Wall St. Helped to Mask Debt Fueling Europe ’s Crisis

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

De suggestie die veel voorkomt in de commentaren is het land bankrupt te
laten gaan en zorgen dat de betreffende banken hetzelfde lot ondergaan.

Goed idee, alleen dan zal tezelfder tijd een 'eigen markt' voor de Euro
opgezet moeten worden. Iets voor de ECB?

En dan uiteraard voedselbanken opzetten in Griekenland ;)

Groet / Cees

February 14, 2010
Wall St. Helped to Mask Debt Fueling Europe’s Crisis
http://www.nytimes.com/2010/02/14/business/global/14debt.html
By LOUISE STORY, LANDON THOMAS Jr. and NELSON D. SCHWARTZ

Wall Street tactics akin to the ones that fostered subprime mortgages in
America have worsened the financial crisis shaking Greece and
undermining the euro by enabling European governments to hide their
mounting debts.

As worries over Greece rattle world markets, records and interviews show
that with Wall Street’s help, the nation engaged in a decade-long effort
to skirt European debt limits. One deal created by Goldman Sachs helped
obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for
ways to help Greece forestall the day of reckoning. In early November —
three months before Athens became the epicenter of global financial
anxiety — a team from Goldman Sachs arrived in the ancient city with a
very modern proposition for a government struggling to pay its bills,
according to two people who were briefed on the meeting.

The bankers, led by Goldman’s president, Gary D. Cohn, held out 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.

It had worked before. In 2001, just after Greece was admitted to
Europe’s monetary union, Goldman helped the government quietly borrow
billions, people familiar with the transaction said. That deal, hidden
from public view because it was treated as a currency trade rather than
a loan, helped Athens to meet Europe’s deficit rules while continuing to
spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece
groaning under the weight of its debts and with its richer neighbors
vowing to come to its aid, the deals over the last decade are raising
questions about Wall Street’s role in the world’s latest financial drama.

As in the American subprime crisis and the implosion of the American
International Group, financial derivatives played a role in the run-up
of Greek debt. 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 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.

Critics say that such deals, because they are not recorded as loans,
mislead investors and regulators about the depth of a country’s liabilities.

Some of the Greek deals were named after figures in Greek mythology. One
of them, for instance, was called Aeolos, after the god of the winds.

The crisis in Greece poses the most significant challenge yet to
Europe’s common currency, the euro, and the Continent’s goal of economic
unity. 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.

A spokeswoman for the Greek finance ministry said the government had met
with many banks in recent months and had not committed to any bank’s
offers. All debt financings “are conducted in an effort of
transparency,” she said. Goldman and JPMorgan declined to comment.

While Wall Street’s handiwork in Europe has received little attention on
this side of the Atlantic, it has been sharply criticized in Greece and
in magazines like Der Spiegel in Germany.

“Politicians want to pass the ball forward, and if a banker can show
them a way to pass a problem to the future, they will fall for it,” said
Gikas A. Hardouvelis, an economist and former government official who
helped write a recent report on Greece’s accounting policies.

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.

“If a government wants to cheat, it can cheat,” said Garry Schinasi, a
veteran of the International Monetary Fund’s capital markets
surveillance unit, which monitors vulnerability in global capital markets.

Banks eagerly exploited what was, for them, a highly lucrative symbiosis
with free-spending governments. While Greece did not take advantage of
Goldman’s proposal in November 2009, it had paid the bank about $300
million in fees for arranging the 2001 transaction, according to several
bankers familiar with the deal.

Such derivatives, which are not openly documented or disclosed, add to
the uncertainty over how deep the troubles go in Greece and which other
governments might have used similar off-balance sheet accounting.

The tide of fear is now washing over other economically troubled
countries on the periphery of Europe, making it more expensive for
Italy, Spain and Portugal to borrow.

For all the benefits of uniting Europe with one currency, 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.

Derivatives do not have to be sinister. The 2001 transaction involved a
type of derivative known as a swap. One such instrument, called an
interest-rate swap, can help companies and countries cope with swings in
their borrowing costs by exchanging fixed-rate payments for
floating-rate ones, or vice versa. Another kind, a currency swap, can
minimize the impact of volatile foreign exchange rates.

But with the help of JPMorgan, 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.

“Derivatives are a very useful instrument,” said Gustavo Piga, an
economics professor who wrote a report for the Council on Foreign
Relations on the Italian transaction. “They just become bad if they’re
used to window-dress accounts.”

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.

These kinds of deals have been controversial within government circles
for years. As far back as 2000, European finance ministers fiercely
debated whether derivative deals used for creative accounting should be
disclosed.

The answer was no. But in 2002, accounting disclosure was required for
many entities like Aeolos and Ariadne that did not appear on nations’
balance sheets, prompting governments to restate such deals as loans
rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics
agency, reported that “in a number of instances, the observed
securitization operations seem to have been purportedly designed to
achieve a given accounting result, irrespective of the economic merit of
the operation.”

While such accounting gimmicks may be beneficial in the short run, over
time they can prove disastrous.

