Recent Items

Goldman Helped Greece Disguise Deficit

Posted on by

Readers may know that one point of contention in the worries about Greece’s deficits is that it had hidden the fact that it violated Maastricht rule that fine eurozone countries whose fiscal deficits exceed 3% of GDP.

How was this subterfuge achieved? While the Greek government engaged in some bogus accounting on its own, it also got some help from Goldman. Der Spiegel explains how:

Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country’s already bloated deficit.

Greeks aren’t very welcome in the Rue Alphones Weicker in Luxembourg. It’s home to Eurostat, the European Union’s statistical office. The number crunchers there are deeply annoyed with Athens. Investigative reports state that important data “cannot be confirmed” or has been requested but “not received.”

Creative accounting took priority when it came to totting up government debt.Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn’t exceed 60 percent.
The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. “Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future,” one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece’s debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.

Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives. “The Maastricht rules can be circumvented quite legally through swaps,” says a German derivatives dealer.

In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank. In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today’s records, it stands at 5.2 percent.

At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

Yves here. This is why I am dubious of customized OTC derivatives (as opposed to plain vanilla products, like most interest rate and currency swaps). Their main uses are regulatory arbitrage, per above (generally with very rich fees attached) or to shift risk onto chumps.

Print Friendly
Twitter0DiggReddit0StumbleUpon1Facebook20LinkedIn1Google+0bufferEmail

45 comments

  1. oldeuropean

    What’s the problem, Yves, the 3% or the USAmerican derivatives?

    The strings attached is the main USA policy, for Iran or Greece.

    You call it business,

    Something new?

  2. NabeelNabulsi

    Well, this is not new. In 1998 there were questions as to how Italy could join the coming Euro given its deficits relative to GDP. There were at the time rumors of huge Lira/Yen cross-currency swaps executed by JP Morgan (the seemingly anti-GS). Of course working for a competing swaps dealer we were confused where all the volume was coming from. After a visit to the central bank of Italy with my boss who knew how to party with the chief guys there we were told that they had swapped their high coupon Lira interest payments into nice low Yen payments. Of course when the swaps mature they would have to pay back the yen principal which could have ripped a massive hole in their budget but they were counting on being part of the Euro (which would have launched by then) and therefore did not end up with a potentially bigger obligation due to the strength of the Euro. Still the whole risk part was “off balance sheet”.

    And the innovator was JPM not the Vampire Squid.

    1. Yves Smith Post author

      I’m not of the school that JPM is better than Goldman, trust me, in fact, I was at a lunch today where some serious banking industry experts went on about how awful JPM’s books were (consumer loans, real estate, etc) and that in the crisis, it would have been the first to keel over in any serious derivatives market troubles.

      Re this case, though, this trade sounds different than the sort you are talking about. There, a lot of countries were taking foreign currency bets. They were speculating, the trade might have blown up, but in the case you mentioned, Italy, it didn’t.

      The article mentions swaps that sound like the type you described, then goes on to say the Goldman one with Greece was different:

      The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.

      Such transactions are part of normal government refinancing. Europe’s governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

      But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates.

      As I read this, this was not a normal currency trade at all, particularly given the use of non-market rates. These aren’t swaps where they are switching to borrowing in a lower cost currency (classic carry trade) but actually booking phony prices.

      1. Filistine

        its an off-market swap; what they delay in principal is made up for in the coupons being paid for in time (in terms of the coupon, or the notional on the swap legs due to an off-market FX rate). Either way, this more about bad inspection or measurement practice, but hardly an ingenious ploy. In other words, the loophole allows a truck to be driven through it.

  3. Anal_yst

    What’s the problem? This is not the fault of the investment banks for taking advantage of legislative and regulatory loopholes left open by inept (or worse) Government types. This is just another example of massive legislative, regulatory, and enforcement breakdown, pretty much end of story if there’s not clear breach of law.

    1. Yves Smith Post author

      Sorry, your reasoning does not wash.

