How Goldman Sachs Helped Greece to Mask Its True Debt (2010)
spiegel.de
spiegel.de
Of course Goldman Sachs themselves cashed in on the deal immediately, and they probably used their client's money, so for them this has been a "successful trade". Will they ever stop, will they ever be kept accountable for what they do? I fear nothing will happen to them, again.
One thing which should be noted, though. There were two banks that didn't need a bailout back in '08-'09: Goldman Sachs and JP Morgan. They were forced to take the money by none other than Goldman's ex-CEO: Hank Paulson.
They claim that the potential AIG default had been hedged. So what? The AIG securities were hedges in the first place; apparently that doesn't eliminate counterparty risk! If the public had not stepped in, and GS was forced to call upon the next insufficiently-capitalized insurer in the chain, it is likely that party would also have proved insufficient. After enough layers of recursion, eventually GS would have been left holding a bag of some size, and its precious shareholders would have lost some of their money. And that would have been perfectly OK. You can't claim with a straight face that unemployment would be any higher today in that fairer, more just world.
If the Treasury Secretary wasn't a Goldman alumna, there's no way in hell that only the AIG securities held by GS would have been made whole in the way that they were. That is pure corruption, and the verdict of history will be very harsh.
[0] http://www.amazon.com/All-Devils-Are-Here-Financial/dp/15918...
Goldman had CDS against AIG imploding, had CDS-of-CDS against AIG's counterparties imploding, etc., etc. The solution to this hedging problem turns out to be the eigenvector of a CDS/exposure matrix, which is kind of fun.
Anyway... Goldman's bet was that the whole world would not implode. If there had been no bailout of anyone--you're right--everyone would've failed, including Goldman. In this scenario, there's no doubt in my mind unemployment would be higher today. But, given that someone was saved--anyone at all--Goldman turned out just fine. The cost of this hedge was ~$2.5 billion. For this, they were able to recover $10 billion. So, 75 cents on the dollar. More than they deserve!
The real crime has nothing to do with "needing to be bailed out"--this is just the story given to the public--it's the fact that Goldman may have had material nonpublic information about AIG. I think this article sums it up pretty well:
http://www.realclearmarkets.com/articles/2010/01/13/goldman_...
You've turned over another rock to find another example of GS malfeasance, so thanks for the info, but you're wrong about economies in the long term. The fact that GS was backstopped by the public in this case, and that their ownership of Treasury had so much to do with that (now I see why a knucklehead like Geithner was fast-tracked into his current position), will inspire not just GS to keep doing the same thing, but everyone else in the market to emulate them. Next time around, all the amounts will be bigger, maybe even big enough to break the nation, but since everyone at every department and agency will be a puppet of some financial firm, our reaction will be even more corrupt. All because Bush the Lesser didn't have the stones to tell Paulson to go pound sand when he started his high-pressure sales routine. The seeds of future disaster were planted during this pretend disaster.
I've heard all the whining about pension funds and whatnot, but surely they weren't all all-in on GS and its ilk? When the stupid investment banks fail, the big institutional funds might drop 10 or 20%, but life will go on. This is an example of the well-known fact that sometimes securities decrease in value. The services that GS provides, others could provide just as well. The damage that was done to good regulation and fiscal prudence in this nation, will never be fixed.
ps. thanks for resurrecting this thread!
To be fair, Americans aren't the only ones that assume US laws apply everywhere. I had a friend in the British Army military police and he said a few times he had squaddies say something to the effect of "I know my rights, I'm pleading the Fifth",'as if the fifth amendment of the US constitution counts for much in UK military justice. That's the power of Holywood for you.
GS seem to have no problem screwing an entire population to make some profit. They don't care that the Greek or EU people ultimately need to pay for it.
No indeed! I'm convinced (and was taught in Technical University) that you always have responsibility yourself. Bad things [1] happen if you do anything someone asks of you / pays you for.
Let's assume the money is never repaid; at this point it seems likely that at least most of it never will be especially given the enormous haircut private lenders already took. How does that teach GS a lesson? The article even quotes a German noting that CCSs are legal (not that following the law has done much for bankers over the last 10 years). More importantly, what makes you think GS has any net exposure to Greece at this time? The swap was sold on. There is very little Greek debt left in private hands and I doubt that GS would be so foolish as to have any material exposure to it, whether in the form of CCS or anything else. And the buyer of the swap, supposedly a Greek bank per the article, is already a total zombie regardless of this particular asset. Whether Greece defaults on it or not will not be material to its fate.
