A banker’s perspective of the Greece derivatives debt dodge

By Edward Harrison of Credit Writedowns. Last week, Yves wrote her perspective on the Goldman-Greece cross currency swaps. Here’s a slightly different take. Comments are appreciated.

By now, you know about the much-discussed swaps that Greece used to conceal it’s debt load.  While the amount of debt concealed is low relative to the total, the mere fact that Greece attempted to conceal its true fiscal position is damning in light of revelations in October that the government’s fiscal hole for 2009 is three times the original April estimate.

The problem is, in a word, credibility. Greece now has none – and this is why its bond yields have skyrocketed.

But what about the investment bankers like Goldman Sachs who helped Greece in its machinations – aren’t they to be vilified as well. What do we do about them? I was thinking about that after an interview I did this morning on Canada’s Business News Network (see clip here). 

Last week, we got some pretty pointed views on this subject. Felix Salmon says “Goldman is a scapegoat.” Yves Smith takes a more negative view of Goldman’s culpability. So I decided to take a different tack and share some thoughts with you on how investment bankers think – and how it may have led to this. I am using this term ‘Investment Banker’ generically to refer to financial staff at broker-dealers whether they work in a sales & trading or an advisory role. This distinguishes the I-Banker from a commercial banker where incentives are somewhat different.

The first thing you have to realize about investment bankers is that it’s all about the money.  Now I’m not talking about a greed is good mentality here. I’m referring to money as validation for achievement, success and self-worth. 

Corporate hierarchies

In a normal corporate environment, there is a strict hierarchy in which those at the top earn more than those at the bottom. In order to rise to the top (and earn the salary and huge bonus – I might add), one needs to be considered successful. And that means putting in years of effort for which one receives performance reviews.

If you do well on these reviews, you might even receive accolades, awards and so on – the point being you are a rising star with talent. So you get promoted. “The way you’re going, you might even rise to CEO one day!” That’s the kind of praise you might hear. So the whole hierarchical apparatus is designed to align high achievement with other external signs of success: good evaluations, promotions, more money, more responsibility, more underlings, larger budgets, awards, and accolades and so on.  All you need to do is look at an org chart and you get a pretty good sense of who’s supposed to be the stars. And by the way, this is how it works in commercial banking as well.

Investment banking hierarchies

But, that’s not how it works in investment banking at all. When one deal or a series of trades can mean billions in profit, even a relatively junior person can have influence on the bottom line far beyond what her title suggests. This is certainly true in the advisory business, but it is even more true in trading – especially proprietary trading, a major reason that proprietary trading is inherently risky and would be restricted under the Volcker Rule. By the way, this is also a major reason that investment banks that are public companies and not partnerships are risky companies with notoriously poor managers.

A slovenly 32-year old junior trader with terrible social skills, zero management ability and no one reporting to him can make millions of dollars a year. He’s the guy you read about in the newspaper making three times the CEO’s salary. He’s the guy that all the other firms are trying to poach. And he’s the guy that used to be referred to admiringly as a “big swinging dick.” You don’t see that at Acme Incorporated. That’s what I mean when I say it’s all about the money.  You learn very quickly in investment banking that status is not all about the titles, it’s more about the money.

Read any account from investment banking like Predator’s Ball or Liar’s Poker you will quickly notice that even the higher level guys are driven to earn a lot of money, not only for the money itself but for what that money says about their status and value relative to their peers.

Advisory business

So, with that in mind, let’s think about the advisory business, Goldman Sachs and the infamous cross-currency swaps. The advisory business is more hierarchical than the sales & trading side of things. But, you can still make a shed load of cash by doing the right deals and being on the right team. Most people in the advisory business work in product or industry groups like Technology or Industrials or Structured Products. In those groups you have some professionals who are product experts while others are relationship managers.

Now, as an individual, your ostensible goal is to serve your clients by giving them the best advice on financial products and transactions to fit their short- and long-term goals. The payoff comes in the form a fee for capital raised, a merger completed or a financial transaction completed. The reality is you as an individual make more money – and hence have higher status – the more transactions you do, the more complex and bigger the deals you do.

So, as an individual there are two major conflicts you might have with your client.

  • If your client wants to do a deal that you don’t think is advisable or ethical; or if you uncover damaging information about your client that makes you believe the terms of a deal need to be altered.
  • If you can arrange a deal that you believe is not in your client’s best interests but which earns your company more money.

Greece wanted these deals

In the case of the cross currency swaps, all available evidence says that the Greeks were actively looking for ways to reduce their apparent fiscal debt levels and deficit numbers without having to reduce spending or raise taxes. It’s called having your cake and eating it too.

So, I imagine Goldman and other banks each had conversations with the Greek government about the government’s financial advisory needs. The Greeks probably said they wanted to have their cake and eat it too and asked if the investment bankers could help them. Now Goldman had a very good relationship manager in the form of Antigone Loudiadis, who had done valuable service for Greece before and had good contacts with the client (exactly what you want in a relationship manager).  According to the Wall Street Journal:

Guided by Ms. Loudiadis in the 1990s, Goldman set up a series of currency "swap" trades for Greece, enabling the country to use favorable exchange rates to record some of its debts. By 2001, when those rates had become unattractive, Ms. Loudiadis helped Greece structure a different trade that enabled the government to continue using advantageous rates for accounting purposes.