      You can’t argue that the contracts (the swaps themselves) be respected, and then argue that it’s OK for governments or private parties to evade legally binding arrangements like regulations.

      If I buy your argument, that it’s OK for Greece to break the rules via subterfuge, then it’s OK to break the swaps (say by imposing currency controls that have the effect of voiding the swaps).

      And don’t try calling the currency swap a loophole, the intent was clearly to evade well recognized, well publicized rules.

      1. Siggy

        I’m with you on this one. What is vry important in this item is who at GS engineered the trades. There is a more important issue that comes to mind. The broker has a responsibility to not abet the abrogation of established laws.

        Now there is this tendency to use firm names in instances like this. I would prefer to know the names of the individuals who engineered the trades. It may be true that there is a firm culture that fosters malfeasance’ yet even in that it is individuals who execute the actions that defraud.

      2. Anal_yst

        Huh? Your read of my comment doesn’t wash. You really need to get off this Goldman hate, its taking away from the value of your otherwise quality analysis. I’m not suggesting they’re without blame, but GS/AIG, GS/Greece, come on already. Pick your battles is all I’m saying.

        I don’t see what the problem is here. Did Goldman violate any laws? Did Greece? Sure, they may have dodged the spirit of them, but that’s what bankers get paid to do – outsmart regulators. Whether this is socially optimal (probably not) is a completely different discussion.

        My argument is that better legislation/regulation/enforcement is needed, and you can’t blame the ibanks for identifying opportunity and exploiting it, such is the nature of the beast.

        1. Yves Smith Post author

          You statement is functionally equivalent to saying, “Well, even though I took a vow to be faithful till death do us part, and also got a marriage license, adultery isn’t against the law in my state, so it’s perfectly fine if I whore around.”

          So I assume you won’t mind when you find your spouse (assuming you are married) in bed with another man.

          Actually, in this scenario, the better analogy is you’d approve of a gigolo/escort approaching your spouse even though he could see that s/he was wearing a wedding ring.

          Have you ever negotiated a contract? It is impossible for contracts or agreements of any sort to contemplate all possible scenarios. If so, documents for even routine, not-complex deals would run to hundreds of pages. Doing any business would become impossible because the negotiating/contracting costs would be too high.

          A basic premise undergirding all law, which includes both contractual and regulatory arrangements, is good faith and fair dealing. Lawsuits can often succeed (trust me, I’ve extracted big settlements myself this way) from a violation of good faith and fair dealing.

          In addition, no one is going to go about suing Greece, but the German quote to the contrary, the EU operates much more on a principles based standard than the US, which is rules based, so your assumptions re regulatory arbitrage being legitimate does not comport with their legal construct.

          1. Anal_yst

            I’m not a lawyer so I’ll defer to your apparent expertise on European Union legal precedent, but I don’t buy your analogies. Your view seems to deny the way the world works (like it or not – I don’t – but I’m not delusional).

            Lawyers get paid more (ceteris paribus) than Legislators/Regulators, so do bankers and accountants, all because they help clients outsmart the Gov’t types, in hopes that their financial/legal contribution is worth more than the alternative(s). Do you deny this (or a description less akwardly-crafted)?

            I think we need to focus more on aligning the incentives and operation of legislators/regulators/enforcement such that they’re more inclined to suck less at what they do, to give them a fighting chance of the professionals on the other side who stand to make millions for beating them at the game.

          2. Yves Smith Post author

            I must note you failed to address my arguments and merely chose to say “that’s how the world works”. I happen to believe in the virtue of the rule of law. You seem to prefer corruption and cheating. So I hope you keep a close eye out on your significant other.

            I suggest you look at MartinDale Hubble. The vast majority of lawyers do routine contract law, negotiations, and deal closings. The vast majority of energies of lawyers are devoted to helping clients operate within established parameters of the law, not to bending rules. And I have worked with some top regulatory lawyers, both banking and FDA, so do not try telling me this reflects a lack of knowledge of the terrain. I have worked on path-breaking deals in both the US and Japan, and the intent was not to fly beneath the radar, the deals involved discussion and negotiation with the authorities, who were quite concerned about the impacts on their markets/business practice.