34 billion, or 12%, seems to be private: http://graphics.wsj.com/greece-debt-timeline/
It seems safe to say that the impact of the Greek default, at least as far as direct financial/economic matters are concerned, is going to be very limited. As far as the private sector is concerned, the damage has already been done.
Argentina has 4 times larger population, though.
And yet there are no consequences to GS, they are not exposed at all.
1. The Greek government that engaged in this transaction was formed following a free and fair election. The CCS was not some dictator's scam.
2. GS didn't screw their customers. If they screwed anyone, it was the buyer of the CCS, a Greek bank, who certainly should have known better. The net result of this trade was that the Greeks screwed themselves; if you think of the trade as a chemical reaction, GS was just a catalyst.
3. The other EU countries also have democratically elected governments that chose to participate in bailing out Greece rather than cutting it loose in the first place. Those same governments also deliberately overlooked not only sketchy off-balance-sheet stuff like this but also rampant overspending and excessive on-balance-sheet indebtedness by EU members both large and small over a period of many years.
The only real sympathy I have is for the anti-EU minority across Europe who keep voting against these scams and keep getting stuck with the bill anyway. But that's the universal failure of democracy for you; it's not only the EU that suffers it.
My earnest hope is that everyone learns not to trust GS at their word, or at all. And then GS can't find buyers.
Hey, I can dream, right?
If not GS then the IMF or some other organization would have been coerced to loan Greece money. Greece has been betting on the idea that the EU could not afford and would not allow them to implode.
When they got called on it they went into blackmail mode. Worse they set up a force failure by locking down bank transfers for the week. This means no one can do business, you cannot pay for what is being shipped and cannot place orders for more. Why would any EU company trust a Greek purchaser to pay now?
What must really happen is Greece must right size their government, pensions, employees, and military, to what they can afford and quit pretending its evil mean bankers that caused their plight. Oh they might have helped by lending money but Greece never would put forth serious effort to constrain spending.
The austerity the claim to suffer is applied the same way all politicians apply political pressure. By depriving those who already have no voice of essential services while making sure they themselves, their cronies, and supporters, don't suffer or as much.
Many sides have had their share in this. The Greek government of this time has made some severe errors. But I see an even bigger share in the EU (also German) politicians of that time (before the Euro was installed). It is a fact, that those politicians sold the Euro to the German population (I guess to others the same way) with the argument, that no country will ever have to pay for an other Euro country. They said, that there are so many security measures installed ...
But the weakest spot in those "security measures" where the politicians themselves. They wanted Greece to be inside the Euro, so they turned a blind eye to any warning signs. Of course they also turned a blind eye to every other country, because according to the "security measures" that where announced, nearly no country would have got the Euro ... (even Germany violated the terms)
So, I see the biggest failure in the politicians, that just wanted to have this adventure -- without really managing the risks ....
It is really an ugly business, and we will see, where all this disaster (the Euro) leads us to. In now 5 years of so-called crisis-management, they even did not manage to "rescue" Greece ... (they just prolonged the pain) and other countries can still become in trouble soon. With a bigger country, the troubles will be proliferated.
For me, the whole case is a (n other) portent of the incapacity of today's politicians.
As I an Irish person, it makes me a bit bitter that ultimately part of whole problem for our economic recession was the Euro interest rates were ultimately too low for the economy we were running in the Celtic Tiger. Around 2003 or so onwards, we needed a higher interest rate to take the steam out of our economy. However, Germany and France had done pretty poorly for so long, we were locked into an interest rate and currency which was being dictated by them.
Ultimately only we are to blame (no one put a gun to our heads and asked us to play real-life Monopoly) and we won't shirk it like other countries (even though we should have thrown a few of the banks and bond-holders to the wall) but it irritates me that these fact is not mentioned more often.
Unfortunately those people that invaded your island back in the days hinder us bit :)
Yes. Hilbert said "Physics is too hard for physicists.". Politics is many order of magnitude harder. I would give one arm for reducing the difficulty of politics to even chemistry hard.
https://en.wikipedia.org/wiki/Angela_Merkel#Background_and_e...
