When is a Fraud Not a Fraud? (Greece-Goldman Edition)

The short answer to the question in the headline is “When there are no rules.”

A headline in a current Bloomberg story illustrates the problem: “Goldman Sachs, Greece Didn’t Disclose Swap, Investors ‘Fooled’.”

“Fooled” is an unusual choice of words, particularly when applied to to presumed grown-ups like institutional investors and international overseers. Bloomberg seems to be mincing around the more obvious F-words, like “fraud” (as in defrauded) or “fleeced.”

Although there is a considerable amount of well-warranted consternation about how Goldman sold swaps to Greece that allowed it to mask how bad its deteriorating finances were from the EU budget police, there has been perilous little discussion of why the fact that this was permissible says there is something very wrong with the rules in place.

The latest twist is that Goldman managed $15 billion of debt sales for Greece after the debt-disguising swaps were in place, and (needless to say) there was no disclosure of the existence of the hidden debt (Bloomberg was able to obtain only six of ten prospectuses in question and found no mention of the swaps; it seems pretty unlikely that the others disclosed their existence). That means investors were hoodwinked. It goes without saying they would have seen Greece as a worse credit risk if they had been in full possession of the facts, and would presumably have required a higher interest rate.

Yet we get amazingly weak statements from the experts quizzed by Bloomberg:

Goldman could face legal liability “if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading,” said Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. “But that would be a tough hill to climb, in terms of burden of proof. There’d have to be some sort of smoking-gun memo.”

Yves here. I’m not certain how much a US law professor knows about the securities laws that govern this particular offering (as in it most certainly is NOT US securities regs). But there seem to be three issues:

1. What disclosure standards would apply to the Greece bond offering. The offering memorandum, from a legal standpoint, is the issuer’s document, meaning Greece’s, not Goldman’s. So any shortcoming in disclosure is a liability issue for Greece (no joke, the deal manager makes the issuer sign a little letter acknowledging what portions of the offering memo were provided by it, and it is just a few sentences, like the selling price of the bonds, the underwriters’ spread, stuff like that. The description of the issuer and the securities themselves is most assuredly NOT the responsibility of the underwriters. Update: this is a simplification, and arguably an oversimplification; reader Brown Ram in comments describes how underwriters absolve themselves almost entirely from liability for the accuracy of offering documents).

2. OK, but what about this famous due diligence that investment bankers are supposed to perform? Well I have to tell you, even in good old SEC land, it’s less than you might think. In my day, the only thing that seemed to be required was visiting the major facilities of a new issuer (as in a company doing an IPO or first bond offering) and having outside counsel read board minutes (and tell the managers if they saw anything they found troubling).

3. But in this case, we have an interesting conundrum. Goldman clearly HAD TO KNOW the Greek offering documents were incomplete, right? They had arranged those swaps, they knew there was more debt than Greece was ‘fessing up to in its later offering memoranda.

Point 3 is where matters get a bit sticky. Under SEC regs, the failure to mention the swaps or their effect (that there was additional debt that had been deferred) would be a violation. This is a simplification, , but the concept is that the offering documents have to make a full and fair disclosure. That means not only do the statement made need to be accurate as of the date when they were made, but further more, they cannot fail to state a material fact if leaving that information out would be misleading. So question is whether under the regs governing this deal, whether an omission of this sort would also be considered a regulatory violation and/or an investor fraud.

If so, it’s pretty clear Greece defrauded investors. But what about Goldman? Here, Prof. Hazen is far too charitable to Goldman. “Smoking gun memo?” No, you just need to understand how Goldman works. Even though my knowledge is dated, I strongly suspect the firm is still organized more or less the same way, because it was considered a competitive strength and was widely emulated in the industry (t had the effect of creating loyalty to the brand rather than individuals).

Goldman has centralized account management. One person, a relationship manager, is ultimately responsible for selling all products to particular corporate clients and government entities. His full time job is client coverage; he then works with product specialists as needed to get deals done (specialists are also assigned to particular accounts, but the relationship manager is always in the mix. Hank Paulson was one of these relationship managers, called investment banking services). So Goldman cannot pretend that somehow the team that handled the bond offering didn’t know about the swaps deal. That’s unlikely to begin with, given Goldman’s fetish about communication, but structurally impossible (the new business guy would have known about both sets of deals).

In addition, Goldman new business officers (the account managers) are required to document every meeting with the client (this is to protect the firm in case someone is hit by a bus or leaves the firm). This was also a long-standing fetish. In the 1980s, I as a junior account member could ask the library for the “credit memos” as these notes were called. On well-established clients, the meeting notes went back to the 1950s.

So I’m not certain you need a particular memo, even though such documents probably exist. All you need to do is walk through the structure of Goldman relationship management and their usual client communication protocols to establish that it is just not credible that the team working on the bond issues could not have known about the swaps. Then you just need to figure out a legal theory as to why what Goldman did was not kosher (presumably it was an investor fraud, but you’d need the relevant statutes and precedents).

Some people are willing to say in a pretty straightforward fashion that this sort of thing is not right. And if the regs really are so lax that this sort of omission is permissible, that is yet another bit of evidence that deregulation has gone too far (and I fail to understand why investor would be willing to buy paper in a disclosure regime that inadequate, but that is a bigger topic that we will hopefully turn to at another point). From the Bloomberg story:

“Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union,” said Matrix’s [Bill] Blain. “The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case.”