George Alogoskoufis, who became Greece’s finance minister in a political
party shift after the Goldman deal, criticized the transaction in the
Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the
government with big payments to Goldman until 2019.

Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message
last week that Goldman later agreed to reconfigure the deal “to restore
its good will with the republic.” He said the new design was better for
Greece than the old one.

In 2005, Goldman sold the interest rate swap to the National Bank of
Greece, the country’s largest bank, according to two people briefed on
the transaction.

In 2008, Goldman helped the bank put the swap into a legal entity called
Titlos. But the bank retained the bonds that Titlos issued, according to
Dealogic, a financial research firm, for use as collateral to borrow
even more from the European Central Bank.

Edward Manchester, a senior vice president at the Moody’s credit rating
agency, said the deal would ultimately be a money-loser for Greece
because of its long-term payment obligations.

Referring to the Titlos swap with the government of Greece, he said:
“This swap is always going to be unprofitable for the Greek government.”
-------------------------------------------------------------------------
7.
Rance Spergl
Chicago
February 14th, 2010
11:19 am
This becomes more and more unbelievable as details become known. What
are we supposed to do, descend into anarchy, march to Wall Street and
have an undisguised lynching of these people?

I can't find a job. I can't fix my car or afford to see a doctor. Where
does this end?
  Recommend  Recommended by 320 Readers
6.
JesterJames
Pennsylvania
February 14th, 2010
11:19 am
Is anyone suprised that Goldman Sachs is again at the front and center
of this?
  Recommend  Recommended by 281 Readers
9.
Winski
Chicago
February 14th, 2010
11:21 am
So it's the same group of crooks from JP Morgan and Goldman that brought
most of the rest of the world to it's knees over the last two years that
are doing the same thing again but mostly in struggling countries in the
lower-band European economies..I see, and we're suppose to pay them
BILLIONS more in new bonuses to let them get us out of this mess too??

Governments and legislators and regulators that allow this to happen
should all BE IN JAIL with Bernie Madoff not in a BILLION DOLLAR
MANSION!! What are you clown thinking?? So all these prominent 'free
market warriors' are DESTROYING economies world wide. If anyone,
anywhere says the word 'regulation' it's like lunatics start chanting
from the streets "the sky is falling - the sky is falling"....

WHY ARE WE CONTINUING TO LET THIS HAPPEN??
  Recommend  Recommended by 236 Readers
3.
times
Houston, TX
February 14th, 2010
11:18 am
Wall Street fat cats, in the words of Boss Tweed, want to know "What are
you going do about it?" as the stroll into the White House and the hall
of congress where their cronies wield power. How outraged do Americans
have to be before this president and this congress reign in Wall Street
scumbags? Where are the cops?
  Recommend  Recommended by 219 Readers
2.
Brandon
Ohio
February 14th, 2010
11:18 am
I don't think this surprises anyone.

It is clear that Market Fundamentalism is a bankrupt, immoral ideology.

Too bad that taxpayers, worldwide, have experienced double indemnity as
a result of this chimera.
  Recommend  Recommended by 185 Readers
17.
the long emergency
Iowa
February 14th, 2010
11:23 am
why isn't someone in jail for this yet. I am still waiting to for
someone to tell me why we even keep Goldman Sachs around...this seems
like legalized crime to me.
  Recommend  Recommended by 183 Readers
10.
fed up
Florida
February 14th, 2010
11:21 am
What’s the problem? This is just more of Goldman Sachs doing God’s work.
  Recommend  Recommended by 147 Readers
13.
bellsmith
Canada
February 14th, 2010
11:22 am
It may be "perfectly legal" but it's blatantly criminal. Lucky for Wall
Street, the US government has decided to protect their crimes instead of
their victims.
  Recommend  Recommended by 140 Readers
8.
JD
Kansas City, MO
February 14th, 2010
11:19 am
This clearly indicates why there should be closer scrutiny of and
stricter control over the financial institutions, like Goldman Sachs. In
the absence of such oversight we are likely to see more, not less,
financial crises, as we see today.
  Recommend  Recommended by 135 Readers
1.
Anne
Idaho
February 14th, 2010
11:18 am
Does this mean that when European countries finally default that we have
to bail out the banks again? These banks should be finally allowed to
fail - this is ridiculous. Why can't they use their bonuses to bail out
Greece? That would be the right thing to do.
  Recommend  Recommended by 130 Readers
23.
CitizenWhy
Providence, RI
February 14th, 2010
12:39 pm
Sad facts:
Swedish capitalism lets companies fail, economy and social benefits to
thrive. A true free market.

US capitalism will not let Wall St, privileged companies fail while it
lets its economy and social benefits to wilt.

The US stands for perpetual war, a finance based economy, massive debt,
and, on the plus side, a reward system for entrepreneurs of all sizes.
But how long can entrepreneurship last under a debt taht cannot ever be
repaid.

Multiplication of unpayable debt is what Wall street has been all about,
and Obama, the rich man's President, praises Goldman Sachs. Ugh!