So, there’s the basis of what occurred. All of this is well within the norm. 

An alternate view of the deals

But, here’s the problem. There’s another way to look at these deals. Here is the definitive take from a 2003 article in Risk magazine, pointed out by Felix Salmon. I have bolded parts I want to stress:

Ever since the deficit and debt rules for eurozone member states were drawn up in the early 1990s, there have been persistent rumours and allegations that governments have used derivatives to get around them. For some time, economists have argued that the combination of strict external targets with considerable local autonomy in sovereign debt management almost inevitably leads high-deficit countries towards derivatives.

It is now widely known that since 1996, Italy’s Treasury has regularly used swaps transactions to optically reduce its publicly reported debt and deficit ratios. Such trades remain controversial, and were the subject of fierce debate in late 2001, when Italian academic Gustavo Piga published a paper accusing eurozone countries of ‘window dressing’ their public accounts using derivatives (Risk January 2002, page 17).

Now, Italy has been joined by the Hellenic Republic of Greece, as evidence emerges of a remarkable deal between the public debt division of Greece’s finance ministry and the investment bank Goldman Sachs. The deal is not only likely to reopen an old debate on public accounting for derivatives, but also sheds light on the way banks charge clients for taking credit and market risk exposure.

So, Italy played this game as far back as 1996.  And, that’s the crux of the matter. As a banker, you never re-invent the wheel. If a deal works and makes lots of money, you shop that deal around to everyone you can until it doesn’t. If you don’t, your competitors will.  I reckon bankers at Goldman were very excited that Greece wanted to do these deals – and I wouldn’t be surprised if other bankers did the deals or other countries still.

The deal structure

Risk does an excellent job of outlining the structure of the actual swaps.

The transactions agreed between the Greek public debt division and Goldman Sachs involved cross-currency swaps linked to Greece’s outstanding yen and dollar debt. Cross-currency swaps were among the earliest over-the-counter derivatives contracts to be traded, and have a perfectly routine purpose in debt management, namely to transform the currency of an obligation.

For example, an issuer with foreign fixed-rate debt might choose to lock in a favourable exchange rate move. To do this, it could swap a stream of fixed domestic currency payments for a stream of foreign currency ones, referenced to the notional of the debt using the prevailing spot foreign exchange rate, with an exchange of the two notionals at maturity. Because they are transacted at spot exchange rates, cross-currency swaps of this type have zero present value at inception, although the net value (and credit exposure of either counterparty) may subsequently fluctuate.[emphasis added]

Here’s the thing though. As an individual you will always come to a point where a client is you begging you to do something that is legal, makes lots of money for your company, but that you feel is unethical. There had to be a moment in this transaction here.

However, according to sources, the cross-currency swaps transacted by Goldman for Greece’s public debt division were ‘off-market’ – the spot exchange rate was not used for re-denominating the notional of the foreign currency debt. Instead, a weaker level of euro versus dollar or yen was used in the contracts, resulting in a mismatch between the domestic and foreign currency swap notionals. The effect of this was to create an upfront payment by Goldman to Greece at inception, and an increased stream of interest payments to Greece during the lifetime of the swap. Goldman would recoup these non-standard cashflows at maturity, receiving a large ‘balloon’ cash payment from Greece. [emphasis added]

You get that? Goldman had been doing swaps with Greece in anticipation of Euro entry. These transactions allowed them to take U.S. Dollar and Yen-denominated debt and transfer them into Euros at exchange rates which made the level of Yen/Dollar debt look lower until the swap transaction came due and Greece was forced to make a balloon payment to Goldman.

The morality of all this

What other purpose can these transactions serve other than to mask the true indebtedness of Greece?  Did anyone actually break the law? If these are legal transactions, does Goldman Sachs have any responsibility inform the EU of the deals? Should Goldman’s bankers have refused Greece’s wishes, knowing that some other banker would collect the fees? Why does this matter now other than in regards to Greece’s credibility in future sovereign debt deals?

These are all good questions.  But, the Wall Street Journal article gets to the heart of things and why the deals happened.

Even though the transaction occurred nearly a decade ago, it has come under scrutiny by European Union officials as they examine how Greece fell into such dire economic straits.

Ms. Loudiadis became a Goldman partner in 2000. A cerebral Oxford University graduate, she was eventually named co-head of the company’s investment-banking group in Europe, making as much as $12 million in annual compensation, according to someone familiar with the matter. She lives an exclusive neighborhood in West London known for its white stucco homes.

From a banker’s perspective, that’s what this is all about – money, and the status that goes with it.


Revealed: Goldman Sachs’ mega-deal for Greece – Risk magazine

Also see Tim Iacono’s piece “Playing up to the edge of the line.”

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


  1. yoganmahew

    With respect, I think the point is slightly being missed. The problem, as you point out, is not the swaps themselves. It is subsequent debt issues that Goldman handled for the Greek government with the knowledge of these swaps, but without disclosing them as material to the subsequent issue.

    Goldman has been laying the blame for this on the issuer, but does it not also have a due diligence function in a debt issuance?

    Look at it from a buyer’s perspective:
    – you buy from someone with a good reputation for disclosure (since the issuer wants the money as cheaply as possible, they have an incentive to be economical with the truth; the handler has a separate issue – they want to continue to be trusted for other issues for other people).
    – if you can’t trust the handler, then why bother paying for them? (and you do, because I am sure that a lower yield is demanded from trustworthy handlers than untrustworthy).