Even before this latest wrinkle, Simon Johnson was quite clear that these deals did not pass the smell test:

Faced with enormous pressure from those eurozone countries now on the hook for saving Greece, the Commission will surely launch a special audit of Goldman and all its European clients…

If the Federal Reserve were an effective supervisor, it would have the political will sufficient to determine that Goldman Sachs has not been acting in accordance with its banking license. But any meaningful action from this direction seems unlikely….

To preserve Goldman, on incredibly generous terms, in the name of saving the financial system was and is hard to defend – but that is where we are. To allow the current government-backed (massive) Goldman to behave recklessly and with complete disregard to the basic tenets of international financial stability is utterly indefensible.

Yves here. Goldman has made a science of being too clever by half, but it may have made a fatal mistake. Governments do not take well to being abused or made to look foolish, and Goldman appears to have done both.

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  1. Kevin Smith

    Yves wrote:
    ““Fooled” is an usual choice of words”

    did Yves mean:

    “Fooled” is an unusual choice of words..

  2. bob

    “I fail to understand why investor would be willing to buy paper in a disclosure regime that inadequate, but that is a bigger topic that we will hopefully turn to at another point)”

    Let me start it off. What institutional investor is going to admit that they bought this crap?

    Without that, there is no fraud, or proof of it anyway.

    If a bond fails in europe and there were no buyers, do the civil courts hear about it?

    What if goldman pulls the very popular CYA step of buying this crap back in order to maintain its ‘client relationships’? Then the fed is once again on the hook.

    Great piece.

  3. Diego Méndez

    It’s pretty obvious creative accounting surges where debt has mounted. Eurostat knew about these practices, but did nothing. Why? Because France and Germany were having debt problems and they wanted to leave the door open?

    Since entering the euro, Spanish accounting has become more, not less, creative. We’ve specifically copied some methods from “prudent” countries, e.g. the German method.

    If you want infrastructure (roads, airports, hospitals, whatever), you can pay a company $100m to build it, which makes a $100m deficit. Or you can use the German method: the company builds it and you rent it for 50 years, which makes only for a $2m deficit this year.

    Both situations are equivalent in the real world (after all, state-owned infrastructure can be privatized if in debt), but you’ve got almost 0 deficit if you use the method Germans used and Spaniards implemented as soon as we entered the euro.

  4. attempter

    Governments do not take well to being abused or made to look foolish, and Goldman appears to have done both.

    We’ll see if that’s true in Europe, but it doesn’t seem to be true in America, where almost no one in government any longer even seems to care about keeping up appearances.

    You would think it’s embarrassing to be nominally powerful and yet obviously be nothing but a corporate bootlick, and to be constantly publicly reviled and riduculed as such. But no one cares anymore. They have no shame and no self-respect, just their greed.

    Any one of them is like a young man who would knock down an old woman to be the first to grab a nickel lying on the ground, would do it right in front of a hissing crowd, and would feel not shame but a defiant sense of entitlement in the face of the hissing.

    That’s all of them – Dodd, Frank, Summers, Geithner, Bernanke, just to grab a few names.

    It’s the same psychological dynamic, and structurally related to, how Congress and many among the judiciary (including the “supreme” court) have abdicated their constitutional responsibilities and prerogatives in favor of corporations and the imperial presidency.

    No shame, no self respect. They’re just gutter rats.

  5. john haskell

    Can anyone help me with the sentences below? As I read it, no one is responsible for anything:

    “The offering memorandum, from a legal standpoint, is the issuer’s document, meaning Greece’s, not Goldman’s. So any shortcoming in disclosure is a liability issue for Greece (no joke, the deal manager makes the issuer sign a little letter acknowledging what portions of the offering memo were provided by it, and it is just a few sentences, like the selling price of the bonds, the underwriters’ spread, stuff like that. The description of the issuer and the securities themselves is most assuredly NOT the responsibility of the issuer).”

    1. Brown Ram

      Yves is extrapolating a bit here from US securities laws as applied to US offerings (though she is careful to note that all of the US securities laws don’t apply in foreign offerings to non-US investors; although she and others have noted that it is common for offering documents to conform generally to what is expected in the US). Also, I think that there’s a typo–I think that she meant to write that the underwriter/deal manager is not responsible for the description of the issuer and the description of the securities.

      As a matter of law, the issuer is responsible for every single thing that goes into the prospectus. Also, as a matter of law, the underwriter is responsible for every single thing that goes into the prospectus. However, underwriters have a “due diligence” defense–if they perform enough due diligence on the company (which would include getting assurance letters–also known as “comfort letters”–from the auditors), underwriters are absolved of liabilities for mistatements or omissions in the prospectus. Underwriters further shield themselves from liability by contractually agreeing with the issuer that the issuer will indemnify the underwriter against all claims and losses arising from an offering unless the underwriter is responsible for the events giving rise to the claim or loss. (By the way, the SEC believes that this indemnification provision is unenforceable and against public policy).

