Open Source Inquiry Opportunity: Some of Goldman’s Greece Swaps Made Public

In a New York Times op-ed late last year, Bill Black, Frank Partnoy, and Eliot Spitzer called for an open source investigation:

we know where the answers are. They are in the trove of e-mail messages still backed up on A.I.G. servers, as well as in the key internal accounting documents and financial models generated by A.I.G. during the past decade. Before releasing its regulatory clutches, the government should insist that the company immediately make these materials public. By putting the evidence online, the government could establish a new form of “open source” investigation.

Once the documents are available for everyone to inspect, a thousand journalistic flowers can bloom, as reporters, victims and angry citizens have a chance to piece together the story. In past cases of financial fraud — from the complex swaps that Bankers Trust sold to Procter & Gamble in the early 1990s to the I.P.O. kickback schemes of the late 1990s to the fall of Enron — e-mail messages and internal documents became the central exhibits in our collective understanding of what happened, and why.

Now it is worth noting that the emphasis in the Black/Partnoy/Spitzer argument was to get a lot of eyeballs on a large stash of source material that is presumably pretty accessible to the public, namely, e-mails.

But there is a second line of potential open-source inquiry that would be at least as valuable: getting people who have expertise in certain types of documentation to look probe transaction documentation for deals that were deceptive or had significant negative outcomes. Even with more and more investigators of various sorts getting their noses into various suspect-looking activities, a lot of the destructive behavior took place in the form of transactions that industry participants at the time would argue fell within normal, accepted practice. Understanding what was deficient about prevailing practice is therefore key to developing durable reforms.

For instance, one of the requirements in the FDIC’s proposed securitization reforms is to have the participants disclose their motivations and intentions as well as their fees. That means that parties like Goldman and Deutschebank, who teed up CDOs for the purpose of them taking a short position would have had to disclose that objective under the proposed regulations.

Reader Nick has provided a link to one of the now-infamous Goldman-Greek government swaps, which served to camouflage the magnitude of its fiscal deficits from the EU. His comments:

I came across the prospectus for the 5.1bn Euro Titlos PLC Asset Backed Notes which Goldman arranged for Greece in 2008.

This was the restructuring of a controversal 2005 swap, which, in turn, related to the infamous
“Aeolos” deal in 2001. Aeolos was the SPV which GS and the “Hellenic Civil Aviation Authority” used
to enable the Greeks to hide its borrowing and enter the EU under false pretenses.

See page 47 of the pdf file (page 43 of the document) under “Use of Proceeds”. I’m curious that no mention of Greece’s real motivation to do this deal — or previous ones — is mentioned. (Maybe it’s in the doc, but I sure couldn’t find it.)

Will the final net result of these derivative trades be a transfer from German and French taxpayers to Greece along with $300mm or so to GS?

Yves here. Per the remarks above on the FDIC, I’m not surprised at all regarding the lack of disclosure. And Nick’s comment raises a more basic point: how the use of forms and mechanisms from regulated markets have served to lull investors and issuers into a false sense of security.

Now here, Greece presumably knew exactly what it was doing. The whole point of this deal was to allow it to hide its failure to live up to its Maasricht obligations.

But even though I have looked at various types of deal documents for decades, something that should have been blindingly obvious occurred to me only tonight. This document, like all of its cousins, says very clearly that the securities (in this case, notes) will not be registered with the SEC, but will be listed on the Luxembourg stock exchange. So this one at least is subject to certain disclosure requirements. But as Nick points out, you sure couldn’t tell what the real motivation for the note deal was from this prospectus (as in the stated aim, while not necessarily untrue, was not the real driver).

But investors have over the course of decades come to expect that documents like this make a full and fair disclosure. The use of this particular form of presentation conveys the message (among others) that everything you need to know to invest is here. It may be somewhat obscured by clever lawyering or the relegation of key facts to financial footnotes, but the belief surrounding documents like this is that the investors have been told what they needed to know.

