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 The writedown came late in the quarter after a Dec. 22 decision by
Portugal's central bank that effectively wiped out certain Banco
Espirito Santo creditors.
On Christmas Eve, a group of senior Goldman executives held a
conference call to discuss the writedown and how it would affect
employee bonuses, people familiar with the matter said. About 15 to
20 people worked on the Banco Espirito Santo deal, but because of
the way Goldman structures its bonuses, up to 50 people in the
broader group will be affected.
Goldman and some of its clients lent Banco Espirito Santo $835
million in July using an entity it created called Oak Finance
Luxembourg SA. The Bank of Portugal stepped in with a 4.4 billion
euro ($5.2 billion) bailout of Banco Espirito Santo in August and
split it into two parts - a new, healthy bank called Novo Banco, and
a legacy entity that is being wound down.
Banco Espirito Santo's collapse came after it unveiled losses on
loans made to an assortment of companies run by its founding family.
The broader Espirito Santo group, which included tourism, health and
agriculture companies, sought bankruptcy protection and began
liquidating last year. Portuguese prosecutors have since launched an
investigation into the company's collapse. New management put in
place at Banco Espirito Santo by the central bank has said they
suspect the lender engaged in illegal behavior.
Goldman officials believed that the Oak Finance loan would be
protected in the new structure, in part because a senior Bank of
Portugal official said so in writing, Goldman spokeswoman Fiona
Laffan said. But on Dec. 23, Novo Banco said in a regulatory filing
that the Bank of Portugal decided not to transfer the Goldman-backed
loan to the new entity.
As a result, the prospects of Goldman and its clients being repaid
have dimmed and Goldman's finance staff had to write down the value
of the loan.
It could not be learned how much of the $835 million loan came
directly from Goldman Sachs, how big the writedown was, or how much
bonuses would be affected. Laffan declined to provide those details,
as did other sources who requested anonymity because they were not
authorized to discuss the matter publicly.
It's not clear who at Goldman Sachs had chief responsibility for
originating and structuring the loan to Banco Espirito Santo, though
such a commitment typically has to move through the firmwide capital
committee, which includes senior executives like Chief Financial
Officer Harvey Schwartz and Chief Risk Officer Craig Broderick.
Those involved with the loan at Goldman came from the securities
division, as well as the financing group, which sits within the
investment banking division. The securities business is overseen by
co-heads Isabelle Ealet, Pablo Salame and Ashok Varadhan, while the
financing business is overseen by co-heads Jim Esposito and Marc
Nachmann.
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Vice Chairman Michael Sherwood and Co-Head of Investment Banking
Richard Gnodde, who together run Goldman Sachs International, were
also apprised of developments regarding the Banco Espirito Santo
loan.
One person said the earnings effect of the writedown isn't
"material," meaning the bank will not have to disclose it in detail
on Friday when it announces results. Goldman hedged its exposure to
the loan, which helps reduce the potential for losses.
But another source said Goldman was the "lead" participant - meaning
it provided the biggest chunk of financing - and that it wasn't able
to distribute as much of the loan as it initially planned because
Banco Espirito Santo's finances deteriorated so rapidly.
Goldman has said "multiple investors" participated in the loan,
including pension funds. After the Bank of Portugal's decision,
Goldman said it would pursue "all appropriate remedies" to recoup
money for itself and its investors, unless the central bank changed
its mind.
The reduction in bonuses due to a bad bet on Banco Espirito Santo
comes at a time when many traders are already expecting lower
bonuses.
In a report on Tuesday, Barclays analyst Jason Goldberg said he
expects Goldman to say it paid out less revenue to employees last
year to ensure that profits for shareholders are at reasonable
levels. On average, analysts expect the bank to report earnings of
$4.35 a share for the fourth quarter, versus $4.60 a share a year
earlier.
Trader bonuses at Citigroup Inc will be down 5 percent to 10 percent
compared with 2013, after market tumult in the last two weeks of the
year hurt revenue, Reuters reported last week. Bank of America Corp
is also reducing bonuses for investment banking and trading staff,
the Wall Street Journal reported.
Pay consultants say they expect overall bonuses in the banking
sector to be flat-to-down.
(Reporting by Lauren Tara LaCapra; editing by Dan Wilchins and John
Pickering)
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