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Goldman Sachs helped Greece "skirt" European Union debt limits leading to the
current financial crisis, reported the New York Times.
The report, based on interviews and documents reviewed notes that the tactics
employed by Wall Street were similar, at least conceptually to the same ones
that prompted the subprime mortgage crisis.
The Times, reporting based on interviews with individuals close to the situation
noted that as early as November, Goldman Sachs was in Greece bringing "modern
solutions" to the Mediterranean nation. According to the report, Goldman offered
Greece a "a financing instrument that would have pushed debt from Greece’s health
care system far into the future, much as when strapped homeowners take out second
mortgages to pay off their credit cards." And this wasn't the first time that
Goldman had come to Greece's aid. According to the report, in 2001, Goldman engineered
a solution that featured a loan, basically disguised as a currency trade that "helped
Athens to meet Europe’s deficit rules while continuing to spend beyond its means." The
fact that Goldman structured the deal as a currency trade kept the transaction
from public view.
And although Greece didn't take Goldman up this time, The Times article notes
that the use of derivatives remained a central part of the potential transaction
and "Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range
of other banks enabled politicians to mask additional borrowing in Greece, Italy
and possibly elsewhere." In fact, as the Times points out "In dozens of deals
across the Continent, banks provided cash upfront in return for government payments
in the future, with those liabilities then left off the books. Greece, for example,
traded away the rights to airport fees and lottery proceeds in years to come." In
essence, the report suggests that aside from the usual political smoke and mirror
tricks employed in jiggering annual budgets, there may be more significant problems
that lie ahead, based on the assumption that more derivative based deals have
been cut with other countries.
What makes the Greece issue significant, aside from the lack of transparency,
is the involvement of major banks. The New York Times reported: "The country
is, in the argot of banking, too big to be allowed to fail. Greece owes the world
$300 billion, and major banks are on the hook for much of that debt. A default
would reverberate around the globe."
So here's where it gets even better. None of this, is in the strictest sense
illegal. According to The Times: "Wall Street did not create Europe’s debt problem.
But bankers enabled Greece and others to borrow beyond their means, in deals
that were perfectly legal. Few rules govern how nations can borrow the money
they need for expenses like the military and health care. The market for sovereign
debt — the Wall Street term for loans to governments — is as unfettered as it
is vast."
Even more important is to know why this happened. Aside from the obvious link
to human nature, that everyone wants to live beyond their means and pass trouble
on into the future, the formation of the E.U. is central to this crisis. When
the union was formulated, countries like Greece were nowhere near the financial
place needed to enter. So in came in Wall Street with so called solutions, or
ways to get the books to look as if they met criteria. In the meantime, liabilities
were disguised and pushed forward in order to make things look acceptable. And
large fees were collected. The New York Times reports that Greece paid Goldman
Sachs $300 million for the 2001 deal.
The bottom line is that "the birth of the euro came with an original sin: countries
like Italy and Greece entered the monetary union with bigger deficits than the
ones permitted under the treaty that created the currency. Rather than raise
taxes or reduce spending, however, these governments artificially reduced their
deficits with derivatives."
And Greece is not alone. According to The Times: "Italy was able to do more than
that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s
budget into line by swapping currency with JPMorgan at a favorable exchange rate,
effectively putting more money in the government’s hands. In return, Italy committed
to future payments that were not booked as liabilities." Greece's deals are even
more startling. According to The Times: "In Greece, the financial wizardry went
even further. In what amounted to a garage sale on a national scale, Greek officials
essentially mortgaged the country’s airports and highways to raise much-needed
money. Aeolos, a legal entity created in 2001, helped Greece reduce the debt
on its balance sheet that year. As part of the deal, Greece got cash upfront
in return for pledging future landing fees at the country’s airports. A similar
deal in 2000 called Ariadne devoured the revenue that the government collected
from its national lottery. Greece, however, classified those transactions as
sales, not loans, despite doubts by many critics."
So is Goldman holding the bag? Are you kiding? The Times reports that Goldman
sold its stake in the 2001 currency swap to The National Bank of Greece in 2005.
Conclusion
The story about the tangled web created by derivatives is mind boggling. To be
sure, there is no apparent legal problem here, and the ethics are murky. After
all, governments have duties to their populations with regard to keeping services
going.
What this is about is more about the fiat money system, which is based on the
legal tender promise, which is akin to air, as new money comes from the mind
of whoever is in charge of the central banks.
Indeed, we may be watching the early stages of a multi-tiered implosion of the
fiat system. But, whether this implosion matters or not remains uncertain.
The majority of the world's population has no idea as to what fiat money means,
or that the whole global financial system is based on a sort of fiction concocted
by central bankers and the markets' perception of who's got a better imagination.
This may turn out to be a non event, at least from a market standpoint. But,
then, maybe not. It just gets crazier with every new day.
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