    So Goldman are in danger of stiffing their buyers. They are in danger of losing the trust of the people who buy from them because it appears that they will not disclose material matters if it would disadvantage Goldman…

    1. Edward Harrison Post author

      That’s not MY point at all. That may be THE point now in regards to Goldman. But my point is that many bankers have a very narrow focus on doing deals and making money. The ethical considerations, therefore, become obscured.

      1. yoganmahew

        That’s fair enough, hence my respect!

        It does appear that those who get vast sums for controlling the individuals are rather lacking? Who watches the watchmen – senior management at Goldman bears responsibility for either not understanding their own people and setting appropriate controls or by being unwilling to rock the boat as it could interrupt their own money/status flow?

        It appears to be the same story as everywhere else that is bonus driven – if I do my job in sovereign, we all get less money; if Bob in corporate doesn’t do his job, they will get more money…

      2. Mickey Marzick in Akron, Ohio


        Such AMORAL behavior is not illegal – which is precisely your point. Should it be may not be. But as a former student once opined: “It may be unethical, but it’s not illegal!” And I’m not sure this banker would even see her behavior as unethical.

        But before we point the accusatory finger I always ask myself “If given the opportunity in such a position would I be any different?” How many individuals, if given the chance, would jump at it? Indeed, isn’t the knowledge that there’s always someone willing to do it if you won’t what contributes to such amoral behavior?

        Tunnel vision is a prerequisite for many a job. And it pays much better…

        1. Edward Harrison Post author

          You make a good point Mickey. It is easy to point an accusatory finger. I have been in this position as a banker – and I know that it is difficult to stare millions of lost fees in the face and walk away from something – especially if your legal team is telling you it’s kosher.

          Your comment “Indeed, isn’t the knowledge that there’s always someone willing to do it if you won’t what contributes to such amoral behavior?” is insightful. Human nature is such that bad behavior drives out the good.

          I made a similar point in December when looking at mortgage lending standards:

          What is needed is a relative debt constraint like debt to income – or in the case of aggregate figures or sovereign debt figures, debt to GDP. For example, before the bubble in the U.K., one might have seen relative debt constraints like three times income. That meant one could borrow up to three times one’s annual income – no ifs ands or buts. If you worked in the City and received a bonus, you might have convinced the bank to count half of it toward your income for loan purposes.

          As prudence was thrown out, these constraints were relaxed. The Bradford and Bingleys of the world used lower interest rates to justify jacking these constraints up to 3.5 times or four times income. Eventually these constraints hit six times in the UK.

          How do you compete against that as a bank? All of the business is going to Bradford and Bingley and you are getting stuffed. I guarantee you shareholders won’t like that. As an executive, you better find the holy grail of prudent but profitable lending or follow Bradford and Bingley on the road to easy money. Otherwise, you will be out of a job.

          Eventually, even the prudent relax their standards too – that’s how risky behaviour drives out good when risk is rewarded.

          As I see it, this is where a lax regulatory mindset comes into play. People are always going to play right up to the limit of what is considered acceptable. In a lax regulatory environment that automatically means greater and greater risk-taking, and more questionable ethics. This is Hyman Minsky’s point about apparent economic stability breeding greater risk and instability.

          1. Gareth


            Its the 3 deeds together that solidify the case against them.

            The original deal MIGHT be defensible from a legal perspective, but when coupled with the later bond sales Goldman’s morality deficit becomes a serious issue.

            But for me the final clincher is the fact that they were trying to pitch another deal in November. Goldman is a coagulation of shameless banksters.

            However, I have spent enough time in markets to have faith that in time the market will deliver what they truly deserve.

            And I agree with Nik Kondratieff below, its the only way to wipe the slate oclean.

  2. Allan Baraza

    The political leadership in Greece IMHO, want to make it look like they didn’t know about this, and it was some dodgy technocrat inside the finance ministry who’s behind the shady deals with Goldman. But come on, the deals were legal, they wanted the derivatives, Goldman shouldn’t be the villain here; rather, the stupid Greek leadership which didn’t have the clear sense of mind to know what they were doing.

  3. Kataphraktos

    I’m not sure what world you folks live in, but in my former career as an FX trader, if a Fed auditor caught me doing off-market rate deals, I and my bank would be in lots of trouble.

    Also, when did we begin condoning the “if I don’t do this, someone else will” excuse?

    Funny, how many people will twist themselves into complex, spine-breaking yoga stances to excuse any and all Goldman behavior.

  4. voislav

    I don’t think there is anything unethical in Goldman selling the swaps. This is pretty much business as usual and is no different than Swiss or Liechtenstein banks providing services to people who are evading taxes in other countries. It’s none of banks business if you are doing something illegal as long as they are within the law.
    What is troubling here is that Goldman then peddled this debt under false pretenses, working against the interests of their customers. For this they should be hung, drawn and quartered and have their license revoked. But the blame for the swaps falls squarely on Greek shoulders.

    1. Edward Harrison Post author

      I can’t agree with you there. If due diligence determines that you are helping your client do something illegal, you must refuse the business. Full stop. However, this was NOT illegal.

