May 24, 2013
It’s Greek to Goldman Sachs
Posted on Feb 17, 2010
Editor’s note: An earlier version of this column incorrectly stated that Greece joined the European Union in 2001. As our diligent readers have pointed out, Greece joined in 1981. The author meant that Greece joined the European Monetary Union of the EU in 2001, when it adopted the euro.
“What is this Goldman Sachs and why has it caused us so much grief?” is a question they must be asking in even the most remote of Greek villages, as they are throughout much of this economically troubled world. The Greek financial scandal in which Goldman Sachs stands accused of selling dubious derivatives that concealed enormous government debt has sent the Greek economy and European markets into a tailspin. But that’s just part of a made-in-the-USA banking hustle that has haunted folks at home and abroad.
At the heart of the worldwide banking meltdown are those mysterious unregulated derivatives that Goldman and JPMorgan led the way in selling. But Greece’s case did not involve the usual questionable mortgages packaged into derivatives with credit default swaps backing them up, but rather expected revenue on airport fees and other potential sources of the cashed-strapped government’s future income.
As The New York Times headlined it: “Wall St. Helped to Mask Debt Fueling Europe’s Crisis.” The story described the scam succinctly: “As in the American subprime crisis and the implosion of 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. ... Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.”
As a result of such shenanigans back in 2001, Greece was allowed to join the Economic and Monetary Union of the European Union while running up enormous debt that went undetected. Greece’s neighbors will now be forced to bail it out, much as U.S. taxpayers have done for banks as a result of the scams Goldman and other financial houses pulled off in this country. The common denominator is that the packagers of the collateralized debt securities, be they based on subprime mortgages or government airport fees, have no real interest in the integrity of the packages, for they will balance them out with credit default swaps that pay off when the assets prove toxic. And they will make their lucrative commissions coming and going, no matter what goes wrong. Even after all the trouble in Greece, Goldman President Gary D. Cohn was back in that country last November with a new derivative scam based on potential revenue from Greece’s health care system.
He got that right. The financial sector was and is responsible, but it still resists increased transparency and other necessary regulations over the derivatives that gamblers like Paulson themselves don’t understand. As Peter Eavis writes in The Wall Street Journal: “How many more crises will it take? The Greek emergency is a reminder of how little has been done to fix large, potentially unstable parts of the financial system. ... The banking lobby is resisting efforts to overhaul the $605 trillion market for derivatives that don’t trade on exchanges.”
The U.S. comptroller of the currency estimates that Goldman Sachs has a derivative “credit exposure” that is a whopping 858 percent of its risk-based capital and that JPMorgan Chase is in second place at 290 percent. That statement calls into question the savvy of President Obama, who crowed just last week in defense of Goldman CEO Lloyd Blankfein and Jamie Dimon, his old Chicago buddy who heads JPMorgan Chase, “I know both those guys; they are very savvy businessmen.” Tell it to the Greeks.
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