Goldman's Golden Fleece

The steady stream of revelations regarding the role Goldman Sachs has played in the fleecing of Europe should reinvigorate efforts in Congress to rein in the reckless trading that could send the global economy into another tailspin.

To recap, Greece and a number of other European Union countries are dangerously in debt. EU rules say member countries cannot have budget deficits that exceed 3 percent of their gross domestic product (GDP). The Greek government recently revealed that its debt is closer to 12 percent of GDP. Other countries including Spain, Ireland, Italy and Portugal are also in trouble. Like our behemoth banks, these countries are “too big to fail.” A default by any one of them would put an end to talks of “green shoots” and could lead to a double dip recession.

In early February, the German magazine Der Spiegel broke the story that Greece has been hiding the extent of its debt for years, with the aid of U.S. investment banks. In 2001, Goldman was paid $300 million to structure a complex derivative deal that allowed Greece to borrow billions while hiding the true extent of its debt. Without this creative assistance, Greece may not have been accepted into the common currency “Eurozone.”

Because the deal was structured as a currency swap (a type of derivative) and not as a loan, it was secret, bilateral and off-book. Goldman may have been the only party that knew about it, leading many to speculate how it may have profited from the knowledge.

Last week, the other shoe dropped. The New York Times reported that a company backed by Goldman, JP Morgan Chase and other big banks had set up an index in London that allows investors to gamble on the likelihood of a Greek default. As banks and other players rush into these trades -- called credit default swaps -- they make the cost of insuring Greek debt rise, making it harder for the country to borrow and bringing it closer to the brink.

Sound familiar? In 2002, the same firm created a similar index that allowed investors to bet on the likelihood of defaults in the subprime bond market. The “savvy” investors at Goldman made a fortune off the collapse of the market. It’s a sure bet that they will do so again if Greece goes down.

Recent revelations about the extent to which Goldman sold toxic mortgage-backed securities to its clients while betting against those securities in the market prompted Phil Angelides, chair of the Financial Crisis Inquiry Commission, to suggest that this business model was “like selling a car with bad brakes and then taking out an insurance policy on the driver.”

Federal Reserve Chair Ben Bernanke told Congress that the government was looking into Wall Street’s use of credit default swaps to bet on a Greek collapse. “Using these instruments in a way that potentially destabilizes a company or a country is counterproductive,” Bernanke said. But the Fed has advocated a light hand in regulating derivatives and has fought to keep currency swaps exempt from reform bills.

With some predicting a major economic shock if the EU’s debt crisis is not resolved promptly, this business model is worse than “counterproductive” -- it is cataclysmic.

This week the U.S. Senate is turning its attention to bank reform. Congressional reform plans for derivatives trading are full of loopholes. Go to to send a message or find a toll-free number to tell your members of Congress where you stand. All derivatives should be traded on an open exchange. Derivatives that act like insurance should be regulated like insurance and abusive derivatives should be banned. Without strong new rules on these weapons of mass destruction, another derivative-fueled financial crisis is certain.

First printed in Madison's Capital Times newspaper.

Mary Bottari

Mary Bottari is a reporter for the Center for Media and Democracy (CMD). She helped launch CMD's award-winning ALEC Exposed investigation and is a two-time recipient of the Sidney Prize for public interest journalism from the Sidney Hillman Foundation.


The regs for these transactions were debated by the EU parliment and reviewed by Eurostat shortly after they happened. This was covered in an article in Risk Management magazine back in 2003. The EU got exactly what they wanted, plenty of budget wiggle room for it's members. Now that it has become a problem, the politicians are looking for a scapegoat. When will you guys in the pitchfork crowd realize that you are being played by the politicians? Just a few facts. The Greek transactions were cross currency swaps. What makes them unique is the use of a lookback period for the exchange rate instead of the spot rate. The pricing of CDS follow the credit quality of the issuer. If the Greeks were not such terrible credit risk you can bet the cost of Greek CDS would be cheaper. If you restrict CDS trading you WILL hurt liquidity in the market and restrict credit. CDS did not wreck th U.S.economy, an overleveraged consumer did. What do you think the "toxic assets" are made of? They are the nonperforming loans of overleveraged consumers. It doesn't matter how many times you write this stuff, you don't make it true. The only thing you do is fan the flames. Most of your audience doesn't have a prayer of truly understanding how any of these transactions work.

First, most people can understand the unavoidable result of loans made regardless of ability to repay and the inevitable results. What they cannot understand is how associates of the same people can make huge money out of, let's face it, dishonest behaviour. Second, Asia did not suffer the devastation because those countries look ahead, have sensible regulation and look at the QUALITY OF INDUSTRY PARTICIPANTS. . One can regulate until the end of time, but if greedy people are allowed to trade in a market economy the whole thing will collapse. As we have seen. Those same people are still there, but the innocents have lost their homes and families. And gullible taxpayer/voters will ensure it all happens again. When cash dictates the vote, the system is rotten to its core. No matter what "ism" one adopts, be it capitalsm or communism, greedy people will determine the path and its end. Play the disciplined markets helps. Have a good Chinese New Year.

UH...some psychological projection in the letter writer's use of the ad hominem "the pitchfork crowd". In American folk usage, the pitchfork is in the hands of the guy with the red skin, horns, and tail, much more resembling Goldman Sachs' purchase of the lives and souls of the Greek citizenry who will pay Goldman, win or lose. Like Enron's inner workings, shielding the general public and regulators (if any) from understanding was essential to the subprime mortgage/credit default swap scheme. Likewise Madoff. Likewise Goldman/ Greece. When writing to convey expertise, and to say the public hasn't a prayer of understanding, it would show sincerity to give detail in place of professional terms. Tell us why a currency swap was in Greece's interest, the consequence of the use of lookback over spot timing. Further, who was running the government, and what was the rationale? Who did the deal for Goldman? And who dimed to Der Spiegel? Why now?

You ask, "When will you guys in the pitchfork crowd realize that you are being played by the politicians?" I'll think all is well when politicians quit giving my money to people like you. That means not rewarding you for the damage you have done with your irresponsible lending and fraudulent trading, perhaps taking it back out of you personally and surely putting your ring leaders in jail. As for your precious liquidity, I'm going to be happier with a return to reforms forged in the last depression that kept a lid on your ilk for about sixty years.