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Greece an ideal Goldman client; profitable, culpable

February 16, 2010

Goldman Sachs has a lot to be thankful for – huge bonuses, massive taxpayer subsidies, unrivalled political influence – but in Greece they have finally found nirvana: a highly profitable business partner who can also credibly serve as the villain in the piece.

Goldman is widely reported to have arranged a swap transaction for Greece early in the last decade structured in such a way as to provide the country with $1 billion upfront in exchange for higher payments much later.

That later bit is key – it helped to mask over-borrowing by Greece from the euro zone’s budget watchdogs in Brussels, not to mention from Greek taxpayers and the buyers of Greek debt, all of whom have a right to fully understand the risks of a country incurring liabilities which perhaps it may struggle to repay.

Greece’s deficit has grown to such a size as compared to its ability to generate revenue that it will now require a rescue package from its euro zone partners, or if not may face the dire possibility of a default or exit from the currency union.

Other banks, mind you, are likely to have facilitated similar deals, and if they didn’t I’m betting it wasn’t for lack of trying.

The New York Times has reported that Goldman arranged other deals for Greece, the common denominator of which seems to have been getting money upfront.

Greece paid Goldman about $300 million in fees for a 2001 deal that helped it borrow “billions,” according to the Times, a set of figures that implies this deal was either enormously large, fantastically complex or that Greece was, shall we say, price insensitive.

Goldman has been pilloried, often rightly, for its role in the crisis, and its presence at this particular road traffic accident is an invitation to construct a story line in which once again evil bankers loot and pillage their way through society.

That would be wrong. Greece has to shoulder its own blame. It borrowed too much and did some of it in costly ways whose principal benefit seems to have been obscurity. It is one thing for a badly educated Californian to blame a bank for lending her ten times her income to buy a house, it is quite another when we are talking about a country, not to mention one within the euro.

LEGAL AT THE TIME
“We’re trying to change the course of the Titanic,” Greek Finance Minister George Papaconstantinou said ahead of meeting with euro zone finance ministers in Brussels on Monday. “People think we are in a terrible mess. And we are.”

Asked about a European Commission claim that Greece had not told the EU about the deals arrange by Goldman Sachs, Papaconstantinou said: “The kind of derivatives contracts reported by some newspapers were legal at that time. Greece was not the only country to use them.”

Get that – “Titanic,” “mess,” “legal at the time.” You really can’t make this kind of stuff up.

I’m not saying that someone who structured one of these deals does not deserve to take a loss, or that the derivative market does not need better disclosure. All of this is true.

Greece, though, is a grown up nation and the way in which it mismanaged its finances are its own responsibility. The primary problem in this particular slice of the ongoing financial scandal is the dysfunctional way in which the euro zone works.

When it comes to sovereign nations, you cannot expect banks to impose fiscal discipline, much less to make nations deal honestly and openly with one another. Nor can you expect a bank to serve as a policeman of a nation on behalf of its taxpayers.

It would be enormously satisfying on one level if banks which structured or invested in these deals took losses as a result of a Greek default. Those who did the structuring are likely to have sold off their exposure to others anyway, and a Greek default, though perhaps deserved, is not very likely. The consequences for Greece, for the euro zone and for investors would be too dire.

As for investors in Greek debt, again the Greek government has the primary responsibility for disclosure. Of course if Goldman or another bank had material information about the state of Greece’s finances it should be obliged to disclose this to buyers of that exposure.

The logic of the euro zone, which has no exit mechanism, is such that many investors quite conceivably would have bought Greek exposure anyway on the expectation of the bailout they are about to benefit from.

There is a hierarchy of responsibilities, and countries in the end have to come higher than banks.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

Comments
21 comments so far | RSS Comments RSS

“There is a hierarchy of responsibilities, and countries in the end have to come higher than banks.”

We’re all screwed!

Posted by csodak | Report as abusive
 

Thre is no consideration given in your article of the obvious.. that Baksheesh is acceptable practice in Greece since the Ottaman times many centuries ago and that Goldman is not averse to Baksheesh for “value received” as long as it is opaque, can be “bundled” into the “transaction”, and is “legal”, no matter how borderline..

Posted by Bludde | Report as abusive
 

There is no consideration given in your article for the obvious.. that Baksheesh is acceptable practice in Greece since the Ottaman rule many centuries ago and that Goldman is not averse to Baksheesh for “value received” as long as it is opaque, can be “bundled” into the “transaction”, and is “legal”, no matter how borderline..

