PhantisOn February 13, 2010 the New York Times published an article titled “Wall St. Helped to Mask Debt Fueling Europe’s Crisis” exposing Goldman Sachs’ secret deals with earlier Greek governments whereby with creative financing through the Wall Street giant Greece was able to conceal billions in debt and stay under deficit thresholds set by the Maastricht Treaty.
In early November 2009 — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.
The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.
Wall St. Helped to Mask Debt Fueling Europe’s Crisis
According to the article, Athens did not pursue the latest Goldman proposal.
That was early November 2009.
On February 25, 2010 the New York Times published an article titled “In Greece’s Crisis, Fed Studies Wall Street’s Activities,” where earlier that day Federal Reserve Bank chairman Ben S. Bernanke in testimony before the Senate Banking Committee told Congress that the Fed was “looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece.”
Mr. Bernanke said the Securities and Exchange Commission was also concerned about how derivatives — financial instruments that are largely unregulated and do not trade on public exchanges — have contributed to Greece’s problems. “Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive,” he said.
The S.E.C., in a statement, said that it could “neither confirm nor deny the existence of an investigation,” but added that it was cooperating with United States and international regulators in examining “potential abuses and destabilizing effects related to the use of credit-default swaps and other opaque financial products and practices.”
Sen. Christopher Dodd, D-Conn., the chairman of the panel, began the hearing by asking Bernanke if he was troubled that financial firms could bet against Greece using credit default swaps. Dodd said he thought the trading added to "a rising atmosphere of crisis."
“The S.E.C., of course, has been interested in this issue,” Mr. Bernanke said in response to questions from Senator Dodd. It is counterproductive, he said, to use “these instruments in a way that potentially destabilizes a company or a country.”
In Greece’s Crisis, Fed Studies Wall St.’s Activities
This is now.
So what happened in between? What prompted the inquiry?
This is a three-year interactive chart in the Wall Street Journal’s website illustrating the “spreads” or premium in percentage points selected euro-zone governments must pay on their 10-year bonds over their German equivalent, the 10-year ‘bund.’
Moving the cursor over a country’s line graph through the timeline one can see the respective spread for that country. If one moves the cursor over the Greek line graph for the period of November 16, 2009 and later, one will notice a skyrocketing of the Greek spreads. Coincidentally, that was around the time Athens had rejected Goldman Sachs’ latest secret proposal.
In it’s defense for the 2001 transaction with Greece, Goldman Sachs in its website states:
The Greek government has stated (and we agree) that these transactions were consistent with the Eurostat principles governing their use and application at the time.
Goldman Sachs Transactions with Greece
This statement leads one to believe that such transactions are no longer “consistent with the Eurostat principles governing their use and application.” So why did the Goldman Sachs team, headed by its president Gary D Cohn, visit Athens in November 2009 and propose a similar transaction, according to the New York Times article? Were they pursuing transactions inconsistent with the Eurostat principles governing their use and application? If not, why then doesn’t Goldman Sachs deny the New York Times report and sue the Times for libel?
But is Greece the only target prompting a Federal Reserve and S.E.C. inquiry?
On February 25, 2010 the Wall Street Journal published an article titled “Hedge Funds Try ’Career Trade’ Against Euro” where some heavyweight hedge funds including titans SAC Capital Advisors LP and Soros Fund Management LLC have launched large bearish bets against the euro in moves that are reminiscent of the trading action at the height of the U.S. financial crisis.
Hedge Funds Try ’Career Trade’ Against Euro
Since the Greek crisis started in mid-November, the value of the euro vis-à-vis the US dollar declined over ten percent. The Journal states:
The euro, which traded at $1.51 in December, now trades around $1.35. With traders using leverage—often borrowing 20 times the size of their bet, accentuating gains and losses—a euro move to $1 (parity) could represent a career trade. If investors put up $5 million to make a $100 million trade, a 5% price move in the right direction doubles their initial investment.
Is the timing here also a coincidence?
Article 123 of the Lisbon Treaty states:
Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
Article 125 of the Lisbon Treaty states:
The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.
As per the Lisbon Treaty, it is clear that there can be no ‘bailout’ of a member state from the European Central Bank or from another member state. Every euro-zone country is on its own. Perhaps Greece with its newly elected government was perceived as the euro-zone’s weakest link and targeted to default on its loan obligations. Such devastating consequences could create contagion issues within the euro-zone as the threat alone has put intense pressure on the euro. Is Greece the laboratory animal of the Gordon Gekkos of Wall Street?
Or was Greece ’punished’ just for saying no?
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