      Where was the ethical lapse? In my opinion, the peddling of debt under false pretenses AND the attempts to help hide the debt were both questionable acts. Again even Corrigan says so.

      “There was nothing inappropriate,” Corrigan told Parliament’s Treasury Committee. “With the benefit of hindsight, it seems to be very clear that the standards of transparency could have, and probably should have been, higher.”

      It’s about transparency. I guarantee you that the issue would be much more black and white for people had this been a corporate client – say Enron.

      1. yoganmahew

        “I guarantee you that the issue would be much more black and white for people had this been a corporate client – say Enron.”
        What do you think the view would have been if it was a bank? It seems that we allow one set of companies to obscure their positions? Greece not being in the bank club, it shouldn’t be allowed to do that?

        1. Edward Harrison Post author

          Banks are being forced to bring their off-balance sheet liabilities back onto the balance sheet soon. Going forward, there will be a lot less tolerance for any entity – country, corporate or bank – trying to mask their true financial condition.

          1. jake chase

            Edward you are some dreamer. Phony accounting is the lifeblood of high finance. The corporate sector could not exist without it, and all those executive bonuses and stock options would be creatures of history. I can hardly wait to see a financial world in which off balance sheet structures will be less tolerated. Less tolerated? What does that mean? Propped up by fifty more pages of footnotes?

          2. Edward Harrison Post author

            Jake, I am hardly a dreamer. The off-balance sheet rules (SFAS 166 and 167) have already been issued and will eventually come into being:


            The dream is that this will change behavior. It will not. There will always be a cat and mouse game of accounting standards and regulators controlling the rules and companies looking for legal (and sometimes illegal ways) around those rules. And derivatives are a big part of that. That will never change.

      2. tinbox

        Are you really sure this is legal?

        A sham transaction which occurs in order to facilitate an ulterior goal is generally not legal. “Off-market” rollovers have a long history in financial deception. In this example Goldman is making a loan which had an implied interest rate. Did Goldman pay tax on the interest income (surely they incurred and reported interest expense funding it), or did they claim it as a trading profit as a swap? By misreporting the transaction as a trade, it becomes hard not to then falsely report on trading income (subject to bonuses) and other relevant tax issues–it becomes nearly impossible not to falsely report to shareholders and the SEC and the Fed.

      3. M.G. in Progress

        I wrote at http://mgiannini.blogspot.com/2009/12/lies-damned-lies-and-statistics-or.html that
        it’s a typical case of EU’s failure to scrutinize and monitor correctly member states’ economies.
        Where were the European Commission and EUROSTAT when Greece had been fudging statistics? Why have not they judged these deals inopportune and not transparent? Are not they “vigilantes”? Can Member States officials in the EU institutions monitor their own country of origin and be independent?

  5. lambert strether

    Harrison writes:

    She lives an exclusive neighborhood in West London known for its white stucco homes.

    Marx got it right. Groucho Marx, that is:

    You can even get stucco. Oh, boy, can you get stucco!

  6. misle

    I’m in the process a putting a note on my travel voucher to reimburse my company for the $2.19 I spent over the allowed contract rental car rate.

    This is the world that I and most people live in. Everyone works with people who end-run the rules and exploit every opportunity for personal gain. But those aren’t the heroes and stars; those are the MFRS that you have to put up with.

    I keep thinking I’m not going to be some SAP for a bunch of sociopaths, but I’m lost what to do about it.

  7. Nik Kondratieff


    I think you make a good argument and I agree with you it’s a cultural thing with I-bankers. But that is the the root of problem. When you have a system that has a monolithic reason for being–which happens to be the pursuit of ever increasing profits–ultimately you get major dysfunction. Which is where we are now. It’s not about legal or illegal, right or wrong, moral responsibility, competition or the like. What this crisis–Greece’s debt issue, the global financial credit crash, the housing crash, the U.S. unemployment morass, etc–shows is that fundamentally the system of global capitalism that we have experienced for the last 30 years is hopelessly broken. When the system crashes, which it has to do because you cannot sustain the unsustainable, it is going to make the Great Depression seem like a walk in the park.


  8. MG77

    Who is worse – the drug user or the peddler who sells the drugs? That’s how I view this mess.

    I hate that the press has to dumb down the discourse but I have found this has made the discussion much more easier with a number of people & friends who don’t follow much in the way of news. Even my great uncle who is 98 was able to understand the previous analogy to some degree when explaining what was occurring in Greece (and with these types of contracts in other areas).

    1. But What do I Know?

      In the financial biz, “sophisticated” is what you call the people who are paying you :>)

  9. M.G. in Progress

    Let’s have another perspective. What if:
    The Greek government requested explicitly that kind of swap deal to meet the criteria to get into the Euro;
    The European Commission (its officials and desk officers) which is in charge to monitor member states’ economies knew about it;
    Eurostat (its officials and missions team members) which provides data to “certify” the national accounts knew about the deal and did not construed it as a problem of regularity and legality.

    Alternatively we have to think that officials in the EU institutions are incompetent (some really are about swap deals at least) and they did not see this coming.

    However bearing in mind the size of the operation and the numbers the deal cannot go unnoticed (particularly for Bank of Greece and balance of payments accounts).

    Under the above circumstances one would conclude that Goldman Sachs provided the requested services and of course made money with it. What’s wrong from their perspective?

