So, yeah, juvenile of me, but it’s just a little hard to keep an entirely straight face about the fact that Goldman Sachs is the first U.S. bank to venture into the world of Islamic finance. And it’s not going so hot:
Goldman Sachs’ controversial $2 billion Islamic bond programme faced a fresh challenge on Wednesday as it emerged that at least two scholars named as potential approvers had not even seen the prospectus.
Asim Khan, an adviser to Goldman on the issue which needs approval from sharia scholars to proceed, confirmed media reports that three of the eight scholars listed as potential approvers had not responded to requests to endorse the issue, but he said their lack of co-operation had no bearing on its sharia credentials.
Oops!
I went and found the prospectus and it’s fascinating for someone, like me, whose understanding of Islamic finance basically comes from Wikipedia. Now, even I know that the basic idea of a sukuk is to replicate a fixed income, or let’s say not-quite-common-equity-anyway, financial instrument without the use of “interest,” because interest is forbidden under Shari’a law. This, actually, is a topic close to my heart, because it turns out that in regular old American law sometimes “interest” is also forbidden, and by “forbidden” I mean “taxed,” which means that people who do what I used to do have certain incentives to turn things that look like taxable interest into things that look like non-taxable equity returns and vice versa. One thing you learn in that line of work is that it’s in large part the business of defeating substance with form: you pay for the use of money over time, but fall into some category of “paying for money over time” that isn’t what that is normally called, viz. “interest.” There are ways to do that in American tax law (one is called “option premium,” true story), and there are apparently ways to do it under Islamic law (one is called “murabaha,” which is what GS is aiming at here, and it’s basically the equivalent of “getting paid a fee for brokering a commodity transaction with forward settlement”).
It’s unclear if Goldman achieved that here. People have said that the Goldman sukuk does and does not* comply with Islamic law, and I am the last person in the world to weigh in on that, so whatevs. Apparently there’s at least controversy. And here’s the thing: when you are in a line of work that exists to privilege form over substance, you really really have to get the form right. Implying that you’ve gotten signoff from people who you haven’t gotten signoff from is … unhelpful.
It’s particularly unhelpful here. Here is a risk factor you don’t see so much under American law:
Investors must make their own determination as to Shari’a compliance
Members of a group of advising Shari’a scholars have issued a fatwa in respect of the Certificates and the related structure and mechanism described in the Master Murabaha Agreement and the Transaction Documents and their compliance with Shari’a principles. However, a fatwa is only an expression of the view of the Advising Scholars based on their experience in the subject and is not a binding opinion. There can be no assurance as to the Shari’a permissibility of the structure or the issue and the trading of the Certificates and none of the Trustee, the Delegate, GSI, GSG, the Arranger nor the Dealers make any representation as to the same. Investors are reminded that, as with any Shari’a views, differences in opinion are possible. Questions as to the Shari’a permissibility of the structure or the issue and the trading of the Certificates may limit the liquidity and adversely affect the market value of the Certificates. The Shari’a scholars advising on this Base Prospectus are of the view that the Certificates can only be traded in the secondary market at par value (that is, in relation to Certificates of a particular Series, the amount of the pro rata Deferred Payment Price relating to such Certificates) and on a spot basis in order to comply with Shari’a principles. Investors are advised to obtain their own independent Shari’a advice as to whether the structure meets their individual standards of compliance and make their own determination as to the future tradeability of the Certificates on any secondary market.
In addition, prospective investors are reminded that the enforcement of any obligations of any of the parties under the Transaction Documents would be, if in dispute, the subject of court proceedings under the laws of England and Wales and, in the case of the Guarantee, the laws of the State of New York,
USA. In such circumstances, the judge may first apply the relevant law rather than Shari’a principles in determining the obligations of the parties.
There are things to unpack here! “Members of a group of advising Shari’a scholars have issued a fatwa” is a wonderful three-quarters-truth: some members of the group listed in the prospectus have apparently signed off, so it’s technically true, though if you read it fast you might interpret it to mean that all of them had, which I guess is false. Also the choice of law warning is a thing you’d want to keep an eye on what with Americans being really into their courts not using Shari’a law.
But my favorite bit is: “Questions as to the Shari’a permissibility of the structure or the issue and the trading of the Certificates may limit the liquidity and adversely affect the market value of the Certificates. [Oh, by the way,] The Shari’a scholars advising on this Base Prospectus are of the view that the Certificates can only be traded in the secondary market at par value …”
Catch that? If there’s controversy about the structure – and there is – it might make the certificates trade down. But they can’t trade down, because if they did then that would violate Shari’a law. (Because if you bought at like 98 or whatever you’d be getting basically 2 points of OID interest and interest is what you’re trying to avoid.) So you’ve got a neat binary: you’ll either be able to sell these things at par, or no one will take them off your hands ever. (Actually, not quite true: that relies on the premise that you care about Shari’a compliance. If you don’t care, you can sell them at 98 to your heart’s content, and someone else who doesn’t care about compliance can buy. Let’s assume that most of the buyers here actually do care, and that Goldman’s advisors are right that selling below par would violate Shari’a.) The normal market mechanism that accounts for uncertainty, dubious value, contingency of claims – a fluctuating price – breaks down a bit here.
We talked a bit yesterday about the contamination principle, which “means roughly that if there is a possible spot in time and space capable of bringing a profit, then the areas surrounding it need to account for that effect.” That is a good guide for life. It’s fun to see examples where it doesn’t hold. The Goldman sukuk, strangely, may be one of them.