      The only instance where the underwriter affirmatively agrees to be liabile is the portions of the prospectus where the underwriter is described and where the underwriting process is described. The underwriter agrees to liability with respect to these provisions (and agrees to forego indemnification) in a “blood letter”. Rumor has it that it’s called a “blood letter” because it’s easier to squeeze blood from a stone than responsibility from an underwriter.

      It’s good to be an underwriter, eh?

      1. jpe

        The issue re: disclosure here is whether Greek’s debt was adequately disclosed _elsewhere_, and I don’t see how the underwriter could be responsible as a matter of law for accurate disclosure in another document (Greek budget docs) for which they’re not responsible.

        The analog to US securities would be requiring the underwriter to affirm, under pain of violating disclosure rules, the accuracy of an issuer’s 10-Q filings.

      2. Percy

        It is hard to imagine how a due diligence defence to omission of mention of the swap deal and its implications in the subsequent bond offering documents could be mounted by Goldman when Goldman was the conterparty to and creator of the swap — if, and this is a big if, the information was “material,” as jpe notes below. jpe’s comment, however, seems to suggest that the amount involved in the swap was immaterial compared to total debt. But “materiality” in this contxt may not be just a mattere of a little number compared to a big one. What was the effect of the swap deal on Greece’s standing in the EU and compliance with its requirements? Would acurate and complete information about the swap deal have affected the investors’ total mix of information in a way that reasonably could have been expected to have affected the decision to buy the subsequently issued bonds? If so, one comes up with a different answer to whther the information was “material.” Finally, under the circumstances, no amount of diligence by Goldman in ferreting out details about or assurances from Greece as to its financial condition could erase its knowledge of its own prior deal and its effects and its responsibility as underwriter to refrain from using the offering documents that did not contain that information if it was “material.”

  6. fresno dan

    To me the interesting question is: Why does anyone do business with Goldman, when it is obvious that most dealings are done in Goldman’s interest, and often AGAINST the client?

    But than again, I can’t figure out why Moodys, S&P, and Fitch are in business when they admit that there business model is providing uninformed opinions.

    1. DownSouth

      fresno dan,

      Your quandary is “I can’t figure out why Moodys, S&P, and Fitch are in business when they admit that there business model is providing uninformed opinions.”

      In The Theological Origins of Modernity, Michael Allen Gillespie argues that modernity took a lot of the beliefs and practices of antiquity and the middle ages, dressed them up as “science” or “nature,” and recycled them in the modern era.

      Could what Moodys, S&P and Fitch do be described as the modern version of selling indulgences? From Gillelspie:

      The central purpose of religious practice for both Luther and the Church was salvation, but they disagreed about how it was to be obtained. According to the Church, salvation was wrought by divine grace, but behind such grace lay divine justice and divine reason. God thus saved those who merited salvation by their good works and true repentance. The church played a crucial role in evaluating the sinfulness of human actions and in assigning earthly penance. From an early period, however, the church had found it difficult to convince many newly converted Christians (especially among the most powerful) to perform penitential acts and as a result had come to accept a financial payment in lieu of actual service. This was the origin of the idea of an indulgence. The practice of selling indulgences, however, soon became a dependable source of revenue. Moreover, church authorities began to claim that the church was the repository of all the forgiveness earned by the suffering of the martyrs who had fallen on behalf of Christ and that the church had the right to sell this forgiveness to release sinners or their dead relatives from time they would otherwise have to serve in purgatory. In this way, the questionable practice of accepting gold in lieu of penitential acts in this world became the corrupt practice of accepting gold and promising God’s forgiveness for the sins of both the living and the dead.

    2. jpe

      Getting debt that they didn’t have to declare to the EU authorities was very much in Greece’s interest.

      This deal worked to the benefit of Greece and GS and against the interests of the EU and holders of Greek debt.

    3. Anonymous Jones

      I find myself around lawyers who do nothing but give uninformed opinions (and hedge further against even those they describe as ‘uninformed!’), but there is no shortage of clients who want to hire them.

      You want to know why so many grinders (i.e., not those lawyers with actual talent) at big NY firms (yes, even the big firms have them) get hired when they don’t know much about business, or negotiation, or even law? Because the person doing the hiring is an agent (generally for a corporation), and the agent’s number 2 goal (number 1 goal is to make successful decisions, natch) is to provide cover when unsuccessful decisions are made. Hire a big firm, and you can later point and say, “Hey, I hired XYZ, LLP! How can you fault me?”

      The rating agencies, like many of my former colleagues at big law firms, sell CYA. That’s why they exist. They sell a little info and a lot of CYA. It’s not meant to be efficient. It’s a product of principal-agent relations and must be exposed whenever possible.

  7. Moshi

    The SEC rules on sovereign disclosure are a little murkier than you describe. Relevant are Schedule B to the 1933 Act, which requires very little from sovereign issuers (and specifically not swap agreements), as well as liability provisions that allow the easiest burden of proof to escape liability for those relying on public official documents (i.e. the official Greek debt records now known to be false). This burden still requires underwriters etc (as well as the sovereign issuer) to have no reasonable ground to believe and no actual belief that the disclosure is false, which appears to be the core of your argument. Nevertheless, this path is well trodden by others and consistently populated by parties regarded by the SEC as cranks, so bear in mind. See this for example: http://www.americanbondholdersfoundation.com/PDF/Sovereign_Disclosure_Obligation.pdf

  8. jake chase

    Rather than continue harping on this Greece thing, why not discuss the fact that EVERY large company financial statement is a complete fiction, since swaps and off balance sheet transactions make it impossible for anyone to remotely understand what any large company’s financial situation really is? What we have is TOTAL REGULATORY FAILURE.