By the way, using a common currency does not require that the debts of those using it should be the responsibility of all who are using that currency. California's debts are California's problem and the problem of those who buy its bonds. Other states aren't obligated to bail it out.
The problem is (as much I understood), that when one Euro country is going bankrupt, this will damage the confidence in the currency as such. But I don't fully understand the reasoning, as I said.
It also could be, that it was the "one and only alternative", because some big German banks would have been severely damaged back then (back then, they held a big amount of the Greek debts) ... Today, only the tax payers will be damaged, what is not so bad ...
French and German banks had bough Greek bonds. France and Germany didn't want their banks to default, even though the banks had made these bad investments.
That's the only way a bank will learn to properly weigh benefits versus risks. If they get bailed out whenever a bad risk blows up, they won't learn to avoid or charge rates appropriate to the level of risk.
And depositors should also think twice about where they put their money.
If we want banks that don't default, we should have banks that only issue mortgages for less than 80% of a home's pre-bubble price. Let the buyer or another lender be on the hook for the risky part of the loan.
And if this bank fails, let its assets be turned over to a corporation owned by all the depositors, whose shares they can buy and sell. There's no reason to make the taxpayers pay to recapitalize the bank and keep the unwise bankers in business.
If there's a demand for that level of risk and the low rates it pays, that will solve the problem who want that level of security.
But we want to be insulated from risks and have them spread around to other people when dumb investments blow up. So even wise investors are stuck paying the costs. And we DO eventually have to face these costs despite all the borrowing and money creation we do to paper them over.
The lenders were greedy, so they looked the other way and hoped their high-risk bets would pay off before things went south.
Deceit isn't really relevant here. The lenders consisted of hedge funds, major banks, large pension funds, and other financial entities. We're not talking about retail investors here, but people who had plenty of experience in sniffing out this kind of fraud. The bottom line is that they didn't bother: they looked at the eurozone membership and bloated ratings and pulled the trigger for an extra few basis points. After that went to hell, the official-sector lenders, who employ endless ranks of PhDs and ex-bankers to help them set policy and make financing decisions, stepped in and lent the Greeks even more money on ultra-sweetheart terms. Now that money is not going to be repaid, either. Who would have expected that outcome? Oh, right... everyone.
Really, at what point are we supposed to feel sorry for any of these people? I can't. With the exception of whatever tiny number of Greek citizens have steadfastly and publicly refused to support their government's choices, not only today but dating back to the go-go 2000s, every single player in this pathetic drama has gotten what they deserve. You can try to make this into some BS class-warfare thing, you can try to make it about left-right or broken EU politics or any number of other things, but what it really boils down to is persistent, pernicious greed coupled with persistent stupidity of spectacular magnitude. There's nothing else here, nothing to debate or cast aspersions over. Just greed and stupidity. Don't try to make it about anything else.
That is exactly who the current Greek Government is.
These decisions ware made immediately after the cold war ended by representatives that were raised by parents that killed each other in a world war. European integration and the Euro are highly connected with the 2 + 4 talks [0] and German unity [1]. Europe would look very different if these politicians had not taken the risk and united it.
[0]: https://en.wikipedia.org/wiki/Treaty_on_the_Final_Settlement...
[1]: http://www.spiegel.de/international/germany/the-price-of-uni...
Might be, that part of it was because of the will to unite Europe, but it was from the beginning at least "well meant, but very badly executed".
What we have seen in the last five years, was growing resentment between Southern- and Middle-Europe because of the Euro. The "unity" of Europe is more endangered by the Euro, than rescued, as much I see now.
Idealistic goals can not make up for lies (about the security of the Euro, where no measures where really taken serious) and extreme poor execution. Some countries where taken in the Euro, just because some countries wanted to counter the influence of Germany. That is not idealistic, but purely old, dirty power politics.
Sounds like Eurostat needs to hire some smarter people.
And for selling military equipment to Greece: http://www.theguardian.com/world/2012/apr/19/greece-military...