Goldman faces new controversy over Islamic bond [Reuters]
* The title of this article is “Goldman Sucks,” which is not exactly original to him, but we’ll allow it because in the “sukuk” context he’s scoring a rare triple entendre.
Tell me more about this asset class you call "suksuk". I feel that's something I could really wrap my head around.
-J. Epstein
Nothing to see here, people. Just doing Allah's work.
Check with Yum Yum and Click Clack over there, Zipperhead.
Organized Berlin scheisse collectives and now Goldman suksuk funds are making me very very nervous. 2012 is the alpha and omega.
Suksuck?
Everyone knows that we've cornered the market on that.
-UBS MD
A note to readers – Muslim Clerics are just like any other those in any other organized religion. Show them the cash and they'll find a way to make it sharia compliant.
What cracks me up is the pains Muslims go through to basically convince themselves that what they're doing isn't "haram" or forbidden. Lets be honest – a sukuk is a bond, and the fees you get related to the principal of that sukuk is interest. Do sukuk holders have a senior unsecured claim in bankruptcy? I think so.
Just because I call my peanut butter and sandwich a David Hasselhoff Deluxe, doesn't mean it ain't a PB&J.
A note to readers – Muslim Clerics are just like those in any other organized religion. Show them the cash and they'll find a way to make it sharia compliant.
What cracks me up is the pains Muslims go through to basically convince themselves that what they're doing isn't "haram" or forbidden. Lets be honest – a sukuk is a bond, and the fees you get related to the principal of that sukuk is interest. Do sukuk holders have a senior unsecured claim in bankruptcy? I think so.
Just because I call my peanut butter and sandwich a David Hasselhoff Deluxe, doesn't mean it ain't a PB&J.
Report
Come again?
So, there's a need to have Muslim clerics take a fee so that everyone involved can feel that paying for the use of money – i.e., interest – isn't really interest because religion and culture would make everyone feel sinful (and generally icky) if it was paying for that (as opposed to something else). Same business model as Tiffany's, different context!
You had me up until "whatevs". Now I will forever think of you as a 15 year old girl.
Today, we are all Saudi's
xoxo, Lloyd
"people who do what I used to do " look matt were not going to discriminate here..
as long as you continue with the interested, though somewhat self important/smarmy writing what you and philip did was yur own biz.
Please please refrain from using "whatevs" ever again… Matt, what are you? A Cali Tween? I'm going to start calling you Rebecca Black.
Oy yeh! It was such a nice firm created by a few good Jewish boys. Now they are getting into this Suksuk business! What would their bubbies say?
a corner ? you'll be hearing from my staff.
that blond cftc guy
Suksuk is God's work
-L. Tilton
Islamic Bonds = Instruments of C4
Banking rules for the 7th century. Charming.
"Well, Allah the most merciful and beneficent, if you'll look at the contract terms in context, you'll see quite clearly that this isn't interest. It's a fee. What? No, really it's a fee. No, no, look… again, I'll humbly direct your supremely indulgent and divine attention to Section 3, subsection 6…"
I see no problem with this.
- That guy who played Percy from The Green Mile
It's "sukuk" – Got ADD? Ergo your comment is not funny.
Scat!
We have no interest in sukuks. Really.
So let me see if I understand. GS publishes preliminary prospectus listing 8 names of potential advisers. Three of those names claim to be surprised to find themselves on the list. Islamic accounting requires at least three positive opinions. GS claims it has more than three. The final prospectus is not out yet. What's the problem?
That you Sveny ?
Sell me 5 not held
There's nothing unusual in elevating form over substance in financial transactions. Do you know what a sale-leaseback is? Those have been done for decades and are as American as apple pie, but also involve disguising interest as something else. The only difference is that PwC would issue the fatwa in that case.
I have a suggestion. They should add another clause in the indenture as follows: "If the principal amount amount is not redeemed within 10 days following maturity, a Mujahadin will serve punishment at his absolute discretion"
The problem is:
1) this might gives the indication that the three scholars have DISAPPROVED the structure. Hence, it is not in compliance with Sharia
2) Putting the names of three scholars could make Middle Eastern & Malaysian investors buying blindly these sukuk because they *trust* these 3 scholars. So using their names may convey the impression of MISLEADING investors that these scholars have approved the structure.
Oh, I hear ya, I hear ya. Not saying that it isn't done all the time. And that's perfectly fine.
But my point was, either you're GS trying to pull the wool over on the faithful (with the help of some of the faithful, natch), or better, you're the faithful trying to pull the wool over on your deity.
Not to mention Repo 105.
Allahu ackbar!
E&Y Partner
1) The rule is 3 for, not 3 against (according to the reuters article, I'm no sukuk expert).
2) If investors are going to "buy blindly" and not pay attention to what the prospectus actually says (or wait for the final prospectus), may Allah have mercy on them!
see
Hedge Hogs; Gold Man’s Sacks;
“financial terrorist attacks;” and the Obama sellout:
Status Quo “change” we do not believe in.
Blockbuster coming to local theaters soon: You may not
be interested in “Financial Terrorist Attacks,” “Structural Adjustments
Programs,” and “WWIII,” but the Banksters (& their contractors) are
making them interested in you. http://abusalmandeyauddeeneberle.wordpress.com/he…
hear hear
Oh – I will.
LT
Me sucky sucky. Ruv you rong time.
ioHz1J A round of applause for your blog post.Thanks Again. Really Great.
Thank you ever so for you article.Much thanks again. Keep writing.