    I may add that in the European Institutions (Eurostat and the Commission) some of the officials monitoring the country and/or going on mission to Greece are Greek themselves. Searching on internet you can discover that one was also an ex official of the central bank of Greece.

    It is doubtful that EUROSTAT did not know anything about the swap deal as you have the Greek official there in the team.

    Moreover they are supposed to investigate always those deals as accounting standards before the currency swaps of the Eurostat team that visited Athens in September 2008 to monitor Greece’s debt management” (report at http://epp.eurostat.ec.europa.eu/portal/page/portal/government_finance_statistics/documents/Report%20on%20the%20follow-up%20mission%20to%20the%20EDP%20methodologica.pdf)
    “Government expenditure and revenue are reported to Eurostat under the ESA95 transmission programme. They are the
    sum of non-financial transactions of the general government accounts, and include both current and capital transactions. For definitions, see Commission Regulation No. 1500/2000 of 10 July 2000.
    It should be noted that, following an amendment to ESA95, the government balance (which may be calculated as the
    difference between total government revenue and expenditure) is not the same under ESA95 as that of the excessive deficit procedure. Regulation (EC) No 2558/2001 on the reclassification of settlements under swaps agreements and forward rate agreements implies that there are two relevant definitions of government deficit/surplus:
    • The ESA95 definition of net lending /net borrowing does not include streams of interest payments resulting from swap
    agreements and forward rate agreements;
    • For the purpose of the excessive deficit procedure, net lending /net borrowing of general government includes streams of
    interest payments resulting from swap and forward rate agreements.

  10. Mind the Gaap


    Thanks for writing a piece that’s a simple and lucid enough explanation for me to pass to my non financially-oriented co-workers. You have no idea how many people want to understand these things, but just can’t get simple explanations to them.

    On a tangential note, I am curious if you agree with Yves’ view that the bankers may have been “too clever by half”, and that this is going to bite them in the ass in a big way later.

    One little quibbling point: “While the amount of debt concealed is low relative to the total, the mere fact that Greece attempted to conceal its true fiscal position is damning in light of revelations in October that the government’s fiscal hole for 2009 is three times the original April estimate.

    The problem is, in a word, credibility. Greece now has none – and this is why its bond yields have skyrocketed. ”

    This is a little bizarre to me, because the credibility should have disappeared (and yields skyrocket) once the math and basic reasoning show that Greece can’t realistically pay off its debt in a way that its citizens will find palatable. States lie all the time (as do businesses and people). It doesn’t matter, so long as they can cough up the $ on their end of the deal when push comes to shove.

    1. Edward Harrison Post author

      Mind the gap, read my comment agreeing with Mickey from Akron. That gets to some of what I think. But, no I don’t think that Goldman was too clever by half. I think they were merely doing what everyone else was doing. And remember, this was 10 years ago.

      The point with Goldman – that I think Yves is making too – is that they understand that the most money in financial services is made by working right up to the edge of what is considered acceptable at the given time. Remember the big to-do last month about Goldman’s alleged frontrunning clients?

      The similarity there to here is that Goldman often is in a situation in which its interests and its client’s interests are in conflict. Michael C’s comments go to the mindset driving Goldman’s views about its clients – who are all qualified institutional buyers. “it’s their responsibility to close the door, not ours.”

      Is this ethical behavior? No, this is in the shadows in which Goldman lives and breathes and makes lots of money – and that’s exactly the point.

  11. rita

    It’s unclear to me how much of the attempt to disguise debt was common knowledge among the EU and potential investors. If they knew or had reason to know about the questionable use of derivatives but chose to ignore it so that Greece could be a member of the EU or for other political purposes, then Goldman Sachs and other I-bankers are not culpable of doing much more than facilitating. To continue the analogy above, the Goldman might have been the pusher but Greece wasn’t the only addict.

    The ethics question is complex. Assuming that what was done was legal but clearly not in the best interests of the client, an ethical bank would step away. But how does an investment banker define “best interests” when it comes to a country? And would the answer to the ethics question change, if it turns out that Goldman advised Greece to take a number of measures to reduce its debt (e.g. change retirement age, reduce government employment, etc) or that Greece told Goldman that it was going to take those steps?

  12. MichaelC

    Ed, there’s another aspect to the culture you describe.

    The IB mindset also says, if others are stupid enough to leave the door open for you to walk through, it’s their responsibility to close the door, not ours.

    The classic example is tax planning. All tax authorities are morons. Therefore the only way to correct flaws in taxes is to exploit flaws till the tax authorities correct their error.

    Perversely the IBs can reason they serve the public interest by exposing the mistakes of others. Lobbying by the bankers to influence the creation of loopholes obviously invalidates the argument, but the authors of the loopholes (our representatives) do bear a huge share of the blame.

  13. KnotRP

    Goldman has sold off a Pig-in-a-poke with the word “Greece” printed on the bag.

    They claim it’s not their fault, because the bag came from “Greece” (see? it’s written right on the bag).

    Unfortunately, Goldman hand-lettered the word “Greece”
    on the bag after they stuffed a greek cat in the bag

    Did they tell everyone they were selling cats? Doubt it.