But we now know they weren’t. The SEC has a key notion in its disclosure rules, that failure to state a material fact is a no-no. It isn’t just that what a prospectus says has to be accurate, it also must not omit to state any material fact that would make the statements in the disclosure documents false or misleading.

And where did the chicanery that led to the crisis take place? Not in areas subject to the full force of SEC regulations, but areas completely outside its reach (derivatives) or where much weaker rules were operative (the rule 3a-7 exemption for asset backed securities).

In case readers think I am making overmuch of this process, consider: propaganda similarly suborns existing channels, in this case, the media. Most people believe that the press and TV tell them what they need to know, both in the sense that what they say is accurate, and anything they fail to cover must not be newsworthy. And even though we have had some stark evidence to the contrary, that the media can be used by the state for its own ends (witness the Creel Commission in World War I, as well as the run-up to the Iraq war) as well as influenced by powerful private interests, the conditioning, which is to trust the media, remains very much intact.

So as much as I welcome and encourage reader comments on the document that Nick pointed out, I’d also welcome reader input on where they think disclosure fell short, and why.

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  1. Jay Rehak

    It seems clear that the United States Government as well as other governments need to review all of the open source documentation related to AIG. Goldman Sachs seems to be at the center of a great deal of the international financial crisis, and as such, needs to be held accountable. It should be easy enough to review all AIG documents and determine whether or not Goldman Sachs has legal obligations to US and other taxpayers around the world. I think an investigation of the AIG scandal should result in international agreements that can “reset” the financial circumstances of many countries and resolve the world wide recession that has been caused, in part, by the derivative market.

  2. nowhereman

    OK, where did disclosure fall short? Good question. My response is that disclosure fell short in every instance of regulatory capture by government agencies responsible for monitoring the financial industry in all it’s forms.
    In all the Senators and congressmen that were bought by campaign contributions. Every lobbiest on Capital Hill. Where does it end.
    I am extremely saddened, because now I am witnessing the divide and conquer strategy that now is blaming unions for the plight of the states and local governments that were conned into buying AAA rated investments that dissapeared into thin air.
    Yet NO ONE is being held accountable. That is were disclosure fails spectacularly.

  3. Steve Diamond

    The SEC’s disclosures rules do not apply to this transaction because it was placed entirely off shore under Regulation S.

    However, while you are correct that the SEC bases its disclosure policy on “materiality,” keep in mind that the SEC does not take the view that it is in the business of telling investors whether or not something is a good investment.

    All that said, what is clearly missing here is any serious assessment of the risk of doing business with Greece!

    1. Yves Smith Post author


      I think you are missing my point. The post clearly states the transaction is not subject to SEC requirements.

      However, my contention is that investors (even sophisticated ones who know better) have been desensitized as to when they are dealing with disclosure documents that fall under the SEC’s purview vs. those that do not, PARTICULARLY because those outside the SEC’s jurisdiction often ape the form of SEC documents.

      1. jake chase

        Yves, I will give you a direct answer based upon personal experience. I have an undergraduate degree in economics, a law degree (from Harvard), twenty odd years experience as a securities lawyer, including time on the SEC staff in Washington (Corporation Finance), thirty years experience trading stocks and options.

        I have been entirely out of the stock market since 2006. I no longer buy stocks because it is impossible, even for me, to understand any major company financial statement. Approximately one year ago I sensed potential opportunity lurking in Morgan Stanley. I pulled up the latest 10Q (then one day old) and found twenty-five pages of footnotes explaining the assets listed on the balance sheet. This of course was not all the footnotes, only those relating to the listed assets.

        I submit that nobody on earth can make any sense out of what now passes for corporate disclosure. Financial statements are merely convenient fictions engineered by management to cloak whatever story they have chosen to peddle while awaiting the next round of stock option grants. To those attempting to invest in this environment my recommendation is you might as well flip a coin or consult a oija board.

      2. Steve Diamond

        Not sure I see the desensitized point: in most private placements the disclosure will mimic that required by the SEC almost to the letter because, first, the bankers want to be able to say the deal does disclose in a manner equivalent to SEC disclosure and, two, many of these deals will trade into the US at some point or want to be offered to the public and so the disclosure done up front will meet the eventual requirements.