            As for your “dollars equals talent” argument, which I find pretty spurious, that is not inherent to begin a regulator, that is a choice we have made in the US, and given the mess we have with our banking regulations, the evidence is overwhelming that it is a poor one.

            When Singapore got its independence, it was a small island, no natural resources, no competitive advantage of any sort. Lee Kwan Yew decided that one of the things that was imperative for Singapore to survive and prosper was that it have clean government. A small, struggling country could not afford the “tax” of corruption, plus having a clean government in a region where there were none would be a competitive advantage.

            Singapore pays its regulators at the level of partners in top law firms. It also has tough internal audit.

          3. Anal_yst

            For someone so fantastically successful and usually spot-on, your ability to ignore anything I’ve said here is suprising. Nowhere did I claim that $ begets talent, not even close. Where you got this from is completely beyond me.

            If you think I’ve failed to address your point its because I don’t know what you’re trying to say, after reading your comment several times. In your most recent response, you say “Singapore pays its regulators at the level of partners in top law firms. It also has tough internal audit.” This is, gasp, exactly what I’ve suggested be included in reform in the U.S. (and elsewhere).

            I don’t (and not sure where you got this, either) support corruption, however, regulatory arbitrage of all sorts is widely studied and established practice the World-over, so I’m not quite sure why you seem to be so surprised to hear about the practice.

            I don’t have a significant other, for whatever its worth, perhaps that’s why your analogies are entirely lost on me, who knows?!

          4. Yves Smith Post author

            Your comment “Lawyers get paid more (ceteris paribus) than Legislators/Regulators, so do bankers and accountants, all because they help clients outsmart the Gov’t types, in hopes that their financial/legal contribution is worth more than the alternative(s)” said, in simpler form:

            “Lawyers are paid better because they help clients outsmart the Government types”

            So how can lawyers do that, in practice? The not-so-hidden assumption is that lawyers are smarter than “Gov’t types”. The usual Wall Street code for that is “talent”, they like to think they are natively superior, but you at least were strongly suggesting “smarter”. I took some liberties but the general thrust was consistent with what you had written.

            As for regulatory arbitrage, its existence is a function of deregulation. The US once had capital controls and tough minded regulators. Japan did too. One of the not-enough-discussed factors in the Japanese bubble was the US pushing Japan to deregulate in the mid 1980s, and their banks were extremely unsophisticated on quite a few axes. Sort like taking someone who knew how to run dray horse, deciding he was really in the transportation business, and putting him in the pilot seat of a Boeing 747. It was bound to end badly and did.

          5. Percy

            It is so, under New York law, for example, but not universally or globally so, that contracts must be carried out in good faith — that is, good faith by one party to the other party to the contract. It has nothing to do, of course, with “good faith” to the “intent” or “spirit” of the law or regulation at issue, a topic that can generate little more than debate, like determining “original intent” in the case of the Constitution. Even the Supreme Court has aknowledged that there is nothing wrong with structuring one’s affairs to avoid adverse consequences under our tax laws even if doing so offends the IRS. It is also true that most lawyers are not called upon to do anything but help clients operate within established legal parameters, but not so for experts in complex areas of regulation, where there always will be novel circumstances not anticipated by the law or rule makers (or what can be presented as novel for one reason or another). It is naive to suggest that such experts do not or should not attempt to bend particular laws or the regulations under them, or seek exemptions from them, to suit the needs and desires of their clients. That is why they are engaged. This is precisely what is going on in consultations by counsel with the agency involved, if there is one, usually about the particular facts at hand and what are perceived to be the applicable precedents, if any. In important and novel situations generally affecting an industry as a whole and not just the particular client, these consultations may take place on a more generalized basis covering a range of hypothetical, but closely related facts, among whcih may be those the client’s situation presents. In both cases agency acquiescence to the course of action that client wants to take is sought and can often be secured, eventually, either explicitly in the form of an undertaking by agency staff not to recommend enforcement action or implicitly by enabling counsel to form the professional judgement, and to so advise the client, that enforcement action appears to be unlikely (sometimes because the staff is too uncertain as to what the right answer is to the question presented or for some relevant policy reason). This is, after all, is what “regulatory capture” of an agency is all about and how it occurs. (See, e.g., the disappearence of Glass-Steagall through the no-action letter process long before Congress rescinded that statute.) I have no idea whether this occurs in the administration of EU law, but would be surprised if it does not. None of this suggests that counsel or the client is behaving improperly when seeking a basis for enabling the client to do what the client wants to do. Here
            we are not a nation of permissions and thankfully retain the notion that what is not forbidden is permitted. Maybe not polite, but not forbidden. If that is not so in the EU, one impagines that Goldman will have made its arrangements with Greece explicitly subject to New York or UK law.