Sad story.
  Recommend  Recommended by 113 Readers
43.
RAB
Michigan
February 14th, 2010
12:50 pm
Goldman Sachs is like a crack dealer operating in the shadows and
targeting money addicts. Now their addicts are turning up dead all over
the place. They are dealing some bad stuff out on the streets.
  Recommend  Recommended by 98 Readers
33.
dnini5
Princeton, NJ
February 14th, 2010
12:47 pm
"A giant vampire squid wrapped around humanity,with it's blood funnel
stuck into anything that smells like money"
  Recommend  Recommended by 95 Readers
16.
Fathoms
Faroe Islands
February 14th, 2010
11:23 am
When are we going to make these fatcats accountable?
  Recommend  Recommended by 94 Readers
4.
soap-suds
BOKOK
February 14th, 2010
11:19 am
Naw, we do not need any stinking financial regulations!
  Recommend  Recommended by 91 Readers
12.
Delta Jordan
Palm Bay
February 14th, 2010
11:22 am
Nobody has commented on this yet?
The citizens of Greece should "bankrupt" their Lotto games and stop
paying out their Lotto proceeds to the "buyers" of that revenue stream
that Goldman finagled. Restart the games calling them "Greece Lucky
Numbers".
Anyone who bought Greece's future Lotto revenue, deserves to lose their
money. Anyway, the buyers should sue Goldman Sachs, and go after the
personal assets of those scallywags, who were getting around EU debt
rules by calling the debt by another name. Am I missing anything?
  Recommend  Recommended by 82 Readers
18.
sbanicki
michigan
February 14th, 2010
11:23 am
Does anyone doubt that the financial services industry does not need to
be further regulated?
  Recommend  Recommended by 75 Readers
22.
Marcus
Sweden
February 14th, 2010
12:36 pm
This is probably one example why China restricts its internal markets
and refuses to let "private foreign capital" in in any serious way. Why
willingly let the fox into the chicken coop?
  Recommend  Recommended by 73 Readers
11.
Tell the Truth
Bloomington, IL
February 14th, 2010
11:21 am
If Greece were an individual or a family, most people would say, "Why
did they borrow more than they could pay back?"

It will be interesting to see if most people change their tune and turn
on the bankers who made it easy for Greece to fall into such a deep
hole. If Greece (with its finance ministers, etc.) is not culpable, what
chance does a family of financially illiterate people have?

And what role did hosting the Olympics have in all of this? And why
wasn't the IOC on top of this? Or did it also turn a blind-eye towards
Greece's financial inability to host the Olympics.

I'm not saying the bankers don't share some of the blame. But this isn't
like an adult offering candy to children. This is more like an adult
offering candy to a dentist.
  Recommend  Recommended by 73 Readers
37.
linda
brooklyn
February 14th, 2010
12:48 pm
we're spending trillions on warfare with our children cast off to
far-flung places when the true enemies of this country and the gravest
threat to international stability are headquartered in lower manhattan.

perhaps european authorities will be more inclined to hold these pigs
accountable. clearly the united states has abdicated any and all
recognition in the rule of law -- and most certainly morality.
  Recommend  Recommended by 70 Readers
34.
Bill
New Jersey
February 14th, 2010
12:47 pm
Under the "Volcker Rule", banks would not be permitted to participate in
such chicanery at the potential expense of the American taxpayer; and
Goldman Sachs would be required to either act as a bank, or give up it's
bank status, lose it's taxpayer protection privileges, and they
themselves be responsible for their profit/loss, i.e. in the eyes of the
government "not too big to fail."

Goldman's been sucking too long on both teats.
  Recommend  Recommended by 70 Readers
47.
M.C.Niu
Garden City, N.Y.
February 14th, 2010
12:52 pm
It is time to extend the Federal RICO (Racketeer Influenced & Corrupt
Organizations) Act to cover those devious and dubious scheme of
derivatives that the banksters are so cleverly masked for their criminal
gains under the pretense of maximumizing the function of capitalism.
  Recommend  Recommended by 56 Readers
20.
Diane B
The Dalles, OR
February 14th, 2010
11:24 am
Take care if you do business with Goldman Sachs and friends!
  Recommend  Recommended by 52 Readers
62.
joe
NY
February 14th, 2010
1:05 pm
The fact that financial derivatives effecively DID NOT EXIST 20 years
ago is proof that they are not essential, so let's put that argument to
rest. These products were invented by ruthlessly deceptive bankers and
irresponsible mathematicians they hired as tax and debt evasion schemes.
They allow a company or a country to cook the books by design using
off-balance sheet vehicles, and the financial services industry sharks
who peddle them get paid very handsomely in fees for deceptive and
dangerous innovations that should be criminalized. Like 20 years in
prison with no chance of parole. How about that?
Swaps, whether the despicable credit default "bet against the homeowners
whose bundled mortgages I sliced and diced and sold to stupid investors
in Iceland" kind, or the devilish interest rate "pay no attention to
your financial troubles, Greece, that'll be $300 million dollars,
please" kind, that oily Goldman reps sold, are all FINANCIAL WEAPONS OF
MASS DESTRUCTION. They are not benign, they have a sordid history,
already, with many, many, many examples of the damage they can cause in
just the last 20 years. Anyone who says differently is lying and anyone
who defends them as necessary or useful is probably doing so for money.

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