Goldman Sachs managed to lose nearly all of the money it had been given to invest by the Libyan government, which eventually led the giant Wall Street bank to offer shares as compensation that would have effectively made Colonel Gaddafi one of its largest single investors.
The Libyan Investment Authority, a sovereign wealth fund worth tens of billions of dollars into which the Gaddafi administration poured the money it made from oil sales, handed over $1.3bn to the bank in 2008 with a mandate to invest in foreign currency markets and other structured products.
The deal was struck months before the onset of the financial crisis, and sources close to the bank yesterday claimed that the LIA had initially been uninterested when Goldman told it that the value of the investment had lost several hundreds of millions of dollars.
But by early 2009 Goldman Sachs had lost 98pc of what it had been given, according to a report in The Wall Street Journal.
It is believed that senior Goldman Sachs officials were then summoned to Tripoli, and were told that, after losing the cash in just a handful of complex trades, the bank would need to offer some sort of compensation.
The bank alleges that its officials were physically threatened during meetings in Tripoli, but denies that it hired bodyguards for its staff.
Along with several other Western companies, Goldman Sachs was eager to get its hands on some of the newly available Libyan wealth after international sanctions were lifted against the country in 2004.
The LIA was, until the start of the country's civil war this year, feted by the likes of HSBC, JP Morgan and Lehman Brothers as well as Goldman Sachs and other large companies in Europe and the United States.
When Colonel Gaddafi's security forces were ordered to put down pro-democracy demonstrations that began in February, the LIA's assets were frozen.
Goldman Sachs is understood to still hold at least three different accounts containing LIA money; two in its asset management division and one in foreign exchange, a legacy of the initial $1.3bn.
The bank yesterday declined to give details of how much money it was holding, but said that the accounts had been frozen in line with worldwide efforts to throttle the Gaddafi regime.
Such was the scramble to mollify the LIA that talks on how Goldman should appease Colonel Gaddafi's government were held at the highest level of the bank – including the bank's CEO, Lloyd Blankfein, and Michael Sherwood, its leading executive in Europe, the Middle East and Africa.
An offer was eventually made to the regime in Tripoli to take preference shares, a complicated financial instrument that pays a fixed dividend, but which does not necessarily give the holder an equity stake in the bank.
According to sources at Goldman Sachs, talks about how to recompense the Gaddafi regime lasted for more than a year and culminated in a meeting at Goldman Sachs' London headquarters on 23 June last year.
Those sources, who declined to be named, said that the bank has had no contact with the Libyan regime or representatives of the LIA since that meeting.
Goldman Sachs and other companies that have LIA holdings could come under pressure to release the Libyan assets to the National Transitional Council, which a number of countries, including France and Qatar, have recognised as the legitimate government in Libya.
Independent News Service