    As for Greece, any institutional investor that believed that country to be anything but insolvent must have been reading nothing except those idiotic disclosure documents which are engineered to hide the truth while providing exemption from potential liability, and have been nothing else since 1933.

    I have no objection to the continued smear of Goldman since they have clearly earned it in several hundred ways. This Greece thing, however, is nonsense.

    1. marc fleury


      Clearly we are looking at the broad failure of legislation based on accounting of balance sheets. The whole securitization industry first appeared as a way for banks to manage their regulatory requirements. States and banks have done the same. Law is enacted in terms of balance sheet ratios.

      The net result has been a dramatic increase in liquidity throughout the economy by the widespread use of credit derivatives. Recapturing monetary levels, means regulation that encompasses such flows. The balance sheet based regulation died a horrible death…

      And yes, GS is nothing but a middleman in this case, enough with the witches hunt already.

      1. DownSouth

        If “GS is nothing but a middleman in this case,” then how come they ended up with all the gold?

        Back when there used to be something called “common sense,” there was a saying that said “the proof is in the pudding.”

      2. jdmckay

        And yes, GS is nothing but a middleman in this case, enough with the witches hunt already.

        I disagree w/both those assertions.

        a) GS nothing but middleman
        b) witches hunt

        re a): A middle man negotiates between parties on the periphery… w/parties to given agreement. At least by Yves account in this post (she questions GS’ legal liability), GS was not in the middle: they acted as an agent. Beyond that, however, they acted for the explicit purpose of obscuring facts, in an endeavor (EU entry) when doing so would, by any measure of basic finance, have bad results.

        In order to exonerate GS, one must do what they have done: create one abstraction upon another, redefining the purpose of both currency (to represent underlying value of something) and agreement, w/each level of abstraction further obscuring the reality of the previous.

        AFAIC, they have done nothing but metastasize alchemy as predominate “principle” in finance, w/legal loopholes not only giving them a pass, but those loopholes setting standards for financial doings.

        re b): “witch hunts” were based on irrational mythology. GS’ activities are quantifiable fraud, with their behavior more closely resembling the witch-hunters than the witches.

        1. marc fleury

          re: alchemy and loopholes.

          Surely you will not find many people that dismiss securitization of debt with such “desinvolture” as a gimmick to exploit loopholes.

          Truth is old limits on bank holdings including Basel 2 ratios are too limiting for today’s economy. Securitization has opened the flood gates to leverages of 40 and up but what should be regulated is the level, not the instrument. The instrument in and on itself serves a very valuable role and can be in large part credited for both boom and bust.

          Let’s not lose sight of the fact that the contract being discussed here in open source fashion is nothing but a $5B swap between GS and Gr. If GS is not middleman then they hold the asset and who *exactly* are they defrauding then?

          You want to get mad at derivatives and all those bad people that do bad things out there then keep on digging into naked derivatives (synthetic CDO’s ala abacus) in order to get any dirt on GS. Even then I find the evidence slim. The GS AIG connection is the closest thing to a real thread.

          But here? move along people! nothing to see! There is a lot headless chickens running around with populist slogans lately…

          1. jdmckay

            Let’s not lose sight of the fact that the contract being discussed here in open source fashion is nothing but a $5B swap between GS and Gr.

            “open source” fashion… you’re kidding, right? Like, 8 yrs after the fact, when the whole thing comes crashing down, a few facts see light of day… you call this “open source” fashion?

            It was +/- $30b not 5.

            And it wasn’t a swap, unless you ignore the currency manipulation part.

            Funny, GS couldn’t sell this stuff to the Chinese, only institutional investors.

            Pretty hard to figure out why Chinese don’t was these kinds of GS “financial vehicles” driving their currency, don’t ‘ya think?

            If GS is not middleman then they hold the asset and who *exactly* are they defrauding then?

            The EU. And bondholders of that debt (non-disclosure).

            You want to get mad at derivatives

            The time to get mad was when WS was issuing this junk: the few who did their homework and identified it as junk don’t have so much to be mad about, except for financial systems around the planet collapsing.

            All the money’s gone now, and then some… so I guess those who bought this junk are a bit mad (and broke and unemployed).

            These guys are crooks of the highest order.

            Personally, I would outlaw derivatives, toute suite. I’d throw those f**ers in jail… indefinite detention as financial terrorists.

            Even then I find the evidence slim.


          2. DownSouth

            marc fleury,

            You write a great deal of jargon and legaleze–Erasmus called it “higher lunacy”–that indicate that common sense isn’t the only word expunged from your vocabulary. Prudence is also MIA.

            If an overwhelming majority of the people, or a cluster of powerful leaders, demand vigorously enough Goldman Sachs’s head on a spike, there’s not a court in the world that’s not going to serve it up, either that or look the other way while the perp is led off to the slaughter.