  14. craazyman

    This is altruism at work, pure and simple. Goldman Sachs is a publicly held corporation. Employees such as Ms. Antigone have an ethical duty to maximize profits, and therefore shareholder value. If it were legal, and profitable, in Greece to grind up illegal immigrants into little particles of bone and skin and feed them to goldfish, then Ms. Antigone would be virtuous indeed to hunt down those profit opportunities and boost her company’s bottom line. Any insinuation that her behavior, or that of Goldman’s executives, is untoward is simply without merit. blubber blubber.

    – Edwina N. A. Reers, PhD Finance and Counting

    1. i on the ball patriot

      I agree Edwina, the scamerican bald legal, the supreme profit maximizing ethical profit standard of all of humanity, stands as a symbolic god of altruism. Any one that suggests that the scamerican bald legal is founded in corruption, deception, or any other devious means, and serves only the wealthy few, is an unpatriotic scoundrel.

      Ms. Antigone stands as pure as the wind driven snow and deserves every penny she has earned grinding up the Greece citizenry … because it is all perfectly legal!

      The scamerican bald legal — guardian of justus!
      The law is the law!

      – Clektive N. Foresment, MAUL, University of Fairness

  15. KnotRP

    But Goldman will argue sophisticated investors could totally hear the mewing, and just thought this particular cat was
    worth the price of a pig.

  16. KnotRP

    Or maybe they think they sold it at a cat price?
    I doubt they made that much profit in this last
    quarter selling cats at non-pig prices, but maybe
    they made it up in volume? (SNL skit)

    Sort of like selling a “Rolex watch” for $25….sophisticated investors *know* it’s fake or hot based on the price, so
    how could it possibly be misrepresentation? Goldman
    just sold an amazing number of them, to hit their bonuses.

    Of course, I bet their is a buyer somewhere along the
    chain (either right from the start, or a sale or two removed) who turned around and sold those watches from a fancy
    shop for the real Rolex price…..to pensions,
    mutual funds, and other sophisticated dumping grounds.

    Wall Street and Waste Management should merge and
    become a one-stop garbage-in garbage-out business.

  17. i on the ball patriot

    I’m confused by the title Ed …

    Shouldn’t it be; “An investment banker’s perspective of the Greece derivatives debt dodge”? You seem to imply that commercial bankers, with a different incentive culture, are warm and wonderful people that would not engage in immoral behavior. Is that the gist of it?

    Anyway … I don’t believe the incentives of an I banker vs a C banker represent other than very minor impacts on the Greece dodge.

    The greater, and, “heart of things and why deals happen”, is the culture of corrupt governments that have been hijacked by an international banking cartel and now have the world by the credit balls.

    It was the wholesale corrupt purchase (unless you believe those cute little euphemisms; pac money, soft money, hard money, etc. are not really graft and influence buying) of government that has allowed these derivative products to be created and sold in the first place.

    Deception is the strongest political force on the planet.

    1. Edward Harrison Post author

      i on the ball, I am not saying commercial bankers are warm and wonderful people at all. I make no reference to them except to say they have different incentives. Moreover, I would argue that the less hierarchy is good – as it is in the technology world.

      The point of the post was what I have stated: sharing thoughts with you on how investment bankers think – and how it may have led to questionable ethical behavior on the part of the bankers in this deal.

  18. Rich

    Mr. Harrison, Excellent post and responses. You have made it abundantly clear why GS and Greece did this deal. The remedy here is lawsuits. Certainly, if GS issued bonds for Greece and failed to disclose its dealings, the purchasers could sue GS for any actual losses incurred. Similarly, given the deceptive nature of the deals, the EU could reasonably take steps against Greece and GS – and the U.S. should do nothing to thwart such efforts. I take your explanation to heart – its the money – not just the money but the prestige of having “big swinging dick.” Thus, the rememdy is to take that money (in court) and shrink those dicks. BTW – I believe that all commercial credit issuance should be limited to not-for-profit organizations for precisely the reasons you detail. The gaming of the system would never end as long as profit is the goal. GS was an investment bank at the time of the deals, so my socialized finance concept would not have prevented them.

    1. Paul


      What you missed that EU laws makes this swap completely legal. Rather than picture Goldman as a crack dealer and Greece as a junkie like earlier in the thread, I think of Goldman more like a porn director and Greece as the guy in the adult video store. What they did was perfectly legal – but is sleazy. If the EU does not condone this then there should not be particular regulations allowing away from market swaps (or pornographic material in the metaphor).

      The names of Goldman and Greece will be dragged through the mud over this, but it is hard to sue seeing that the EU was such an enabler.

  19. The Dane

    I tried to post this information at Zerohedge but nothing happens so I will do it here. Just a little piece of history now that we are debating the situation in Greece, they have been there before:



    of 9 December 1985

    concerning a Community loan in favour of the Hellenic Republic



    Having regard to the Treaty establishing the European Economic Community,

    Having regard to Council Regulation (EEC) No 682/81 of 16 March 1981 adjusting the Community loan mechanism designed to support the balance of payments of Member States (1), as amended by Regulation (EEC) No 1131/85 (2), and in particular Article 2 thereof,

    Having regard to the proposal from the Commission, submitted after consultation of the Monetary Committee,

    Whereas examination by the Commission, in collaboration with the Monetary Committee, of the economic situation of Greece has shown a marked deterioration in the balance of payments, a fall in the foreign exchange reserves and a rapid increase in external indebtedness; whereas these difficulties, because of their persistence are liable to jeopardize the proper functioning of the common market;

