaction – the Libyan Investment Authority’s biggest investment in five years – had lost 72 per cent of its value by the middle of last year.

The LIA entered into the transaction in early March 2008, barely a month after Mr Kerviel’s €50bn of rogue trades left the bank with losses of €5bn. At the time SocGen was struggling to reassure investors and plug a hole in its balance sheet.

The case is just one example of how leading global financial groups did big business with Col Muammer Gaddafi’s Libya in deals that rarely benefited the North African state’s lumbering $65bn sovereign wealth fund, but generated lucrative fees for the banks.

Goldman Sachs also engaged in large transactions with the LIA. The US bank structured a $1.2bn equity and currency derivatives portfolio that lost 98.5 per cent of its value as of the end of June 2010.

The SocGen trade involved a $1bn note, repayable to the LIA in 2018 and adjusted to almost exactly reflect the performance of an equivalent investment in the bank’s shares. SocGen bankers told the LIA that, for a dollar investor, an equity investment would be prone to currency fluctuations, while investing via derivatives would hedge such a risk.

The bank declined to comment, but said: “Société Générale deals with many sovereign funds and complies with all applicable rules and regulations in that matter. The bank cannot comment on any specific client or transaction.”

The LIA did not respond to a request for comment.

Documents from the bank explicitly identify the Kerviel fraud and the fall in SocGen’s shares as having created a buying opportunity for the LIA.

SocGen shares hit a high of €158.42 at the debt boom peak, falling to €75.81 on the day the Kerviel fraud was revealed.

Sales-pitch documents to the LIA say that SocGen was a probable takeover target, and as such, highly undervalued. “More than ever, M&A rumours have fuelled the news and analysts’ anticipations,” says a summary of the “investment context”.

The documents are initialled by Mohammed Layas and Mustafa Zarti, then respectively the executive director of the LIA and his deputy.

An overview of the LIA’s portfolio was revealed last week by the campaign group Global Witness. The LIA’s bet on SocGen’s shares appears as “Soc Gen Europe Meduim [sic]”. It was the worst performing of several “structured products” sold to the LIA by western banks.