Posted by Bludde | Report as abusive
 

If I was a government official, I would just slaughter Goldman Sachs. There is probably much more dirt to come, and no politician in his right mind would like to become so exposed. Best prescription: make up some reason and kill Goldman now. Impose 300 billion in some fees, for example, due immediately. My 2 cents…

Posted by Ananke | Report as abusive
 

So surely an innocent little securities company like G$ couldn’t possibly have known that they were peddling poison to Greece. I’m sure we should start having sympathy for heroine dealers too, after all, as long as their customers are grown ups and all.

Posted by Sinestar | Report as abusive
 

Why all the blame on GS? Wasn’t Greece that was asking for the money?

Posted by nadanadanada | Report as abusive
 

Why do post-event discussions centre around what caused the issue instead of how to get out of mess? Should Greece look towards IMF for help? It may challenge EU’s strength but might be most amicable solution.

Posted by samsing | Report as abusive
 

Both sides are obviously to blame, the corrupt and incompetent greek governments as well as the greedy and possibly corrupt bankers (it will be interesting to see if any whistle blowers on kick-backs come forth). What is however even more interesting is first the incompetent way the crisis has so far been handled from both the EU and Greece with both sides improvising without a script and without really understanding the psychology of the markets (hardly any politician in Greece has the necessary financial or management experience)and second the consequences of very tough austerity measures, if they are in fact taken: Greece will fall into severe recession and it won’t take long before major companies (construction, services, industry) or even banks start to collapse leading to both political unrest, wider financial repercussions and a vicious circle. Greece needs a total bail-out and a fundamental restructuring of its economy without a complete collapse in demand. The EU (Germany, France, etc)cannot sell a bail-out to their public. So what remains is either unilateral default and debt restructuring (doubtful if that can be accomplished with Greece inside the Eurozone)or the IMF. An exit from the Eurozone will be a terrific blow for Greece (probably cannot be politically/socially absorbed by the country), so they will do all they can to avoid it and therefore an IMF solution with visible EU support seems the most likely outcome. If the can impose haircuts on creditors so much the better.

Posted by indus | Report as abusive
 

The right thing is Greece to default, which is not politically and socially acceptable though. So, everybody obviously will bail them out, with taxpayers’ money, for the sake of social stability. However, why Goldman should be left unpunished and re-paid? The people want to see somebody hanged /since the Roman empire this always helps against crisis/, and the most suitable for the rope is Goldman. My point – now is EXACTLY the best time that to happen.

Posted by Ananke | Report as abusive
 

while Sarko is ready and willing to write a check on French taxpayers accounts, Merkel refuses to even discuss. Given the antipathy expressed by major German newspapers in editorials, Germany is out… However, it isn’t Greece that threatens the Euro. Most of the heavies have offset their CDS positions and are eyeing even bigger fish, the barracuda called Espana.. wondering why Finance Minister Elana, alone amongst all of the EU FM’s, found it imperative to run to London, Brussels, and Paris, to “discuss” the Greece Sit with Sarko/Trichet, both Frenchmen, and to express Spains support for Greece. Spain is weak, huge trillion plus debts, recession, 20% unemployment, and a spineless prime minister at the helm. Within 6 weeks Greece will be passe as Espana becomes the target. Those shenanigans (real estate/construction) on the books of banks like Santander will be exposed and Merkel will then be forced to take a stand, as German bank exposure to Spain becomes an issue.. One easy solution is to pass some mandatory EU rules on retirment age, health care etc.. so that Spain, Greece et al can blame the EU and pass the stringent rules..

Posted by Bludde | Report as abusive
 

Goldman KNEW what a mess Greece had on their hands and they even lobbied INDIVIDUAL poloticians and govt. officials to take dangerous steps to fool the E.U. to gain entry.

Goldman Suchs MUST be fined into Oblivion!!!!!

Posted by KirkD | Report as abusive
 

It’s crazy to say that only one party should be policed here. Countries that deliberately obscure their finances should bear the cost of markets no longer trusting them. Likewise investment banks that deliberately obscure a borrower’s liabilities by simply naming them something else should lose their banking license.

To do otherwise is to buy into the bankers’ mantra that it’s only the borrowers to blame, not the lawyers, bankers and accountants that helped those borrowers cheat the due diligence and financial valuation process of investors.

