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Even Dictators Lose Money to Bad Investments

Posted in Money

The Libyan Investment Authority (LIA) is a sovereign wealth fund of the Libyan government, funded by the proceeds from oil development. Reportedly, the Gaddafi regime lost over $1.2 Billion dollars in bad investments with Goldman Sachs through the LIA when it began . It probably lost more with other banks. Although this occurred during the financial collapse of 2008, many lessons can be learned.

Recent article shed light on the dealings of high finance. Not surprisingly, financial institutions cater to rich targets in order to earn big fees. If you know anything about casinos, they cater to the rich too. The rich gamblers that are wined and dined by the casino hosts are called “whales”. Similarly, the LIA was enticed by trips, dinners, and shows in London. Also, there’s allegations of quid pro quo on investments for internships.

In the previous article, Tim outlines 4 financial destructive behaviors. The LIA did not avoid these destructive behaviors:
1. Envious of their neighbor, Saudi Arabia, the LIA wanted to invest their oil funds like they do. By trying to “keep up with the Jones,” the LIA was urged to invest quickly. Probably too quickly to do any due diligence.
2. Catering to greed, the LIA did not invest directly in stocks. They were lured by the “higher” returns by investing in contracts that were probably more lucrative for Goldman Sachs.
3. With laziness, they relied on the advice of the “salesmen” at Goldman Sachs. They did not investigate on their own or understand the risks involved in the contracts. With the lack of understanding “exotic” financial instruments, where speculation of derivatives are transacted, the LIA invested thinking there was very little risk.

Maybe a little bad luck was involved. They invested around 2008 before the financial crisis in United States. Because of bad timing, the LIA invested right before the dramatic drop in financial stocks. However, if they invested in stocks, they may have recovered their investments eventually.

You would think financial institutions exist to help consumers with their finances, even possibly to protect their money. For the most part, I think they do help consumers with options. Without credit and banking institutions, people in the United States would not have the luxurious standard of living today. However, like any other corporation, the financial institutions exist to make money. Banks lend out money to consumers at a higher rate to buy a house or car, but only pay out depositors in the US at 1% or lower.

Examples include Wells Fargo, where quotas have been set to increase number of customer accounts and thus increase in customer fees without their knowledge. An actual incidence of fraud in my opinion, and yet no one has been indicted. The CEO was asked to come for a congressional hearing twice, but there has been no subpoena of records so far.

WFC Source: finviz.com

WFC
Source: finviz.com

Also, Deutsche Bank is compared to Lehman Bros by many as the next financial institution to fail. This bank is considered one of the largest in Europe. The bank is under investigation by the US DOJ but an agreement may be unlikely. Currently, there are no talks of bailout from Merkel and the bank recently accessed the capital markets to gain more liquidity.

DB Source: finviz.com

DB
Source: finviz.com

In personal finance subreddit, there are many requests for advice when one comes into a significant amount of money. Here’s my take on what to do if you come into large sums of money (legally, of course):

1. Set aside 10% for charity (or any other percentage or amount). Put it into a separate bank account, either savings or checking. This will set the total amount you are willing to give away. You can give away freely, without guilt. When the money runs out, then that’s it, you will have to learn to say no. You will realize that there is a limit and you will prioritize your charity. Whether it is to a cause, or to a friend or family in need.

2. I used to be a big believer of paying off all debt, but this may not be always prudent. You can find advice on which debt to pay off first online. Of course it should the highest interest debt first. I would use about 10% to pay off debt that is stressful. Whether it is a credit card or a car loan. If you understand our position, I don’t recommend paying off the mortgage, unless you came into millions of dollars and the mortgage is only thousands of dollars.

3. Invest in gold and bitcoin. I would invest in 10% or less on physical gold, bitcoin, and some gold/silver etfs. You know the reasons why…wink wink.

4. Spend 5% or less on personal gratification. Did you ever want to travel somewhere? Did you want to buy that motorcycle? Again, put this money into another account where you can go hog wild.

5. For the remaining 65%, do not do anything with this. I repeat, do not touch this money. Put into an insured account. If the total amount is above the FDIC limit, break it up into different banks. Do not touch for a year. Do not invest, do not start a business, do not promise people to help. Take this time to either spend time learning about investing, writing out a business plan, or find yourself/passion in your life. This will help you avoid the pitfalls of many people who come into wealth suddenly. Many athletes, lottery winners, and heirs file for bankruptcy within several years after their big payday. Even wealthy families have a tendency to lose their enormous wealth by the third generation.

In basic terms: Don’t lose money.

Articles:

https://www.bloomberg.com/features/2016-goldman-sachs-libya/

https://www.theguardian.com/business/2011/may/31/goldman-sachs-libya-investment

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