        2. bystander

          Anal_yst @2:02
          “this Goldman hate…taking away from the value of [Yves Smith's] otherwise quality analysis.”

          Anal_yst @3:05
          “[Yves Smith]…so fantastically successful and usually spot-on.”

          Anal_yst @ about 3 hours ago from TweetDeck
          “Why I even bother with people like Yves Smith is beyond me, I must be a masochist, ugh”

        3. Chris

          “I don’t see what the problem is here. Did Goldman violate any laws? Did Greece? Sure, they may have dodged the spirit of them, but that’s what bankers get paid to do – outsmart regulators. Whether this is socially optimal (probably not) is a completely different discussion.”

          On the contrary, I would argue that this is precisely the point of the discussion. If we were to agree that this kind of activity is not socially optimal (even socially destructive) and that customized OTC derivatives facilitate doing this on a very large scale, it would seem like a pretty good argument for restricting them as Yves suggests.

    2. attempter

      This liar pretends “legislative and regulatory loopholes” just accidentally happened on their own, as an act of nature, and that banks were innocent bystanders who just “took advantage” (which, by the way, even if true would still make them enemies of the people; if the police simply refused to enforce laws against rape, that wouldn’t justify you in committing rape).

      But of course we know that’s not what happened. The banks aggressively corrupted the system and bought these “loopholes” of which they then took advantage.

      So when flacks make this blame-derelict-government argument, the right analogy is to the man who kills his parents and then begs for mercy on the grounds he’s an orphan.

  4. dimitris

    In old-ish Greek slang, dating from at least the 30s, the colloquial term for squid (σουπιά) is used to denote someone who uses obfuscation (“muddy the waters”, ink) to hide their malfeasance.

  5. David Merkel

    Yves, governments need quants or actuaries to calculate the effects of derivatives. It can be done.

    When we were at the Treasury, one of my few comments was that the problems at the banks could not happen at the life insurers because the actuaries must bring all derivatives into account when they do cash flow testing for solvency purposes. There is no place for a life insurer to hide. All assets and liabilities must be modeled, and actuaries have a strict ethics code.

    But, in this case, we can blame Greece. Because of domestic political pressure, they wanted to cheat, and cheat they did, the same way that Wall Street took in municipalities that wanted to save money with muni swaps.

    The investment banks do deserve some of the blame by tempting dishonest governments to cheat, but it still seems to me that honest governments will not cut corners or take shortcuts. They won’t do something that they don’t fully understand.

    1. charles

      “actuaries have a strict ethics code”

      Like the ones in CALPERS that think they will achieve 7.75% return, using hedge funds, private equity and land banks in California ? Maybe for a retirement paid in monkey Bernanke-money, but in real money, with real purchasing power, no chance ! That is even better than the target performance Warren Buffet gives himself for BRK…

    2. Yves Smith Post author

      David,

      I made two statements, that most OTC derivatives were use to shift risk on to the unknowing OR for reg arbitrage. I was NOT saying Greece was a chump, they had clear intent here.

