The Good, the Bad, and the Defunct  – Early last July, Goldman Sachs set up a financing vehicle called Oak Finance Luxembourg SA, so that the US-based investment bank could coordinate a four-year loan to the Portuguese Banco Espirito Santo. On Christmas Eve, Goldman executives found out via Portuguese media that the loan is not likely to be paid. The shock of the news lies mostly in the size of the loan: $835 million.
This was part of a move to restructure the failing bank and share the burden of bailing it out between the public and the private investors. In the legislative environment after the unpopular bailouts of the Great Recession, Portugal decided to divide Banco Espirito Santo (BES) into two banks: the good bank, Novo Banco, and the bad bank or, simply put, everything Portugal refuses to pay for. Novo Banco will be receiving €4.9 billion from Portugal’s bank-resolution fund to manage the untroubled assets formerly owned by BES, whereas the troublesome assets are planned to remain with BES, which is slated to be liquidated entirely.
New Bank, New Problems – The resolution fund money is not a free ride for Novo Banco. The new bank has been set up to eventually be sold, at which time the initial capital from Portugal’s treasury loan must be repaid. Senior bondholders and depositors are going to face few, if any, consequences, but subordinated bondholders have seen serious losses as regulators throughout Europe have tried to ensure that taxpayers are not on the hook for the losses. The issue remains that Novo Banco will be retaining the sounder, less risky assets while BES will be scrapped along with its so-called “toxic†assets and liabilities.
Goldman Sachs’ problems exist within a small technicality: a Portuguese law passed in August declared that anyone owning more than 2% of a bail-out bank’s shares has last priority for any debt repayments. Goldman acquired 2.27% of ESB in July, which means that Oak Finance Luxembourg SA’s loan will now be tossed into the bad bank scrap heap.
