How Goldman Sachs Helped Create the Greek Debt Crisis
http://www.truthdig.com/report/item/how_goldman_sachs_profited_from_the_gree
k_debt_crisis_20150717/
Posted on Jul 17, 2015
By Robert Reich
The Goldman Sachs Tower in Jersey City, N.J. (Paulm27 / CC BY-SA 3.0)
Editor's note: This article was originally published in The Nation.
The Greek debt crisis offers another illustration of Wall Street's powers of
persuasion and predation, although the Street is missing from most accounts.
The crisis was exacerbated years ago by a deal with Goldman Sachs,
engineered by Goldman's current CEO, Lloyd Blankfein. Blankfein and his
Goldman team helped Greece hide the true extent of its debt, and in the
process almost doubled it. And just as with the American subprime crisis,
and the current plight of many American cities, Wall Street's predatory
lending played an important although little-recognized role.
In 2001, Greece was looking for ways to disguise its mounting financial
troubles. The Maastricht Treaty required all eurozone member states to show
improvement in their public finances, but Greece was heading in the wrong
direction. Then Goldman Sachs came to the rescue, arranging a secret loan of
2.8 billion euros for Greece, disguised as an off-the-books "cross-currency
swap"-a complicated transaction in which Greece's foreign-currency debt was
converted into a domestic-currency obligation using a fictitious market
exchange rate.
As a result, about 2 percent of Greece's debt magically disappeared from its
national accounts. Christoforos Sardelis, then head of Greece's Public Debt
Management Agency, later described the deal to Bloomberg Business as "a very
sexy story between two sinners." For its services, Goldman received a
whopping 600 million euros ($793 million), according to Spyros Papanicolaou,
who took over from Sardelis in 2005. That came to about 12 percent of
Goldman's revenue from its giant trading and principal-investments unit in
2001-which posted record sales that year. The unit was run by Blankfein.
Then the deal turned sour. After the 9/11 attacks, bond yields plunged,
resulting in a big loss for Greece because of the formula Goldman had used
to compute the country's debt repayments under the swap. By 2005, Greece
owed almost double what it had put into the deal, pushing its off-the-books
debt from 2.8 billion euros to 5.1 billion. In 2005, the deal was
restructured and that 5.1 billion euros in debt locked in. Perhaps not
incidentally, Mario Draghi, now head of the European Central Bank and a
major player in the current Greek drama, was then managing director of
Goldman's international division.
Greece wasn't the only sinner. Until 2008, European Union accounting rules
allowed member nations to manage their debt with so-called off-market rates
in swaps, pushed by Goldman and other Wall Street banks. In the late 1990s,
JPMorgan enabled Italy to hide its debt by swapping currency at a favorable
exchange rate, thereby committing Italy to future payments that didn't
appear on its national accounts as future liabilities.
But Greece was in the worst shape, and Goldman was the biggest enabler.
Undoubtedly, Greece suffers from years of corruption and tax avoidance by
its wealthy. But Goldman wasn't an innocent bystander: It padded its profits
by leveraging Greece to the hilt-along with much of the rest of the global
economy. Other Wall Street banks did the same. When the bubble burst, all
that leveraging pulled the world economy to its knees.
Even with the global economy reeling from Wall Street's excesses, Goldman
offered Greece another gimmick. In early November 2009, three months before
the country's debt crisis became global news, a Goldman team proposed a
financial instrument that would push the debt from Greece's healthcare
system far into the future. This time, though, Greece didn't bite.
As we know, Wall Street got bailed out by American taxpayers. And in
subsequent years, the banks became profitable again and repaid their bailout
loans. Bank shares have gone through the roof. Goldman's were trading at $53
a share in November 2008; they're now worth over $200. Executives at Goldman
and other Wall Street banks have enjoyed huge pay packages and promotions.
Blankfein, now Goldman's CEO, raked in $24 million last year alone.
Meanwhile, the people of Greece struggle to buy medicine and food.
There are analogies here in America, beginning with the predatory loans made
by Goldman, other big banks, and the financial companies they were allied
with in the years leading up to the bust. Today, even as the bankers
vacation in the Hamptons, millions of Americans continue to struggle with
the aftershock of the financial crisis in terms of lost jobs, savings, and
homes.