            To quote Hannah Arendt,

            [T]here is little doubt about the nature of those acts on which the court will not rule and which therefore are left outside legal controls. These acts are characterized by their “momentousness” and by “an unusual need for unquestioning adherence to a political decision already made.” Graham Hughes, to whose excellent examination of the political question doctrine I am greatly indebted, immediately adds that “these considerations…certainly seem to imply inter arma silent leges and cast doubt on the aphorism that it is a Constitution that is being expounded.” In other words, the political doctrine is in fact that loophole through which the sovereignty principle and the reason of state doctrine are permitted to filter back, as it were, into a system of government which in principle denies them. Whatever the theory, the facts of the matter suggest that precisely in crucial issues the Supreme Court has no more power than an international court: both are unable to enforce decisions that would hurt decisively the interests of sovereign states and both know that their authority depends on prudence, that is, on not raising issues or making decisions that cannot be enforced.
            –Hannah Arendt, Crises of the Repubic

            In his tribute to Chief Justice Lemuel Shaw, Oliver Wendell Holmes, Jr. in The Common Law quotes with approval Benjamin Curtis’s view that he was “the greatest magistrate which this country has produced.” Holmes added: “the strength of that great judge lay in an accurate appreciation of the requirements of the community whose officer he was…. [F]ew have lived who were his equals in their understanding of the grounds of public policy to which all laws must ultimately be referred.”

            Your arrogance and your disdain for the people that the law was designed to serve becomes palpable when you scold: “There is a lot headless chickens running around with populist slogans lately…” Comments like this strike me as coming from someone who doesn’t know enough to come in out of the rain.

      3. David Merkel

        Three possible solutions: 1) everything must be on-balance sheet, 2) a list of all off-balance sheet items, complete with ownership/lending amounts as affecting the main corporation. 3) An actuarial cash flow analysis that shows the cash flows and their present values over the horizon of the longest assets and liabilities of the business.

        I like the last one. Since we started doing that earnestly, we have had few life insurance failures.

        1. marc fleury


          capturing flows would definitely paint a clearer picture of how much liquidity has been emitted. Besides straight up debt productization in a pure cash CDO sense, we also need to capture CDS. These are harder to capture imho and yet they were the ones that blew up.

          Take abacus and naked CDS and here you have an instrument that multiplied bad debt by a ratio of 4:1. For each real bond that blew up, you had 4 times the liquidity need. When 250B of subprime went south did we need 1T of liquidity? J.Paulson is a hero to some….

          It is clear that current regulation failed to capture the total level of liquidity and therefore the risk being explored. Regulation needs to look at the shadow banking system. Which would negate the very definition of @shadow@ banking system. Measuring flows to the shadow banking system can at least capture some of the liability from the regulated sector even prior to regulation.

          I was interested in reading your note on “insurance companies” and would like to read more. Clearly AIGFP did not capture liability, nor would a cash flow model adequately capture the contractual risk it is building. Naked CDS blew up, how do you capture them?

          I heard traders at GS are pushing for CDS over open exchanges with HFT… that would throw a dramatic spot light on the global flows but it will be a long time before OTC dies…

  9. Jim in MN

    I have no problem with the desire to chase financial evildoers even if it is a bit like ‘whack-a-mole’ these days.

    However we poor unfortunate souls who live and manage finances in this era of TRF (total regulatory failure, let’s popularize that apt acronym) have to decide what to do.

    Yves asks who would buy. Well let’s start with the pension funds and insurance companies…then continue with institutional money managers (think your church or college)…and then consider the possibly fatal political influence of sovereign/central bank buying into bond markets.

    If the bond vigilantes have been neutered, what happens to capital asset pricing models? Isn’t it game over if incentives don’t punish buying parties who lose the nest egg, or selling parties that lie?

    Unfortunately the whole complex, including our unstated mega-Japan policy, points to zero or negative real returns for bonds and bond funds. And Yves or others, please comment on the barriers to individual investors wishing to buy and hold actual paper bond certificates to maturity–probably the only sane mode of investment in these “crapital markets”.

    Please be very careful with bond funds, folks. they are not the same as actual bonds.

    –Jim in MN

    1. DownSouth

      Jim in MN,

      You say: “Yves asks who would buy. Well let’s start with the pension funds and insurance companies…then continue with institutional money managers (think your church or college)…and then consider the possibly fatal political influence of sovereign/central bank buying into bond markets.”

      This hits upon something Jacob S. Hacker discussed in his book The Great Risk Shift: The New Economic Insecurity and the Decline of the American Dream. When Reagan ushered in his “ownership society” it created a massive pool of funds that belonged to the masses. I think it was a part of the original design that this was to be a sandbox for the exclusive use and pleasure of the banksters.

      1. Doug Terpstra

        You could be describing Social Security. It’s already beeen looted; they just haven’t told us yet.

    2. i on the ball patriot


      With crapital markets,
      Nothing is sane,
      Not even bonds,
      Will save you from pain,

      So many scams,
      So little time,
      So many rules,
      That mask the slime,

      Prudent buyer,
      Falls to the ground,
      And lies in a heap,
      When nothing is sound,

      Complexity wins,
      When it cripples the game,
      The losers are thrust,
      Into battles of blame,

      The arena of finance,
      If it wants to get well,
      Must engage in politics,
      And send the perps to hell …

      Deception is the strongest political force on the planet.