      However, I think you are being too forgiving of Goldman. It is a near certainty Goldman proposed this trade, and Greece, being eager for some relief on the Maastricht rules front, would jump on it. The proof would be if Greece got more than one bid. If they had multiple parties competing for this business, you could argue this was their idea.

    3. NabeelNabulsi

      As an actuary, i can say without a doubt the way my fellow actuaries value and model derivatives is a joke. They have this goofy concept called “real world” scenarios that deny the scenarios embedded in option prices. (In essence they make up a set of scenarios around a long term 8% return on equities, a simple black sc=holes model that uses the risk free rate to calculate forwards will use 4.5% in todays environment as the central scenario). The “real world scenarios” in 2006 never contemplated results like 2008. If one generated market consistent scenarios you did (even though with low probability.

  6. Hugh

    Regulation arbitrage sounds so nice, but what it really is about is fraud. Only there is this Alice in Wonderland quality to it that if it is passed through an exotic financial instrument the quality of fraud is somehow removed or as Lewis Carroll wrote:

    “When I use a word,” Humpty Dumpty said in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
    “The question is,” said Alice, “whether you can make words mean so many different things.”
    “The question is,” said Humpty Dumpty, “which is to be master – - that’s all.”

  7. Francois T

    This, in part, explains why govermins have so much trouble agreeing on strongly regulating the banks. They’re too useful for the tricksters.

  8. KnotRP

    Try promising your spouse you’ll stay under 3% total debt,
    then go get a 0% for 6 months credit card and rack up
    more than 3% total debt, with the one caveat that it isn’t
    due until some future date, so *somehow* it “doesn’t count”.

    Anyone using that kind of tortured childish illogical reasoning
    deserves what they get..

  9. KnotRP

    In other words, debt is what you owe in total — it’s not temporal…it doesn’t make it NON-DEBT to say it’s
    not due yet.

  10. psychohistorian

    Absolutely amazing that this house of cards has not yet fallen.

    What is it going to take for the bottom to drop out of this stink hole?

    The sickness of the money changers. Vacuous to non-existent morals and ethics. We need simple and strict financial regulation with no wiggle room and draconian penalties for even bumping against the edges of the regulations.

    Has anyone been charged with a crime yet? What are the chances this will happen?

    1. scharfy

      Good question. The powers that be have acquired more duct tape, superglue and cardboard than anticipated.

      As far as criminal penalties. Recent Federal indictments include Michael Vick, Barry Bonds, Roger Clemens…

      Yes, we are very deep into the rabbit hole.

  11. psychohistorian

    Yves,

    I want to complement you on your comment follow up. It is as good as your postings and not many bloggers have your capacity to respond to their commenters. This posting and comments are a good example.

    Bravo!

  12. Swedish Lex

    A couple of comments:

    - In the run up to the introduction to the euro, the political focus was on getting all euro-state wannabees onboard. There was no incentive, time or resource to thoroughly go through the books of the others. A decade into the euro-marriage and the health of the partners begin to matter a lot. Greece is being scrutinised right now, but I suspect that skeletons will be dropping out of closets elsewhere. It will be interesting to see whether the Eurostat people, and other EU officials, will be give new authorities and means to conduct effective audits (would be necessary to make any bailout work).
    - Goldman and the other investment banks will not suffer that much in the Member States for having provided a “helping hand” (against a handsome fee). However, their standing before the EU Institutions and the European Parliament in particular, could suffer a lot. There is plenty of legislation before the Parliament where GS et Co need to have friends in there. If one couples this latest GS story with the rumours (still?) that “a large U.S. Investment bank that benefitted from the U.S. bailout” plus two hedge funds are doing what they can to wreck Greece (and, possibly, the euro, in the process), then the situation could become lethal for Investment banks and hedge funds. Not that the Parliament can intervene as regards the euro, but there is, for instance, the draft Directive on hedge funds before the Parliament (Report due in March). Should the Parliamentarians PERCEIVE (not necessarily supported by all facts) that hedge funds want light regulation while they are trying to wreck the currency that it took 30 years to create, then they would not hesitate to faire le nécessaire…….

