At first blush, Greece’s prime minister George Papandreou statement that he is looking into litigation against banks that worsened the country’s financial woes sounds like pandering to his electorate. From Bloomberg:
Papandreou said the decision on whether to go after U.S. banks will be made after a Greek parliamentary investigation into the cause of the crisis.
“Greece will look into the past and see how things went,” Papandreou said. “There are similar investigations going on in other countries and in the United States. This is where I think, yes, the financial sector, I hear the words fraud and lack of transparency. So yes, yes, there is great responsibility here.”
Yves here. While this all sounds to those outside the EU like an effort to shift blame, the fact that Greece had a budget crisis does not mean that speculators weren’t trying to play the situation to maximum advantage. But any manipulation took place in the over-the-counter, and virtually unregulated credit default swaps market, so it would be interesting to see what legal theory Greece and other eurozone states could use to file a case. Regardless, the officialdom is looking into abuses:
In the days leading up to the May 10 announcement of a loan package worth almost $1 trillion to halt the spread of Greece’s fiscal woes, European Union regulators were examining whether speculators manipulated the prices of bonds and equities and contributed to the crisis.
The Committee of European Securities Regulators said on May 7 it was investigating “exceptional volatility” in the markets and would work with other regulators, including the U.S. Securities and Exchange Commission, as part of a coordinated clampdown.
Yves again. Even if some readers might think Greece and its peers have a weak case (the media was full of Respectable Economists discussing fundamental weaknesses in the eurozone structure; Greece has had riots and strikes in opposition to the austerity measures), winning in the court of public opinion is probably more important than collecting monetary damages. And if Greece can find a fact set and a legal theory that will survive summary judgment in the US, it can probably do just that. Similarly, EU banking regulators may also grill bank executives and demand records.
Never forget the example of Bankers Trust. In the mid 1990s, a series of corporate clients, including Procter & Gamble, sued the bank over losses on derivatives transactions. Many observers thought the cases were ridiculous. How could sophisticated big companies claim to have been duped by BT? They looked like sore losers trying to recoup on bad bets.
But as facts about the various lawsuits emerged, opinion started to turn against BT. The big shift occurred when P&G got access to recordings that revealed how cynical and openly predatory BT derivatives salesmen were. BT paid large settlements and suffered tremendous damage to its franchise. It limped along until an unrelated scandal led to its sale to Deutsche Bank.
While there is unlikely to be a smoking gun as compelling as the BT tapes, it isn’t hard to imagine that there is evidence at quite a few of the large international dealers of efforts to push the sovereign bond and currency markets during the eurozone upheaval.
As we mentioned late last week, the EU is in the process of putting rules in place to restrict predatory behavior by private equity and hedge funds. Tellingly, the US is trying to characterize these efforts to impose rules as protectionism, when that is not their aim (by the same token, food and product safety rules may have protectionist side effects, since not all exporters may be able to meet those standards, that is typically not their main objective).
If Greece or the EU do find some dirt, that will support calls for much tougher rules, which it may impose on banks that operate within its borders, no doubt over protests by the US. In other words, this line of inquiry has the potential to become interesting.
If the EU does find evidence of