On Feb. 14, the New York Times revealed in a long piece of investigative journalism that Goldman Sachs, that "great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money," in the words of Matt Taibbi, conspired with Greek authorities over the past decade to "skirt European debt limits" by "obscur[ing] billions in debt from the budget overseers in Brussels." -- "In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books," reported Louise Story, Landon Thomas Jr., and Nelson D. Schwartz. -- "In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money." -- "Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds." -- And Story, Thomas, and Schwartz revealed that as recently as November a team led by Goldman Sachs president Gary D. Cohn flew to Athens to propose more of the same. -- The deals in question, the New York Times said, were "perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt -- the Wall Street term for loans to governments -- is as unfettered as it is vast." -- On Friday, the paper reported that as Greece’s problems deepened and the threat to the global financial system grew, "the Federal Reserve disclosed it was investigating Goldman Sachs and other banks that helped the country mask its debts, and investors grew increasingly leery of lending any more money to a nation flirting with default." -- Nelson Schwartz and Sewell Chan said it was "the first time American regulators will examine the highly profitable if little-known business of supplying custom-made financial instruments to strapped countries on the Continent." -- Sen. Christopher Dodd, the chair of the Senate Banking Committee, characterized actions by Goldman Sachs and JP Morgan as "major financial institutions . . . amplifying a public crisis for private gain.” -- And what did the the giant vampire squid itself have to say? -- "Goldman declined to comment, citing its policy of not addressing legal or regulatory matters." ...
WALL ST. HELPED TO MASK DEBT FUELING EUROPE'S CRISIS
By Louise Story, Landon Thomas Jr., and Nelson D. Schwartz
New York Times
February 13, 2010
Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis, shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.
As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.
Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November -- 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.
Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.
As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase, and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy, and possibly elsewhere.
In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.
Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.
Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.
The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.
A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment.
While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like *Der Spiegel* in Germany.
“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.
Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt -- the Wall Street term for loans to governments -- is as unfettered as it is vast.
“If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.
Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.
Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting.
The tide of fear is now washing over other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain, and Portugal to borrow.
For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.
Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates.
But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.
“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”
In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.
Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.
These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should be disclosed.
The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.
Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”
While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.
George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.
Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.
In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.
In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.
Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.
Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”
IN GREECE'S CRISIS, FED STUDIES WALL ST.'s ACTIVITIES
By Nelson D. Schwartz and Sewell Chan
New York Times
February 26, 2010
Greece’s problems deepened on both sides of the Atlantic as the Federal Reserve disclosed it was investigating Goldman Sachs and other banks that helped the country mask its debts, and investors grew increasingly leery of lending any more money to a nation flirting with default.
Wall Street’s role in the run-up to the debt crisis has generated criticism and calls for an inquiry from European leaders. The Fed examination is the first time American regulators will examine the highly profitable if little-known business of supplying custom-made financial instruments to strapped countries on the Continent.
While Greece’s economic troubles have transfixed world markets for weeks, its problems have snowballed in recent days as workers went to the picket lines to protest budget cuts and the government struggled to raise cash to cover what is Europe’s largest budget deficit. Last year, Greece’s deficit equaled 12.7 percent of gross domestic product.
On Thursday, the Moody’s ratings agency joined Standard & Poor’s in warning that it might downgrade Greek government bonds, a move that would increase the premium Athens must pay to borrow. The move comes at a precarious time for Greece, which must raise 25 billion euros ($34 billion) over the next few months to avoid a sovereign default that officials fear could cause the finances of other weak European economies to collapse.
In a sign of the challenges their nation faces, Greek officials also called off a planned trip to the United States and Asia aimed at interesting new investors in its bonds because of a lack of demand, according to an investment banker who was briefed on the government’s fund-raising strategy.
The European Union has said it would come to Greece’s aid only if it develops a plan to reduce its deficit by March 16, further ratcheting up the pressure.
“Even if they bring the deficit to zero, with interest rates at 6.5 percent and a growth rate of zero at best, Greece’s debt ratio remains on an explosive path,” said Miranda Xafa, a former executive board member at the International Monetary Fund. “I just don’t think they can raise funds from the market now.”
Greece has suffered from large deficits for years, and until now it seemed as if big banks would always be there to bail it out. As far back as 2000 and 2001, Goldman helped Athens quietly borrow billions to mask its poor finances by creating derivatives that essentially transformed loans into currency trades that Greece did not have to disclose under European rules.
Ben S. Bernanke, the Federal Reserve chairman, told Congress Thursday 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 SEC, 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.”
Goldman declined to comment, citing its policy of not addressing legal or regulatory matters. But in a Feb. 21 presentation, Goldman said, “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.” Eurostat is the European Union’s statistics agency.
Goldman is not the only bank that supplied derivatives designed to lower deficits. In the late 1990s, JPMorgan Chase helped Italy reduce its budget gap by swapping currency at a favorable exchange rate. In return, Italy committed to future payments that were not booked as liabilities.
A spokeswoman for JPMorgan said that Italy disclosed all of the deals to Eurostat.
Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the Senate Banking Committee, also took aim at credit-default swaps, which allow banks and hedge funds to wager on whether a company or country might default.
Critics say the swaps have contributed to Greece’s problems and increased the odds of a financial collapse.
“We have a situation in which major financial institutions are amplifying a public crisis for private gain,” he said.
The Fed inquiry was begun about three weeks ago, according to an official involved in the investigation who was not authorized to comment publicly. Fed examiners are focusing on whether Goldman and other banks complied with guidance the Fed issued in 2007 outlining how to manage the risk of complex financial vehicles. The investigation is still in its early stages, he added, as officials sift through records detailing how the derivatives were created, what compliance procedures were followed and what internal analysis was performed. The Fed is also looking at whether Wall Street made additional financial arrangements for Greece that have not been disclosed.
Growing concern over these transactions have made investors more doubtful than ever about the government’s ability to quickly secure tens of billions of euros in new financing it needs to avert default. Greece faces a critical test next week, when it will try to raise about 3 billion euros ($4 billion), through an issue of 10-year bonds.
But with threats of a downgrade to its sovereign debt looming, investors say Greece would need to pay a whopping 7 percent interest rate just to get people to buy. That is almost a percentage point more than the rate investors received in the previous Greek bond sale, in January, and a full 3 percentage points more than Greece’s borrowing cost before the current crisis.
A spokeswoman for the Greek Finance Ministry did not respond to a request for a comment.
The rise in investor skepticism has led Greece to adopt a new financing strategy. Instead of selling debt through public auctions, where the danger of a failed offering could further unnerve markets, it has gone directly to institutional investors, sounding them out in one-on-one meetings, mostly in London.
Bankers and analysts in Athens say there is a debate within the Finance Ministry as to whether the government should go to the market now, or wait until a new menu of changes -- like more taxes and further public sector wage cuts -- is announced, in the hope that such measures will result in lower financing costs.
But a more dire view is already taking hold, according to some bankers, as investors fret that Greece may simply not be able to cover 20 billion euros of debt coming due in April and May, and 53 billion euros for all of the year. It seems unlikely that such a quantity can be raised from investors -- many of them conservative pension funds and insurance companies that are already nursing losses from the 8-billion-euro Greek bond issue in January that was hit by the recent market downturn.
--Landon Thomas Jr. contributed reporting.