The New York Times' front page exposé [3] on the role that Goldman Sachs [4] has played in the Greek tragedy unfolding in Europe right now raises a huge number of concerns both for the U.S. economy and the financial reform measures now in Congress.

To recap, Greece [5] and a number of other European Union (EU) countries are dangerously in debt. EU rules say member countries cannot have budget deficits that exceed three percent of GDP. Greece's debt is closer to 12 percent. Other countries including Spain, Ireland, Italy and Portugal are also in trouble. These countries are "too big to fail." A default by any one of them would rock the global markets, putting an end to the hopeful signs of an EU recovery and potentially leading to a "double dip" recession here in the United States.

Greece and perhaps the other EU nations have been hiding the extent of the debt for years. This week, it was revealed that they have been able to do this with the aid of major U.S. players like Goldman Sachs. The German magazine Der Spiegel [6] broke the story that Greece did a billion-dollar currency swap with Goldman Sachs [4] in 2002 that did not show up on the nation's books as debt.

Deals of the Gods?

Yesterday, the Times reported that there was a series of Goldman Greece deals that those chuckleheads at Goldman named after figures in Greek mythology. One of the deals was called Aeolos, after the god of the winds.

"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," reports the Times [7].

Off Book Deals

It walks like a loan, talks like a loan, but because it was actually a complex derivative deal, it was secret, bilateral, and off-book. No one knows how many of these deals there are underpinning the EU's debt numbers or the U.S. debt for that matter.

What the Times story missed is that right now neither the House financial reform bill nor the Senate proposal cover these types of currency swaps. While both bills attempt to to bring some degree of transparency to derivatives trades, they do not cover currency swaps. Why not? Well, this is a bit odd: the Federal Reserve [8] does not want these deals covered.

While there is no evidence that the Federal Reserve is engaging in these types of currency swaps with banks from other nations, their objections to having these deals be made on open, transparent exchanges should ring some alarm bells. The U.S. also has substantial debt. Why tempt fate or creative accountants to borrow off book?

Flying Too High

Like Icarus, Goldman and other big banks, like JP Morgan, who have engaged in these massive deals, are flying a little to close to the sun. As concern about the Greek situation mounts, and as the worrisome implications for the health and well-being of the U.S. economy are become clearer, the big banks are doing their best to illustrate why major financial reform is needed and why no derivative trading should be off book.

The Senate needs to clip Goldman's wings and make sure that all derivatives are traded on an open exchange to provide the maximum level of transparency for the U.S. and the world.