    Whereas the Greek Government has applied for a medium-term loan under the Community loan mechanism designed to support the balance of payments of Member States; whereas the granting of such a loan is an appropriate measure, within the framework of mutual assistance, to facilitate the adjustment of the Greek economy;

    Whereas the main reasons for the deterioration in the balance of payments of Greece are the absence of control over domestic factors, notably a sharp acceleration of inflation, a rapid rise in labour costs, a marked deterioration in the situation of the productive sector and a substantial over-run of domestic budgetary and monetary targets;

    Whereas the Greek authorities have adopted an economic recovery programme and have presented this programme at the same time as their application for a loan; whereas the Commission has addressed to the Greek Government a recommendation on the measures which it suggests should be adopted; whereas the Greek authorities have approved the terms of the said recommendation;

    Whereas the Greek Government, in implementing this recovery programme, undertakes to pursue, over a period of two years, and if necessary taking the appropriate corrective measures during the period, the following objectives:

    1. a slowdown of inflation, so that the annual rate of price increase is brought down to 15 % at the end of 1986 and to under 10 % by mid-1987, excluding the effects of the introduction of value added tax from 1 January 1987;

    2. a very appreciable slowdown in the upward movement of labour costs, through a lasting adjustment of the wage indexation mechanism based on an advance inflation norm and excluding from wage adjustments rises in import prices;

    3. a reduction in the public sector borrowing requirement of 4 percentage points of the Gross Domestic Product in 1986 and of a similar amount in 1987;

    4. a progressive but substantial reduction in domestic credit expansion to 17 % in 1986 and to 11 % in 1987 compared with 25 % in 1985 and a significant reduction in the proportion of the public sector borrowing requirement covered by monetary resources;

    5. a reduction in the current account deficit so that as early as 1988 the external public debt can be stabilized in terms of absolute value;

    Whereas the implementation of this programme is to give priority, within a medium-term perspective, to strengthening and modernizing productive structures; whereas as a result the conditions for the recovery of productive investment are to be established;


    Article 1

    The Community shall grant the Hellenic Republic, under Regulation (EEC) No 682/81, a loan of 1 750 million ECU or the equivalent amount in other currencies.

    Article 2

    The loan shall be made available to the Hellenic Republic in two equal instalments:

    – the first instalment as soon as the borrowing operations are completed,

    – the second instalment within one year of the payment of the first instalment, and, in any case, not before 1 January 1987, the Commission shall release the second instalment in the light of the examination, made in collaboration with the Monetary Committee of the evolution of the economic situation of the beneficiary Member State and the results obtained in the execution of the economic recovery programme, as implemented.

    Article 3

    1. The loan shall be granted on the basis of the decision taken by the beneficiary Member State to implement the economic recovery programme which it has presented, the objectives of which are set out in the recitals to this Decision.

    2. The Commission, in collaboration with the Monetary Committee, shall examine at regular intervals the evolution of the economic situation of the beneficiary Member State and the execution of the economic recovery programme, as implemented.

    Article 4

    This Decision is addressed to the Hellenic Republic.

    Done at Brussels, 9 December 1985.

    For the Council

    The President


    (1) OJ No L 73, 19. 3. 1981, p. 1.

    (2) OJ No L 118, 1. 5. 1985, p. 59. ”


    The Dane

  20. M.G. in Progress

    “Banks Bet Greece Defaults on Debt They Helped Hide”
    That’s another perspective…Let’s call it conflict of interest. But again I would not blame bankers too much. I would blame those government officials who set up the scheme initially and those EU institutions that allowed them to do it. Particularly at EU institution level if you allow to be member of the club somebody who is cheating…Then you can only claim you did not know it was doing that…

  21. Benedict@Large

    The police were questioning Joe the Bartender after one of his patrons that evening had gotten into a serious auto accident while driving home.

    “Why did you continue to serve him after you knew he was drunk?” asked the officer.

    “Because he tipped well,” replied Joe. “Besides, if I hadn’t, he just would have gone to another bar.”

    Can someone please explain to me the moral difference between what Joe the Bartender did and what Goldman did?

    Barack Obama may consider these folks to be savy businessmen. I consider them to be moral midgets.

  22. Neil D

    Morality? This is business. If you want morality, go to church.

    This corrupt business culture is the true American character. It is the legacy of Ronald Reagan, Alan Greenspan, and Ayn Rand.

  23. PG

    Hi Ed,

    I completely agree with your analysis, that most of the activities undertaken where probably not illegal, even though unethical.

