Europe News

Goldman's Role in Lloyds Bank Bond in the Spotlight

Patrick Jenkins, Financial Times

Goldman Sachs was both an underwriter and an investor in Lloyds Banking Group’s vast refinancing deal late last year, the FT has learned, highlighting the potential conflicts of interest at the heart of the investment bank’s business model.

Sharon Lorimer

According to four people involved in the capital raising, Goldman – a dealer manager on the debt portion of the 23.5 billion pounds transaction – demanded last-minute changes to the structure of a deal it was underwriting. This had the effect of benefiting its position as a bond investor.

Goldman bankers stress that its Chinese walls bar underwriters from knowing anything about the investment activity of its proprietary traders and say the exposure of the affair reveals rivals’ opportunism in besmirching its reputation.

The incident, in the final hours of UK bank Lloyds’ capital raising, the biggest in corporate history, last November, will nonetheless add fuel to critics’ suspicions that Goldman puts its own interests ahead clients’.

The revelation comes as Goldman fights fraud charges brought by the US Securities and Exchange Commission.

According to those involved in the Lloyds refinancing, Goldman on the eve of the deal’s announcement that the extra interest payable on the bonds which were to be exchanged for new ones should be increased to as much as 2.5 percent, when a consensus of other banks was 2 percent.

The rise followed a surprise cut in the credit rating assigned to the securities, making them a riskier investment.

Goldman was also involved in discussions about the ranking in a so-called waterfall determining which bonds should be prioritized for the exchange offer.

“They were dictatorial about it,” said one person involved in the deal. Goldman bankers say its role as dealer manager was subservient to senior advisers, and did not allow it to dictate the terms of the waterfall.

It emerged that Goldman was a large investor in the 6.9 percent bond that was top-ranked for the waterfall, said four people close to the deal. One person said Goldman had bought as much as half the $1 billion issue. However, Goldman bankers said last night its proprietary position was “not substantial”.

Goldman’s role in the transaction – both the alleged conflict of interest and the allegation that it helped make the terms more expensive – will be politically sensitive, given that the UK government owns 41 percent of Lloyds.

Lloyds would not comment on the advice it received but said: “The final decision on the terms and pricing of this offer was made by the group following the recommendation of the syndicate, and not any one bank.” Goldman did not comment.