    3. dd

      Jim in MN
      “If the bond vigilantes have been neutered, what happens to capital asset pricing models?”
      Exactly so. The illusion of safety has been shattered along with CAP. All financial instruments are now subject to UFIR (unregulated financial instrument risk, CDS, IRS), UFER (unregulated financial entity risk..aka hedge funds et.al), UTR (unregulated transactional risks ie high frequency trading, black box, unregulated exchanges) that in turn creates UDR (unreliable disclosure risks).
      The SEC has absolutely no power to reign these behaviors in as long as the Fed is running the OTC derivatives show and values “liquidity” over transparency.

    4. Mickey, Akron, Ohio

      Acronyms: TBTF brought about by TRF, resulting in a


      FUCK them all [citizens and their governments alike] attitude… brought about by beliefs grounded in the virtue of selfishness. Free-Market Utopian Anarchists [FMUA] whose only use for goverment is as a vehicle/means with which to enserf the citizenry via debt peonage. Looting with a purpose.

      Individuals may remain debt-free in such a scenario but in the aggregate, it is debt, both public and private, up to their collective eyeballs, enslaving themselves and their children’s children with a borrow now and pay later mentality. Of course the borrowing never ends and merely servicing the debt becomes the way of life.

      Debt = “Forced” Labor mediated by wages. [Modern version of debt peonage exported from the periphery back into the center]. This debt peonage becomes a way of life and ensures that employment becomes the primary enforcement mechanism in its maintenance and expansion.

      TBTF + TRF + FMUA = FUCK

      Now for the more mathematically inclined, translate this into an algorithm and your days of debt peonage are over!

        1. Mickey, Akron, Ohio

          Too MARXIST for polite society.

          Fraudulent, Usurious, Corrupt, Kleptocracy [FUCK] would be better understood in such company. At least among the honest ones…

        1. Mickey, Akron, Ohio


          After yesterday I decided that a day of levity was in order. Hence, my comments above. Enjoyed the Onion piece… it was satire, right?

          Just don’t think we’re there yet – the illusion of money and its worthlessness. I’ll have to remember that the next time I cut the tuition check for my nephew’s education.

          But how long can we keep going like this before the paper is worthless?

  10. Ginger Yellow

    Not to absolve Greece or Goldman, but I’d be amazed if more than a handful of investors actually read the offering memorandum. These are Eurozone government bonds! Pre-crisis, people never thought they would default and they weren’t being paid enough interest to do any credit work. To the extent that they put any fundamental analysis into their purchasing decision, it would have been based on official statistics, not anything in the securities disclosure.

  11. Siggy

    This ledgerdemain of moving liabilities on and off balance sheets is fascinating.

    Curious thing, there are liabilities certain and then there are liabilities contingent. Why it’s so complicated you have to keep at least two sets of books. So, you want full disclosure; then, the red-herring has to have at least two chapters. One for liabilities certain and one for liabilities contingent. Now as to that contingent stuff, just how uncertain is it?

    Is there a date certain when the contigency will evaporate and the reality comes home to roost? That’s rather like the query from the back of the bus; Are we there yet?

    Did GS break a law? Probably not. Did Greece break a law? Well, probably not a Grecian Law. Was any law broken? Maybe.

    What do we do? Engineer an accomodation. Bondholders take a sizable haircut. Greece cuts its deficit over some time period, say five, perhaps ten years. As to GS, buyer beware.

  12. Carlos E. Comesana

    Following Simon Johnson, my own “smell” alerts me that the planned/disbursed? oversized Y2009 bonuses could be directed to maintain a fraudulent secrecy on this as other previous deals.

  13. Lee


    When Simon Johnson wrote his post I commented “As smart (and evil) as Goldman has been to this point, I am now starting to think these guys are not so smart.” Your characterization of Goldman being too clever by half is a better way to put it. The Europeans are different than us: less complacent, openly hostile to plutocrats (the people, not the governments). They are not afraid to show their outrage(witness the JPM Morgan bombing in Athens yesterday). I think Goldman has screwed itself this time — too clever by half. The Europeans are going to nail that company. Of course Goldman has far too much hubris understand what is coming but the noose is tightening.

    1. Monday1929

      Exactly- when JPM and Goldman left the home grounds of their fascist “protectors” in the USA, they lost their immunity.

  14. Wade Phipps

    What if Goldman acted investment-wise on the information it knew about Greece’s actual debt? What if they let a select group of clients in on the secret? Would that be a violation of securities laws since it was not publicly available information that was acted on?

    1. scharfy

      Goldman trades against all their clients positions. But they use algorithms to do it. The frontrunning and corruption is all automated by now, so the rank and file banksters just filling order’s in a very sterile way. They got the machine humming.

      Streamlined as hell.

    2. jdmckay

      What if Goldman acted investment-wise on the information it knew about Greece’s actual debt? What if they let a select group of clients in on the secret?

      Indeed… that’s the 1st thing I thought when this came to light.

