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Subject: 	[Marxism] Goldman and Greece
Date: 	Mon, 15 Feb 2010 09:22:39 -0500
From: 	Louis Proyect <lnp3 at panix.com>
Reply-To: 	Activists and scholars in Marxist tradition
<marxism at lists.econ.utah.edu>
To: 	aorta <aorta at home.nl>


http://baselinescenario.com/2010/02/14/goldman-goes-rogue-%E2%80%93-special-european-audit-to-follow/
Goldman Goes Rogue – Special European Audit To Follow
By Simon Johnson

At 9:30pm on Sunday, September 21, 2008, Goldman Sachs was saved
from imminent collapse by the announcement that the Federal
Reserve would allow it to become a bank holding company – implying
unfettered access to borrowing from the Fed and other forms of
implicit government support, all of which subsequently proved most
beneficial.  Officials allowed Goldman to make such an
unprecedented conversion in the name of global financial
stability.  (The blow-by-blow account is in Andrew Ross Sorkin’s
Too Big To Fail; this is confirmed in all substantial detail by
Hank Paulson’s memoir.)

We now learn – from Der Spiegel last week and today’s NYT – that
Goldman Sachs has not only helped or encouraged some European
governments to hide a large part of their debts, but it also
endeavored to do so for Greece as recently as last November.
These actions are fundamentally destabilizing to the global
financial system, as they undermine: the eurozone area; all
attempts to bring greater transparency to government accounting;
and the most basic principles that underlie well-functioning
markets.  When the data are all lies, the outcomes are all bad –
see the subprime mortgage crisis for further detail.

A single rogue trader can bring down a bank – remember the case of
Barings.  But a single rogue bank can bring down the world’s
financial system.

Goldman will dismiss this as “business as usual” and, to be sure,
a few phone calls around Washington will help ensure that
Goldman’s primary supervisor – now the Fed – looks the other way.

But the affair is now out of Ben Bernanke’s hands, and quite far
from people who are easily swayed by the White House.  It goes
immediately to the European Commission, which has jurisdiction
over eurozone budget issues.  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.

This audit should focus on ten sets of questions.

    1. Which eurozone governments have worked with Goldman, and on
what basis, over the past decade?  All actions prior to and after
the introduction of the euro need to be thoroughly reexamined.
    2. What transactions has Goldman facilitated and how has that
affected the reporting of European government debt?  (Under the
Maastricht Treaty, eurozone government debt is not supposed to
exceed 60 percent of GDP.)
    3. In the case of Greece, the accusation is that Goldman
deliberately and in a premeditated manner conspired to hide the
true degree of government debt.  Is this true, and to what extent
has Goldman helped other countries engage in similar transactions,
e.g., countries now seeking entry to the eurozone?
    4. What is the full extent of Greek and other government
liabilities, if these are accounted for properly?  Without this
reckoning, it is impossible to design a proper level of European
Union (or any other) support for weaker eurozone countries.
    5. Are there non-eurozone countries that have also been aided
and abetted by Goldman in this fashion?  For example, are the UK
and Switzerland implicated – and thus endangered?
    6. Has Goldman extolled the virtues of government debt in
Greece, or other countries, while at the same time helping to
deceive investors on the true risks inherent in those debts?  What
were Goldman’s own holdings of these securities?
    7. Is there evidence that Goldman has structured similar
transactions for the private sector – enabling companies to
conceal the level of their true indebtedness?  Have securities
issued by such firms also been endorsed by Goldman to the buying
public?
    8. Were Goldman’s US-based supervisors aware of Goldman’s
activities in Greece and other eurozone countries?  Did they
condone activities that undermine the integrity of the European Union?
    9. Where was the European Central Bank while all of this was
happening?  Has the ECB become dangerously enraptured with the new
Wall Street and its “techniques”?
   10. Did any responsible official really think that what Goldman
was constructing was really some sort of productivity-enhancing
financial innovation – as opposed to a sophisticated form of scam?

The Federal Reserve must cooperate fully with this investigation.
  Ordinarily, the Fed might be tempted to sit on useful
information, but they can now feel themselves in Senator Bob
Corker’s crosshairs.  Republican Senator Corker is willing to
cooperate with Senator Dodd on financial sector reform, opening up
the possibility of legislation that will pass the Senate, but he
wants the Fed to lose its supervisory powers.  If the Fed refuses
to help – willingly and fully - the European Commission with
bringing Goldman to account, that will just strengthen the hand of
Senator Corker and his allies.

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.

Instead, Goldman will probably be blacklisted from working with
eurozone governments for the foreseeable future; as was the case
with Salomon Brothers 20 years ago, Goldman may be on its way to
be banned from some government securities markets altogether.  If
it is to be allowed back into this arena, it will have to address
the inherent conflicts of interest between advising a government
on how to put (deceptive levels of) lipstick on a pig and cajoling
investors into buying livestock at inflated prices.

And the US government, at the highest levels, has to ask a
fundamental question: For how long does it wish to be intimately
associated with Goldman Sachs and this kind of destabilizing
action?  What is the priority here - a sustainable recovery and a
viable financial system, or one particular set of investment bankers?

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.

The credibility of the Federal Reserve, already at an all-time
low, has just suffered another crippling blow; the ECB is also now
in the line of fire.  Goldman Sachs has a lot to answer for.

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