One of the core failing of the derivatives meltdown was that regulators allowed what were really insurance contracts on financial instruments to go unregulated, simply because the banks chose to name them “swaps.” It wasn’t credit insurance . . . it was a “swap!” Imagine a drug dealer pleading not guilty under the defense of, “It wasn’t cocaine . . . it was nose candy!”

To properly regulate and police something as complex as the banking system, and the finances of a country, requires that parties at all levels be held accountable. This includes the banks, the accountants and the law firms. No one should be allowed to weasel out on a technicality, or by simply calling a liability by a different name.

Posted by PapaDisco | Report as abusive
 

“… badly educated Californian …”

I love the passive voice here. The subprime debacle was the result of inadequate school funding.

More like: stupid is as stupid does.

Posted by Mega | Report as abusive
 

I just wonder how many more are out there. Time for the US government to clean up our financial mess before our ship sinks.

Posted by fred5407 | Report as abusive
 

Enough already. I decree that Greece should default. So let it be written, so let it be done!

Posted by vinman1 | Report as abusive
 

Greece is at fault 100% from 2001 onward. I have lived and worked and invested in Greece and i have witnest 1st hand the currupt, greedy and selfinterest government officials who dont care at all about the people or EU regulations but how to get monies in their pockets for luxury goods and how to make sure that their families can milk the cow until the end of time. Greece is in trouble even before 2001 and now its time to pay. Its about time but too bad that the Greeks will pay the bill for the currupt politicians ONCE MORE!

Posted by Trikeriotis | Report as abusive
 

Why was the EU created? What are the benefits? From my brief research, Greece has been a huge beneficiary of this union for many years. I find it a bit ridiculous that they can make this deal without the rest of the union knowing. It seems basic, to me, that the other nations tied to the economy would have knowledge of such transactions, or at least should have. Why would Germany want to be linked to economies like Greece and Portugal?
I feel that it is the EU’s responsibility to help Greece at this point. I really don’t understand the EU fundamentals and will certainly educate myself after this.
Goldman should just take the loss with no penalty and the EU nations take control of the Greek economy.

Posted by mug1sy | Report as abusive
 

Sad to say but America is on the same course for the simple reason that the bailout/stimulus/recovery act or whatever they call it nowadays was nothing more than a bandaid. As someone said, until a fundamental restructuring of the economy is undertaken, America will face similar if not worse collapse.

GS again huh?

Posted by NiiOdartey | Report as abusive
 

James Saft has failed to mention one major detail about Greece in his article – The 3% budget deficit constraint that every member country of the Euro-zone has to abide by was not set yesterday – it was set back in 1999 when the Euro-zone was created and it was the prime condition to be satisfied for any country that wanted to become a member of the Euro-zone. With all the data coming out into the light, it is clear that Greece never met that precondition. They were able to “mask” the true state of their finances by securing deals from Goldman and others that Saft is talking about. Those deals were made on Greece’s own request and not the other way around. Greece cheated their way into the Euro-zone and now have the whole system held hostage to the crisis caused by their lavish government spending. Greece is perennially one of the biggest arms buyers in the world spending several tens of billions on various expensive weapons systems anally, while being a NATO member since 1949 with continuous NATO and US presence on its soil throughout the cold war. They were locked in decades-long arms race with – Turkey of all countries, another NATO member. Correct me if I am wrong, but to me personally seems totally impossible that two NATO members would ever be engaged in a war against each other. NATO is supposed to be a collective security system. The Greeks are plagued by an irrational mentality which is the only explanation of how they managed to amass a national debt of 170% their GDP. Now that the chickens have come home to roost, Greece wants a bailout. I don’t think it’s gonna happen. There is no way they are going to persuade anybody inside EU to land them money, specially since now everyone knows how they became a member of the Euro-zone in the first place. They are headed for a default and a major restructuring of not only their economy, but their elitist mentality as well.

Posted by AlexZ83 | Report as abusive
 

Why are G$ liable to be tarred, feathered, boiled in oil etc., as bankers they have a duty to their employer, not to divulge their financial transactions.
The wheeling and dealings of the Greek Government are their responsibility.
Also, the EU was meant to keep an eye on all members financial wheeling and dealing.

Posted by The1eyedman | Report as abusive
 

Let Greece to default, and the bankers eat the losses. This is going to be a bloodless revolution. Russia survived a bloody Bolshevik revolution, Hitler came and went. Greece will survive.All parties involved will learn a lesson, good for the next 49 years. Hopefully Americans will also learn something new.

Posted by jlpeng | Report as abusive
 

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