      However, I’m sure GS built a firewall between their issuing and selling units, the declaration of which has proven sufficient to assuage responsable lawmakers/regulators in this age of a “finance” being “too complicated” for mere mortals to understand.

      I’d love to be privy to GS Geithner hotline conversations currently… hope they’ve got extra any-time minutes.

      Hey (a light just came on): maybe GS could collateralize derivative bets on excessive over runs on anytime minutes.

    3. jpe

      The extra debt was $1 billion v $400 billion total. I don’t think knowledge that total debt was misstated by .25% would be terribly useful.

      The hidden debt wasn’t material from an financial audit perspective.

      1. jdmckay

        I don’t think knowledge that total debt was misstated by .25% would be terribly useful.

        Perhaps, especially in context that the entire transaction was purposed to hide the underlying debt swapped.

        The hidden debt wasn’t material from an financial audit perspective.

        Which says more about auditing value than the audited “instrument”.

        Incredible to me so many are defending this practice, seemingly viewing it in a very narrow context of it’s own transaction, when multiplied many times over… going back years now, the accumulation of these things and their collective misrepresentation has brought the entire planet to the precipice on several occasions.

        I think what I’ve been saying for a long time: that currency has been redefined in finance to be the value rather than underlying goods/services/property it was created to represent. We talk numbers, %’s of this and that, but very little about underlying activity which currency is built upon.

        We are now seeing the consequences of this. And it seems to me the addiction is so deep, so delusional, that the delusions are driving things much as heroin to a junkie or booze to a drunk.

        Again and again, we’re seeing the addicted go back to their supplier for more, and seeing the practice defended in the profession.

        We have a moral vacuum. It’s the story of civilization, going back to Leviticus.

  15. scharfy

    Pardon me miss?

    Do you guys have one of those currency swap thingy’s in, like a XXXL?

    Yea, red white and blue. I know, you usually you can never find ’em this big. He’s so fat.. (giggle)


    OMG, this is last one? I’ll check online then.

    Ok Thanks.

    Nope that’ll be all.


  16. bobh

    Last Sunday morning, I read the New York Times story about how Goldman Sax had used a derivatives play to help Greece dig itself deeper into its sovereign debt hole. Then I went for a drive. The oldies station played a song I love, and I started singing along. I noticed that Bob Seger and the Silver Bullet Band, way back in the 70s, knew about Goldman Sachs.

    Still The Same

    You always won, every time you placed a bet
    You’re still damn good
    No one’s gotten to you yet
    Every time they were sure they had you caught
    You were quicker than they thought
    You just turned your back and walked

    You always said
    The cards would never do you wrong
    The trick you said
    Was never play the game too long
    A gambler’s share
    The only risk that you would take
    The only loss you could forsake
    The only bluff you wouldn’t fake

    But you’re still the same
    I caught up with you yesterday
    (Still the same, still the same…)
    Moving game to game
    No one standing in your way
    Turnin’ on the charm
    Long enough to get you by
    (Still the same, still the same…)
    You’re still the same
    You still aim high

    (Still the same, still the same…)

    There you stood
    Everybody watched you play
    I just turned and walked away
    ‘Cause I had nothing left to say
    ‘Cause you’re still the same
    (You’re still the same,
    Baby babe, you’re still the same..)

    Oh, you’re still the same…
    Moving game to game…
    Some things never change..
    Oh, you’re still the same
    (You’re still the same,
    Baby babe, you’re still the same..)
    (repeat to fade)

  17. Cynthia

    I was hoping that Obama would do the right thing by turning down his peace prize. But I should’ve known better than to think that a warmonger, who’s just a hair’s breadth away from morphing into a war criminal, knows the difference between right and wrong.

    Now I’m hoping that Obama will do the right thing by retracting his statement about our TBTF banksters being “savvy businessmen.” But I should know better than to think that a power-crazed egomaniac, who’s using his public office for his own private gains, knows the difference between right and wrong.

  18. Tortoise

    Budget deficits are easy to hide in the complex world we live in. Take California that is supposed to have a balanced budget, a constitutional requirement. Everyone knows and the CA government has freely admitted that California has actually been running fiscal deficits since 1998.

    The intriguing question is: Which governments in the EU are running large actual deficits? I believe there are practical ways to infer with excellent success rate the sinners without knowing a single thing about their budgets. Two metrics tell the story: C/A deficits and inflation rates. You can draw your own conclusions.

  19. Blurtman

    In what other industry does the USG or an agency of the federal government stand behind the products of the industry?

    1. scharfy

      Crappy automakers, Big oil, Big Pharma, Organized labor, Amtrak, Health Insurers.

      Anyone with a lobbyist.

      1. Blurtman

        Really? I cannot recall the USG paying out settlements to Vioxx victims.

        I do not disagree that these large industries are in bed with the USG, but can you name another industry where the USG or a federal agency backstops the product?

        1. scharfy

          USG has their hands in alot. Obviously the banks are the most egregious. Auto not too far off. fair point

  20. MichaelC

    It seems to me this is the most importance part of the post.

    “there has been perilous little discussion of why the fact that this was permissible says there is something very wrong with the rules in place”

    Did Greece fudge their figures? Yes
    How was it done? A bad rule that the auditors (the stats guys) raised a stink about but were overruled. How familiar is that?