        I think the larger point is that the SEC does not have the depth in its staff or reach or political power to drive better disclosure. In this case, the country risk associated with Greece is completely missing.

  4. psychohistorian

    You are preaching to the choir as far as I am concerned.

    I have yet to see a TV show about American imperialism nor heard from any respectable economist exploring the potential exploitation of 3rd/2nd and developed countries resources or labor force by US corporations over the past 50+ years.

    America has most of the guns and holds the world economies hostage/powerless to stop US devaluation of their currency by virtue of it’s Reserve Currency status. Is their any question why we are hated? It is not just the American public that is being screwed but the rest of the world to some degree or another as well.

    The interesting thing about this from my perspective is how out of control social realities are becoming compared to what is portrayed through the media…..the wheels are falling off and everyone is working hard to make sure that when the music stops that the fingers won’t be pointing at them.

    Interesting times indeed.

    Thanks for the posting.

    1. Trainwreck

      The system is set up so that if the US fails, so does the rest of the world. To paraphrase Keynes: it is not the aim of a nation to be economically ruined but when ruined to be ruined like ones neighbors. So that in the end you are equally ruined.

  5. Trainwreck

    Only someone of mythic quality such as Jason or Heracles can obtain the Goldman fleece. Until then they hold it, own it, and will use it against us. At least that is what the blind man I met in Thebes told me.

  6. marc fleury

    I am failing to see how this is a big deal very frankly.

    This is 5Bn asset backet swap. It pays euribor+50 bips. The assets are under management by the bank of greece.

    Yes, the government of greece financed itself by using derivatives. Boohoo! Just like everyone else did and still does.

    It is securitization in its simplest form. GS is guilty of what exactly, providing liquidity?

  7. craazyman

    I’m not a lawyer and can’t claim any technical expertise on this issue, but it seems like a repeat of the Wall Street research scandals 10 years ago.

    Then, investment banks underwrote companies whose failure seemed virtually preordained, while pocketing lucrative underwriting fees. We all know about the internal emails sent by the analysts “recommending” those stocks. One of those fellows is now a well-known money-TV host and commentator on the global financial crisis.

    Eliot Spitzer slapped some hands on his way to the governor’s office, before he had his own disclosure problem.

    I’m not sure how this story can end any differently.

    It seems to me the only way to reign in the likes of Goldman et. al. is for leaders with integrity (if there are any anywere) at companies, governments, etc. to stop doing business with these rapist looters. The way you’d (hopefully) refuse to do business with a company that employs slave labor or that cuts costs by hiring children and forcing them to work 16 hour days until they become sick and can’t work.

  8. Andrew

    Yves, do you have an even preliminary view as to whether GS had a material role in the present Greek crisis? My understanding is that this involved a small amount of money relative to the Greek deficits and that what they were doing was fairly obvious to any European official. I have heard the analogy used that this was like paying off a credit card bill with a HELOC, and I have not heard of any European offical claiming they were deceived by this (and anyone who was was careless to a level far beyond any regulatory failings that have come to light in the U.S.) Whatever else you want to say about GS, it seems from what I have read that the Greek problem was an obvious one known for years, that the reason the situation has gone on for so long was political, and that blaming GS for this is ridiculous. But that said, what do I know? Your inital opinion on GS’s “blameworthiness” for the Greek problem would be appreciated.

    1. Lockstep Investing

      Andrew, you have not been keeping up. There are tons of posts across the net talking about how Greece was able to fudge their fiscal numbers due to swaps packaged by GS over the last ten years.

      1. Andrew

        Lockstep, my question is whether this was something the Europeans didn’t understand full well. My understanding was that it was well known that this was the purpose of these swap agreements, and that the EU just looked the other way and ignored the violation of the intent of the rules.