Meanwhile, cities and states across America have been forced to cut
essential services because they're trapped in similar deals sold to them by
Wall Street banks. Many of these deals have involved swaps analogous to the
ones Goldman sold the Greek government. And much like the assurances it made
to the Greek government, Goldman and other banks assured the municipalities
that the swaps would let them borrow more cheaply than if they relied on
traditional fixed-rate bonds-while downplaying the risks they faced. Then,
as interest rates plunged and the swaps turned out to cost far more, Goldman
and the other banks refused to let the municipalities refinance without
paying hefty fees to terminate the deals.
Three years ago, the Detroit Water Department had to pay Goldman and other
banks penalties totaling $547 million to terminate costly interest-rate
swaps. Forty percent of Detroit's water bills still go to paying off the
penalty. Residents of Detroit whose water has been shut off because they
can't pay have no idea that Goldman and other big banks are responsible.
Likewise, the Chicago school system-whose budget is already cut to the
bone-must pay over $200 million in termination penalties on a Wall Street
deal that had Chicago schools paying $36 million a year in interest-rate
swaps.
A deal involving interest-rate swaps that Goldman struck with Oakland,
California, more than a decade ago has ended up costing the city about $4
million a year, but Goldman has refused to allow Oakland out of the contract
unless it ponies up a $16 million termination fee-prompting the city council
to pass a resolution to boycott Goldman. When confronted at a shareholder
meeting about it, Blankfein explained that it was against shareholder
interests to tear up a valid contract.
Goldman Sachs and the other giant Wall Street banks are masterful at selling
complex deals by exaggerating their benefits and minimizing their costs and
risks. That's how they earn giant fees. When a client gets into
trouble-whether that client is an American homeowner, a US city, or
Greece-Goldman ducks and hides behind legal formalities and shareholder
interests.
Borrowers that get into trouble are rarely blameless, of course: They spent
too much, and were gullible or stupid enough to buy Goldman's pitches.
Greece brought on its own problems, as did many American homeowners and
municipalities.
But in all of these cases, Goldman knew very well what it was doing. It knew
more about the real risks and costs of the deals it proposed than those who
accepted them. "It is an issue of morality," said the shareholder at the
Goldman meeting where Oakland came up. Exactly.
http://www.truthdig.com/ http://www.truthdig.com/
How Goldman Sachs Helped Create the Greek Debt Crisis
http://www.truthdig.com/report/item/how_goldman_sachs_profited_from_the_gree
k_debt_crisis_20150717/
Posted on Jul 17, 2015
By Robert Reich
The Goldman Sachs Tower in Jersey City, N.J. (Paulm27 / CC BY-SA 3.0)
Editor's note: This article was originally published in The Nation.
The Greek debt crisis offers another illustration of Wall Street's powers of
persuasion and predation, although the Street is missing from most accounts.
The crisis was exacerbated years ago by a deal with Goldman Sachs,
engineered by Goldman's current CEO, Lloyd Blankfein. Blankfein and his
Goldman team helped Greece hide the true extent of its debt, and in the
process almost doubled it. And just as with the American subprime crisis,
and the current plight of many American cities, Wall Street's predatory
lending played an important although little-recognized role.
In 2001, Greece was looking for ways to disguise its mounting financial
troubles. The Maastricht Treaty required all eurozone member states to show
improvement in their public finances, but Greece was heading in the wrong
direction. Then Goldman Sachs came to the rescue, arranging a secret loan of
2.8 billion euros for Greece, disguised as an off-the-books "cross-currency
swap"-a complicated transaction in which Greece's foreign-currency debt was
converted into a domestic-currency obligation using a fictitious market
exchange rate.
As a result, about 2 percent of Greece's debt magically disappeared from its
national accounts. Christoforos Sardelis, then head of Greece's Public Debt
Management Agency, later described the deal to Bloomberg Business as "a very
sexy story between two sinners." For its services, Goldman received a
whopping 600 million euros ($793 million), according to Spyros Papanicolaou,
who took over from Sardelis in 2005. That came to about 12 percent of
Goldman's revenue from its giant trading and principal-investments unit in
2001-which posted record sales that year. The unit was run by Blankfein.