You're right, they knew but they didn't care.
too much leverage leads to an insolvent society, just as too much debt leads to an insolvent individual.
the history of the world is largely intertwined with stories of debt------who is under the control of whom else?
the answer to too much monetary debt is always monetary debasement. as the money supply is turned to toilet paper, as we have seen in the 20th century with zimbabwe and other countries------------the answer is that societies reform themselves.
the result is other types of debt and relationships arise to fill the gap, while poverty sweeps over the nation.
no financial trickery can solve this problem, at best one can hope to mitigate it.
firms like goldman sachs seek to exaccerbate it as financialization is rooted in crisis capitalism, generating and encouraging crisis in order to take advantage of it.
the entire wall street edifice has transititoned over the years from semi responsible stewards of financial wealth, to a parasitic casino that is built upon the practice of crisis capitalism, bribery and price manipualtion.
Why do these guys have a banking license in the EU?
GS are a symptom, not a cause. They have a license is because they did and do what the people in power wanted, and until you can come up with a way to change the people in power and the incentives they have to stay there...
This article doesn't really explain much (other than that GS has savvy bankers which is nice to know)
As an outsider, I am shocked by the hullaballoo going on to keep Greece in the EU. Why not let them reap what they sowed, as a nation?
Anyway, Greece does not want to get out because on the EU they can travel and commercialize. That's the easy one.
Germany and the other creditors, by their side, do not want it because Greece may not pass trough that anarchy you talk about, but instead may get at the other side better than it is now. If that happens, the EU and their own economies are gone.
There's a lot of debate about Greece and the euro, and while the current Greek government was elected on a platform of staying in the Euro, right now Greece is rapidly heading towards being ejected from it. But there's no real prospect (for now, anyhow) of them leaving the EU.
> why it would be a bad idea to just kick Greece out of the EU?
If you mean the EU, well, nobody really wants them to exit the Euro, but nobody wants them to exit the EU. It would also be ridiculously illegal; there's literally no process by which a country might be ejected.
If you mean the Euro, well, that's an interesting question. The general consensus is that Greek exit would hurt the remaining members and Greece fairly severely; a real case of cutting off your nose to spite your face. Some have suggested (and I agree) that a Greek exit would be worse for the remaining Euro-members than it would be for Greece.
> What's wrong with some good old anarchy
We're talking about people lives; pensions, savings, jobs, dreams. I don't think your flippancy is really appropriate. In any case the victims of a Greek exit won't be politicians and bankers; it will be ordinary people, in and outside of Greece.
> lynching a few dozen former politicians who led the Greeks to this abyss
I don't think you understand politics.
> Why not let them reap what they sowed
For EU leaders, this isn't about Greece, it's about the Euro and the greater project of European integration. They don't want Greece out of the Euro, and they sure as hell don't want them out of the EU. What they want is to keep Greece in the EU, without pissing off their voters too much. It looks like, at the moment, Greece will exit the EU despite what people want.
However, this looks like a terrible mess that will, more likely than not, result in a humanitarian crisis of mythological scale, visited upon the poorest and weakest members of Greek society. So why don't EU states let Greece have that much needed meltdown, but use their money to aid those most in need during the ensuing crisis? I mean, by your analysis, no one culpable takes the fall. And who is culpable, if not the politicians in power over the past decade?
The average Greek in the streets is more likely to blame German politicians than their own, so no revolution is likely. (And I'm not sure they'd be wrong either.)
> result in a humanitarian crisis of mythological scale, visited upon the poorest and weakest members of Greek society.
Honestly, I'm not sure it'll be much worse than what's already happened. The "internal devaluation" Greece has been forced to weather has been brutal, to the point that default and a "real" devaluation offers real hope of improvement.
> So why don't EU states let Greece have that much needed meltdown, but use their money to aid those most in need during the ensuing crisis?
The entire issue is that the rest of the EU (including some parts which are actually poorer than Greece, and have zero moral obligation to be sympathetic) really has no interest in spending their money to continue aiding Greece. Their voters, especially, do not. If they did, Greece wouldn't be heading towards default and exit of the Euro. But they don't, and as such, I don't think there's any good solution here.
In retrospect, Greece should never have joined the Euro.
Problems with kicking Greek out of the Euro are:
- Greece is reliant on Russian gas. How are they going to pay for that? A weaker currency would make this problem worse. The often told story, that their exports would become cheaper does not apply very much, when your biggest company is a betting office.
- When Greece leaves with the option to get back in, countries like Portugal, Italy, Spain and even France would have much less pressure to consolidate their state finances.
- The Euro is not just a currency - it is a step towards European integration. With Russia biting of parts in the East, we cannot compensate to be set back this much.
And last but not least: I use this currency to pay my rent, do not fuck it up!