    But you are missing the bigger picture. Most of the activities undertaken by the large IBs in the run up to the financial crisis weren´t technically illegal. By operating on the same logic of doing everything not technically illegal because otherwise some competitor might take the businness, the financial industry brought itself to the brink of failure. The sector is a failed business model, many of the companies, especially the big IBs would not be around, had it not been for a government rescue. They were rescued, because the danger to the rest of society from the sector failling was considered graver than the problems connected with gvnt. intervention and propping up failed enterprises. These enterprises exist at the whim of governments propping them up, but whilst it maybe beneficial to support the fin. sector as a whole, there is no great benefit or necessity to keep all participants in business.
    And this is where your conclusions are wrong. It is imperative to go after Goldman Sachs. Not because they were the only ones(though probably one of the most active), but because the inner logic of why and how the current crisis came about is of absolutely no interest. The fact that 2 years after bailing out the financial sector(&with it stil being on government life support), we find ourself in another crisis situation due to the same “business logic” is the relevant point.
    The expample of Enron is the right one to use here. In that case the decision was made not just to go after the clearly culpable fraudster(Enron/in this case the frmr. Greek government) but also the enabeling supporters(Arthur Andersen/ in this case GS). This is the reason to go after GS with all available measures(banning them in Europe, suing them, possibly withdrawing their banking license in a location or two…), they will surely sue and may be vindicated(just as AA ultimately was), but given their leverage will surely go bankrupt in the process.
    The Arthur Andersen case foccused minds nicely in the accounting community, if something similar where to happen to GS maybe next time the argument would not be: “if we don´t do it, someone else will”, but rather: “the last ones who tried to test the limits of what is legal and acceptable was GS, we don´t want to end like them”.
    This may seem unfair, it surely would be political interference(then again, the only reason GS is still around and Lehmann is not, is due to political considerations and was just as arbitrary).
    Whilst your analysis of the inner workings of the industry is surely correct, this is completely besides the point. The industry exists due to political considerations(if market forces had been allowed to run their course 2 years ago, no one would be interested in an “(investment-)bankers perspective”), therefore, the overall effect on the well being of society and not the inner logic of a (bankrupt) industry is the appropriate measuring stick.

    1. Edward Harrison Post author

      Which conclusions do you refer to? There are none in the post because I asked for comments to the relevant questions.

      In the comments I have already clearly stated my view:

      As I see it, this is where a lax regulatory mindset comes into play. People are always going to play right up to the limit of what is considered acceptable. In a lax regulatory environment that automatically means greater and greater risk-taking, and more questionable ethics. This is Hyman Minsky’s point about apparent economic stability breeding greater risk and instability.

      1. KnotRP

        And legal capture allows them to move the legal line out of their way….

        Capture of the law making function insures all actions are legal.
        The fact that they are obviously amoral or immoral just indicates
        how far the line has been distorted from “common good”.

  24. liberal

    In terms of why is banking culture the way it is, let’s not forget the filtering effect: people who have priorities in life other than making money (er, collecting economic rents in order to make money) are probably not going to become bankers.

  25. Michael

    “The first thing you have to realize[sic] about investment bankers is that it’s all about the money. Now I’m not talking about a greed is good mentality here. I’m referring to money as validation for achievement, success and self-worth. ”

    I don’t follow. How is ‘it’s all about the money’ any different from simple greed?

    Isn’t the acquisition of money for money’s sake (or even the hollow status that supposedly conveys) the very definition of greed?

  26. Bruce Krasting

    As an IB you have only one thing to sell. Solutions to peoples problems. So you listen to what the problems are. Typical problems are:

    I need money.
    I need cheap money.
    I need sub debt.
    I need equity.
    I needs something to make my balance sheet look better.
    I need something to my my cash flow smoother.
    I need something that gets around (legally) this (x) regulation.
    I needs something so may balance sheet/income statement looks better.

    It’s a long list. But if you sit down with someone who says, “I have no problems”. You do not have a customer.

    If you think the shenanigans with the banks and Greece is something get your seat belt on. There is not an S&P 500 company that has not sat down with and IB person and said, “Here’s my problems, come up with a solution and we have a deal”.

    The client’s needs push this bad behavior. There is no morality issue. If someone wants something the IB will sell it to them all day long.

    If you expect the IB side of the street to police this you are just out of your mind.

    1. MichaelC


      Exactly right. What’s so distressing to me is that the policing is the responsibilty of gov’t, and from where I’m sitting we have no police protection. Instead we’ve got a polished Tammany (timminy?) like political machine running the precincts.

  27. scraping_by

    The not unlawful transactions by the bank (can’t say legal; we folks in Bitterland give that too much meaning) didn’t violate the black letter of the law. The laws that, provably, GS helped write. So separate the lawyerism from the realism and ask, who benefits?

    Outside the Greek Neoliberals and the New York hucksters, nary a one.

    Derivatives, in the main, are an example of how the market doesn’t work for anything other than those who run it. Like a drunk dad, they are daily proof what not to do.

  28. dd

    “Self-regulation” the mantel of all “free market” capitalists is a con now exposed by the con men themselves claiming that they have neither a whit of regard for responsible behavior nor the ability to discipline themselves.
    Will these men ever learn to be responsible adults or do we have to hear them constantly whine about how the client made them do it?

  29. IFRS Course

    There are a good many proponents on both sides regarding IFRS convergence. However, the global impact are cause for concern, particularly whenever the SEC speaks and thousands of companies are impacted.

    I do really enjoy frequenting your site and appreciate the insights, although I must admit that most things we don’t agree on.

    Do you consider US GAAP to IFRS convergence something you plan on discussing in greater detail via a head to head comparison?

  30. Emil Meininger

    Super job, thank you for your posts on this subject. accounting standards are something I enjoy reasing about further.

    Although there are a considerable number of different positions on the issue, it is still great that you have offered this website and content.

    A comparison of the similarities GAAP and IFRS would surely make for some popular interaction.

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