Then the deal turned sour. After the 9/11 attacks, bond yields plunged,
resulting in a big loss for Greece because of the formula Goldman had used
to compute the country's debt repayments under the swap. By 2005, Greece
owed almost double what it had put into the deal, pushing its off-the-books
debt from 2.8 billion euros to 5.1 billion. In 2005, the deal was
restructured and that 5.1 billion euros in debt locked in. Perhaps not
incidentally, Mario Draghi, now head of the European Central Bank and a
major player in the current Greek drama, was then managing director of
Goldman's international division.
Greece wasn't the only sinner. Until 2008, European Union accounting rules
allowed member nations to manage their debt with so-called off-market rates
in swaps, pushed by Goldman and other Wall Street banks. In the late 1990s,
JPMorgan enabled Italy to hide its debt by swapping currency at a favorable
exchange rate, thereby committing Italy to future payments that didn't
appear on its national accounts as future liabilities.
But Greece was in the worst shape, and Goldman was the biggest enabler.
Undoubtedly, Greece suffers from years of corruption and tax avoidance by
its wealthy. But Goldman wasn't an innocent bystander: It padded its profits
by leveraging Greece to the hilt-along with much of the rest of the global
economy. Other Wall Street banks did the same. When the bubble burst, all
that leveraging pulled the world economy to its knees.
Even with the global economy reeling from Wall Street's excesses, Goldman
offered Greece another gimmick. In early November 2009, three months before
the country's debt crisis became global news, a Goldman team proposed a
financial instrument that would push the debt from Greece's healthcare
system far into the future. This time, though, Greece didn't bite.
As we know, Wall Street got bailed out by American taxpayers. And in
subsequent years, the banks became profitable again and repaid their bailout
loans. Bank shares have gone through the roof. Goldman's were trading at $53
a share in November 2008; they're now worth over $200. Executives at Goldman
and other Wall Street banks have enjoyed huge pay packages and promotions.
Blankfein, now Goldman's CEO, raked in $24 million last year alone.
Meanwhile, the people of Greece struggle to buy medicine and food.
There are analogies here in America, beginning with the predatory loans made
by Goldman, other big banks, and the financial companies they were allied
with in the years leading up to the bust. Today, even as the bankers
vacation in the Hamptons, millions of Americans continue to struggle with
the aftershock of the financial crisis in terms of lost jobs, savings, and
homes.
Meanwhile, cities and states across America have been forced to cut
essential services because they're trapped in similar deals sold to them by
Wall Street banks. Many of these deals have involved swaps analogous to the
ones Goldman sold the Greek government. And much like the assurances it made
to the Greek government, Goldman and other banks assured the municipalities
that the swaps would let them borrow more cheaply than if they relied on
traditional fixed-rate bonds-while downplaying the risks they faced. Then,
as interest rates plunged and the swaps turned out to cost far more, Goldman
and the other banks refused to let the municipalities refinance without
paying hefty fees to terminate the deals.
Three years ago, the Detroit Water Department had to pay Goldman and other
banks penalties totaling $547 million to terminate costly interest-rate
swaps. Forty percent of Detroit's water bills still go to paying off the
penalty. Residents of Detroit whose water has been shut off because they
can't pay have no idea that Goldman and other big banks are responsible.
Likewise, the Chicago school system-whose budget is already cut to the
bone-must pay over $200 million in termination penalties on a Wall Street
deal that had Chicago schools paying $36 million a year in interest-rate
swaps.
A deal involving interest-rate swaps that Goldman struck with Oakland,
California, more than a decade ago has ended up costing the city about $4
million a year, but Goldman has refused to allow Oakland out of the contract
unless it ponies up a $16 million termination fee-prompting the city council
to pass a resolution to boycott Goldman. When confronted at a shareholder
meeting about it, Blankfein explained that it was against shareholder
interests to tear up a valid contract.
Goldman Sachs and the other giant Wall Street banks are masterful at selling
complex deals by exaggerating their benefits and minimizing their costs and
risks. That's how they earn giant fees. When a client gets into
trouble-whether that client is an American homeowner, a US city, or
Greece-Goldman ducks and hides behind legal formalities and shareholder
interests.
Borrowers that get into trouble are rarely blameless, of course: They spent
too much, and were gullible or stupid enough to buy Goldman's pitches.
Greece brought on its own problems, as did many American homeowners and
municipalities.
But in all of these cases, Goldman knew very well what it was doing. It knew
more about the real risks and costs of the deals it proposed than those who
accepted them. "It is an issue of morality," said the shareholder at the
Goldman meeting where Oakland came up. Exactly.
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