    1. psychohistorian

      Can the rest of the world force boring banking on the US? I certainly don’t see us doing it ourselves sans total collapse.

      How many countries want and have the political will to separate boring banking from the totally at risk type?

      I want to see the world experience enough economic pain to be motivated to force less economic class structure, restore more evenly applied rule-of-law, and balance the international monetary structure more equitably. What will society do when this situation gets worse?

      Stay tuned.

  13. M.G. in Progress

    I contend that sovereign debt are often disguised Ponzi schemes.
    We just bailed out the banks and put all the debt on the sovereigns who were already straining under massive debt. Then the sovereign debt (public debt) is being sold back to the banks which sometimes cover it with CDS.
    Definitely “market structures helped overcome information asymmetries and sustained the development of sovereign debt”, which is being sold to banks and used by them to create liquidity. What a Ponzi scheme and market for lemons. Then you have investments banks helping governments to fudge national accounts. It’s true that the recession is uncovering what auditors could not and elite of bureaucrats and bankers did not want.

    http://mgiannini.blogspot.com/2010/02/sovereign-debts-markets-for-lemons-and.html

    History of AIG-Lehman is repeating itself “occuring first as tragedy, the second time as farce” as “the deciding factor was concern that letting Greece fail risked a “Lehman-style” run on Club Med debt, with systemic spill-over across Europe.”

  14. craazyman

    This way and that, along the burning rocks
    I saw horned demons armed with great whips,
    Who cruelly beat those fallen from the pain.

    Shit! how they made them wrench and pump their legs
    with such fast blows! and truly not a chance
    between lashes to get a moment’s rest.

    While I was going on, my eyes saw one
    and he saw me; and I said: “Already
    With the sight of you I need to puke my lunch.”

    But still I held my ground to make him out,
    And with me, my sweet Guide came to a stand,
    And agreed to my going somewhat back;

    And he, the whipped one, tried to hide himself,
    Lowering his face, but little it disguised him;
    For I said: “You that castest down your eyes,

    If the features beneath your scars are true,
    Then you are J.B. Banker to Sovereing States;
    But what deed brings you to such torments?”

    And he to me: “Unwillingly I tell this;
    But forces here make me speak the truth,
    Which custom rarely graced me in the world above.

    I was the one who led the deal that made
    a knot of lies and frauds of simple loans
    and brought Europe to a breaking point of debts.

    but I’m not the only banker who weeps here;
    No, rather is this place so full of them,
    That not so many tongues to-day are taught

    from Hamburg to Savena to say ‘borrow’
    And if you want a certain pledge or proof,
    Make it one in taxes and in human bondage.”

    While speaking in this manner, with his whip
    A demon struck him, and said: “Get thee gone
    Banker, there are no nations here to loot!”

    So I went ahead and joined my Guide again;
    Thereafterward with a few steps we came
    To where a crag projected from the bank.

    This very easily did we ascend,
    And turning to the right along its ridge,
    From those eternal circles we departed.

  15. AlphaWorld

    Helping a corporation or sovereign government avoid accurate acocunting or taxation thru the use of off market rates or sohpisticated structuring is fraud. And more importantly, it is wrong in every measure of the word. If the intent of a trade is to confuse, obfuscate, or outrightly avoid the proper oversight of a regulatory authority then it is wrong. To think otherwise highlights the low ethical and moral standards existing in finance today.

    Humbly, I say this as a trader who helped a major US bank aid Japanese banks pad their balance sheet every March (April is start of fiscal year in Japan) for most every year in the 90′s. Later it was explained to me that these trades were “kiseru” trades that padded Japanese balance sheets for 100′s of millions of dollars. At the time, the culture of the trading room was such that not one person questioned the ethics of these trades. In fact, we reveled in the millions of dollars in extra revenue. It was “easy money.” Every trader’s dream.