  9. Doug Terpstra

    To Spitzer et al: good luck with the open source thing. This rigged market casino relies entirely on fraud in direct collusion with the Fed, the Treasury, the SEC, the FDIC, the CFTC, and other captive regulators. Open source would expose the entire Ponzi scam; only when the entire paper edifice lies in smoking ruins like the WTC will we see behind the curtain—and maybe not even then.

    ZeroHedge links to “an article written by University of Tennessee professor John R Garrett, “Monetary Policy and Expectations: Market-Control Techniques and the Bank of England, 1925-1931″, which describes in exquisite detail the gold falsification measures undertaken by the Bank of England in the interwar period in order to impact interest rates in a favorable direction, performed with the full criminal complicity of the Federal Reserve Bank of New York.”

    This arguably ruined Germany’s recovery and did not exactly endear the people to rapacious Jewish bankers.

    Furthermore if the Obama admin is willing to pardon war criminals, cover up murders (at Gitmo) and torture (at Abu Ghraib), and maintain Bush’s secret prisons (, then who here thinks a rational call for real investigations into the kleptocracy’s financial crimes has any prayer of daylight?

  10. Ginger Yellow

    Investors weren’t under any illusions about the motivation of the deal (Aeolos specifically – Titlos is somewhat complicated because the investor and the beneficiary was NBG, not Greece itself). All the contemporary coverage reported that the purpose was to reduce the public sector borrowing requirement to meet Maastricht requirements.

  11. tim

    This post is related to an idea I’ve had to try to spread the word about what is talked about on great websites like this, vs. how weak the coverage in the MSM is.

    “How can Econ-Geeks clearly explain their concerns to the non-Econ-Geeks?

    By getting people to join the FCIC’s social media feeds.”

    Take a second & humor me, and follow this link, help refine it, etc:

    It seems to me, until there is a huge discussion in the MSM about things written about on sites like this, there will not be real financial reform that we need.

  12. JP

    I have a disclosure question concerning mortgage-backed securities. Early in this saga (January, 2008), the NYT ran an article about the due diligence work that Clayton Holdings did for the investment banks on the pools of mortgages they were securitizing.

    From the article:

    “As part of the deal, Clayton has told the prosecutors that starting in 2005, it saw a significant deterioration of lending standards and a parallel jump in lending exceptions. In an another sign that the industry was becoming less careful, some investment banks directed Clayton to halve the sample of loans it evaluated in each portfolio, a person familiar with the investigation said.”

    I’m not a securities lawyer, but this information certainly seems “material” to me as a potential buyer of these securities, yet apparently, it was not disclosed in the prospectuses or to the ratings agencies. The initial articles in the NYT suggested that charges would be forthcoming soon, but I have seen nothing further in the media.
    Does anyone have further information or thoughts on this topic?

  13. Cynthia

    Because the Goldmans profited first by saddling the Greek government with millions in fees for devising a fraudulent scheme to camouflage its debt and then they profited again by selling their shares built from this fraud to Greece’s largest bank, all of the Goldmans, from Hank Paulson and Lloyd Blankfein on down, should be forced to disgorge themselves of all of their billions of dollars worth if ill-gotten gains and forced to live out the rest of their lives in the sweatiest of sweatshops in the banana-est of the banana republics!

    I find it especially fraudulent of the Goldmans to fool the Greek citizenry into falling for this fraud by naming it after one of the most beloved figures in Greek mythology — Aeolos, the god of the winds. Only a psychopath of epic portions could be so cruel and heartless as to screw over those living the cradle of democracy — all for the sake of making a buck. Then again, The Vampire Squid is not only a parasite on our economy, it’s also an enemy to our democracy!

  14. tz

    I don’t know if anyone here has heard of – but it has been taking apart various things which are a threat to opensource coding – copyright and patents – but was founded when SCO sued IBM and everyone else claiming Linux infringed on something. You’ve had thousands of people picking through documents, many on the web (e.g. various embarrassing screenshots of old SCO webpages giving away the “infringing” software). They are currently going through various Microsoft email memos from the anti-trust litigation.

    All I can say is open it up. With thousands browsing various sections of the documents, anything interesting will be quickly exposed.

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