    Is securitization bad?
    No, but securitization based on crap credit ratings is deadly. Credit rating reform is more critical than cying foul at GS. Although crying foul should lead to reform, we need to keep screaming foul at the enablers in the same breath we’re crying foul at the GSs.

    Is a capital framework that favors risks deemed safe by bogus ratings bad? Hell yes, and that part of the BIS needs to be aggressively attacked.

    Is a global regulatory system that outsources one of its most fundamental elements to unaccountable, but legislatively protected, ratings agencies seiously flawed?

    Is the proliferation of toxic derivatives bad? Yes.
    Has that proliferation been fed by a bankrupt bankruptcy law that grants preferential status to derivatives contracts over other creditors? Absolutely.

    Can ISDA’s hijacking of the bankruptcy code be reversed? Hell yes. Is that anywhere on the reform agenda? Hell no.

    The Goldmans and their Euro peers will continue to prosper until the fundamental regulatory arb opportunities are gone. Those opportunities will always exist. The goal of regulatory reform, in my mind, is to begin to close the most egregious gaps, and settle in for the long seige required to close the rest as they are discovered.

    There is no possibility of a financial reform panacea. And since half of the Senate is pledged to sit on their hands, its unlikely we’re going to get anything that doesn’t increase regulatory arb opportunities.

    The bankers can’t be shamed, but the regulators can be if their specific ineptitudes are exposed to the public scorn.

    1. jdmckay

      Good post Michael… agree w/most everything you said.

      Thing is, it’s going to take massive sea change for that to happen. And I see no impetus for any of those changes gathering force anywhere that matters.

  21. mario

    Sounds familiar?

    “J.P. Morgan Chase & Co. yesterday agreed to pay $2.2 billion to settle a class-action lawsuit alleging the bank helped Enron Corp. report misleading financial results, the latest fallout from the accounting scandals of the late 1990s.”

  22. Vinny

    If the EU has any balls, this will go down badly for GS.

    I’m saddened to report that at the moment I had to leave sunny Greece and return to Ecomomy Collapse Central (aka USA), where I continue to be amazed by the rapid degradation of this once great nation. The infrasttucture here is falling apart, a quarter of the population lacks access to healthcare, homelessness is rampant, and people are completely demoralized (although much better informed than just a few years ago – even the cab driver that drove me from JFK had a pretty accurate explanation of what is happening in this nation). I am also amazed to see how empty my favorite NYC restaurants and shops are, and I ca’t understand how they can continue to stay open.

    Fortunately, in a short month I’m returnIng to Greece, where Easter preparations are already in full swing.


  23. Justicia

    So what are we to make of the Goldman-Paulson (John, that is) link:

    Goldman-John Paulson CDO scheme stinks of fraud
    By Kevin Connor • Feb 16, 2010

    hedge fund king John Paulson’s role in Greece deserves far more scrutiny. I wrote about this last week, pointing out that they shared the same vulture flight pattern in Greece, but at the time did not realize that Paulson and Goldman actually partnered in executing massive and profitable bets against the subprime market. Are they doing the same with Greece?

    What is John Paulson doing in Greece?
    By Kevin Connor • Feb 15, 2010
    News of Paulson’s fund taking large positions against Greek debt has barely risen above rumor in the English-language press, despite this article in a Greek daily, which says that Paulson is “orchestrating the pressure on Greek government bonds and the Euro,” and reports that Paulson has a team of 20-30 traders focused on Greece.

  24. M. G. in Progress

    Again it’s true that the recession is uncovering what auditors (and I add economists/statisticians) could not (or better did not want.
    Since foreign banks own some 70% of Greek debt, it appears clear that “market structures helped overcome information asymmetries and sustained the development of Greece sovereign debt”, under very peculiar conditions.
    This paper at http://www.princeton.edu/~pcglobal/conferences/globdem/papers/Bonds_and_Brands14.pdf
    can explain the incentives to fraud in the market for lemons of sovereign bonds…

  25. Robnarc

    “Fraud” is a comparative term. Just like “crook”, it represent a comparative essessment of the balance between self- and community-interest driving an action and the prevailing norm in the relevant society. Most of the financial services sector would immediately be recognised as fraudulent and crooked by an average observer plucked from the ’50s or 60’s, but since it’s what everyone in the industry does today it’s actually neither fraudulent nor crooked in 2010. A shame, really, for the rest of us.

  26. ploigos1

    Goverment Sucks. The “Greek Tragedy” was masterminded by the US FED and executed by their “sweetchild” Goldman Sachs and friends (Paulson etc). A political decision. Unless somebody out there believes that such intercontinental “ballistic” transactions involving megatons (50bn?) of fiat dollars and sovereign(?)foreign countries (a member of NATO as well) can happen “just like that” under the nose of the NSA, the CIA, the Department of State, the Congress, etc…
    The matter is not financial anymore, it is deeply political. It questions the founding principles and the interlocking cogs of the western world and the present and future stability of the social, legal and at the end western political system. The Greek financial bomb is already lit and ticking leading the Western World to a catastrophy. The illusion of fiat money and Democracy is fainting away as the presses keep printing at full speed bailouts and stimulus packages for the PIIGS and the underdogs of the Bankocracy Matrix…

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