    So, more than anything it is a question of corporate culture — and the cultures of major financial institutions are ethically challenged at every level. Anal-lyst’s reaction to the JP/Goldman trade with Greece is a perfectly honest reaction by someone insulated in the corporate financial environment. To his way of thinking, it was a solid trade that was “easy money.” Eventually, I left the financial world and perhaps this is the only way to find salvation.

    1. DownSouth

      [Men in society] are ruled by the power of another man’s nod and learn what they must do from another man’s look. They claim nothing as their own. Their house, their sleep, their food, is not their own, and what is even more serious, their mind is not their own, their countenance not their own. They do not weep and laugh at the promptings of their own nature but discard their own emotions to put on those of another. In sum, they transact another man’s business, think another man’s thoughts, live by another man’s grace.
      –Petrarch, The Solitary Life

      All that is born must die and after ripeness comes decay; no thing of earth endures… [Thus it is not glory that one should pursue but virtue, for] virtue alone, that heeds not death, endures.
      –Petrarch, Africa

      The inevitable hypocrisy, which is associated with all of the collective activities of the human race, springs chiefly from this source: that individuals have a moral code which makes the actions of collective man an outrage to their conscience. They therefore invent romantic and moral interpretations of the real facts, preferring to obscure rather than reveal the true character of their collective behavior… As individuals, men believe that they ought to love and serve each other and establish justice between each other. As racial, economic and national groups they take for themselves, whatever their power can command.
      –Reinhold Niebuhr, Moral Man & Immoral Society

      1. Cynthia

        It’s not all money, it’s just the ill-gotten money that’s the root of all evil. But as long as various leaders of the Evangelical Christian movement preach the gospel of biblical capitalism to the mindless masses of teabagging sheeple that 1) the more money you have, the closer you are to God and 2) the more Muslims you kill, the faster you’ll get to heaven, we’ll continue to let our TBTF banksters and our corrupt war profiteers eat our country out of house and home.

        But hopefully with this news about “how Goldman Sachs helped Greece to mask its true debt,” we’ll have enough dirt on Goldman to bust up this global crime ring, confiscate all of its ill-gotten gains, and throw all of its gangsters into one of our deepest, darkest black-site prisons where none of them will ever again see the light of day!

        BTW, if you’ve never heard about biblical capitalism, Jeff Sharlet, the author of “The Family: The Secret Fundamentalism at the Heart of American Power,” can give you an earful about it:

        http://www.democracynow.org/2009/8/12/sharlet

        1. JTFaraday

          It doesn’t sound like there will be any ciminal proceedings. It sounds like they’ve arbitraged away their liability under criminal law–off on technicalities, apparently.

          In that case, they’re certainly being consistent in suggesting that “regulatory arbitrage” ought work the same way. If it’s not explicitly forbidden, it’s A-okay–off on a technicality.

          On to the Treasury for the Fed Bail.

          Very consistent.

  16. Siggy

    Nicely said.

    Been there, done that.

    With that, I hold that while there is this institutional influence that permeates all trading desks, and the street as well, it is some individual and/or narrow group that takes the first bite.

    As to salvation; it is entirely within yourself. Once you find it you can be anywhere, however, it also means that when you are in the wrong place you have to walk. Now, your impetus for walking lies not in seeking salvation but in the fact that you have found it and must maintain and nuture it in a hospitable environment.

    Welcome to the the journey.

  17. dekan

    Say the guys keeping the infrastructure of the monied class running decided to play by Goldman rules. Willfully stop seeing around corners (e.g., so what he has to bring the mercedes in six times, he only told me to diagnose problem A, not problem D…so what if he got a job with sub-standard materials; shouldn’t he learn something about plumbing before he contracts for it) etc.,etc., etc.

    This is a problem of class as much as anything; a group of people raised and reinforced to believe that this is the way the world works (even though it doesn’t/can’t for 99.9% of the work that has to get done in our ‘civilized’ society.)

Comments are closed.