11 ms·

How Goldman Sachs Helped Greece to Mask Its True Debt (2010)

137 points by Thorondor 11y ago

hussong 11y ago
(2010)
- Thorondor 11y ago
  Edited, thanks.
mmphosis 11y ago
http://www.spiegel.de/international/germany/germany-faces-billions-in-losses-if-greece-goes-bust-a-1041369.html http://www.spiegel.de/international/germany/germany-faces-bi...
- allendoerfer 11y ago
  As described in the different scenarios Germany would face only very few billions of liabilities in any given year. In total the numbers are high, but for the actual yearly budget, these amounts are peanuts. Even small German city-states are used to waste amounts of this size to build shiny concert halls [0] or airports that have crazy ventilation systems hidden below the floors. [0] https://en.wikipedia.org/wiki/Elbe_Philharmonic_Hall https://en.wikipedia.org/wiki/Elbe_Philharmonic_Hall
PythonicAlpha 11y ago
The whole story of Greece is not very nice. Many sides have had their share in this. The Greek government of this time has made some severe errors. But I see an even bigger share in the EU (also German) politicians of that time (before the Euro was installed). It is a fact, that those politicians sold the Euro to the German population (I guess to others the same way) with the argument, that no country will ever have to pay for an other Euro country. They said, that there are so many security measures installed ... But the weakest spot in those "security measures" where the politicians themselves. They wanted Greece to be inside the Euro, so they turned a blind eye to any warning signs. Of course they also turned a blind eye to every other country, because according to the "security measures" that where announced, nearly no country would have got the Euro ... (even Germany violated the terms) So, I see the biggest failure in the politicians, that just wanted to have this adventure -- without really managing the risks .... It is really an ugly business, and we will see, where all this disaster (the Euro) leads us to. In now 5 years of so-called crisis-management, they even did not manage to "rescue" Greece ... (they just prolonged the pain) and other countries can still become in trouble soon. With a bigger country, the troubles will be proliferated. For me, the whole case is a (n other) portent of the incapacity of today's politicians.
- secfirstmd 11y ago
  Also, the fact that France and Germany both broke the 3% deficit rule that they had so strongly insisted on. They never had to pay a penalty for this. So there was one rule for the big countries and another for everyone else. As I an Irish person, it makes me a bit bitter that ultimately part of whole problem for our economic recession was the Euro interest rates were ultimately too low for the economy we were running in the Celtic Tiger. Around 2003 or so onwards, we needed a higher interest rate to take the steam out of our economy. However, Germany and France had done pretty poorly for so long, we were locked into an interest rate and currency which was being dictated by them. Ultimately only we are to blame (no one put a gun to our heads and asked us to play real-life Monopoly) and we won't shirk it like other countries (even though we should have thrown a few of the banks and bond-holders to the wall) but it irritates me that these fact is not mentioned more often.
  - allendoerfer 11y ago
    New York has the same currency as Alabama. The US has no and will never have a unified economy and neither will we. We have to learn from our mistakes and install some systems to actually enforce these laws. Unfortunately those people that invaded your island back in the days hinder us bit :)
    - secfirstmd 11y ago
      The Vikings! Yes they are a pain in the ass :)
- iamcurious 11y ago
  >For me, the whole case is a portent of the incapacity of today's politicians. Yes. Hilbert said "Physics is too hard for physicists.". Politics is many order of magnitude harder. I would give one arm for reducing the difficulty of politics to even chemistry hard.
  - PythonicAlpha 11y ago
    Maybe chemists would be better politicians. Maybe nearly any educated person ...
Maarten88 11y ago
I hope that money will never be paid back, just to teach the people who accommodated this a lesson. Of course Goldman Sachs themselves cashed in on the deal immediately, and they probably used their client's money, so for them this has been a "successful trade". Will they ever stop, will they ever be kept accountable for what they do? I fear nothing will happen to them, again.
- PythonicAlpha 11y ago
  It will be like it happened to the German banks: When in trouble, tax payers will bail them out.
  - arbitrage314 11y ago
    People like to rip on Goldman, and indeed, they deserve it. One thing which should be noted, though. There were two banks that didn't need a bailout back in '08-'09: Goldman Sachs and JP Morgan. They were forced to take the money by none other than Goldman's ex-CEO: Hank Paulson.
    - jessaustin 11y ago
      Goldman (and Paulson) profited hugely by the bailout of AIG. This bailout was focused on securities issued by AIG that GS held, and certainly wouldn't have taken place had the securities been held by e.g. Lehman. Let's rip Goldman for that one, too. Counterparty risk is a bitch, unless you own the Treasury Department.
      - PythonicAlpha 11y ago
        In the case of Greece: As much I remember, one big German bank held many debts of this country in 2010, but the CEO of that bank also was the adviser of the German chancellor. No wonder, the so called rescue-umbrella did also rescue this banks money.
      - deleted 11y ago
        [deleted]
lucozade 11y ago
Does anyone know of any reference that covers the actual trade that was done? This implies a seriously off-market x-cry swap. I would be interested in the terms esp notional and rate. This article doesn't really explain much (other than that GS has savvy bankers which is nice to know)
- ShinyThings 11y ago
  This is the closest I was able to find; it's a Risk.net article from '03: http://www.risk.net/risk-magazine/feature/1498135/revealed-goldman-sachs-mega-deal-greece http://www.risk.net/risk-magazine/feature/1498135/revealed-g... Short answer: it was a 15-20yr CCS in about $10bio notional; the upfront payment amount isn't clear; and Goldman bought 20yr Greece CDS from Depfa to hedge the credit risk. And Nick Dunbar, who originally wrote the Risk article, followed up ten years later with a whole lot more detail: http://nickdunbar.net/2012/01/24/goldman-swap-shows-greece-was-europes-subprime-nation/ http://nickdunbar.net/2012/01/24/goldman-swap-shows-greece-w...
- lucozade 11y ago
  @ShinyThings. Thank you. Exactly what I was looking for. BTW your account is coming up as dead. In case you weren't aware.
arbitrage314 11y ago
"This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives." Sounds like Eurostat needs to hire some smarter people.
- makomk 11y ago
  They almost certainly knew - it wasn't exactly a secret at the time - they just didn't care for political reasons. All the political momentum was for further European integration.
  - stefantalpalaru 11y ago
    > All the political momentum was for further European integration. And for selling military equipment to Greece: http://www.theguardian.com/world/2012/apr/19/greece-military-spending-debt-crisis http://www.theguardian.com/world/2012/apr/19/greece-military...
  - mjklin 11y ago
    I lived in the UK during 1996-97 and there were plenty of stories in the news about the "poorer" countries being allowed to join the EU. Greece being the chief among them. You're right, they knew but they didn't care.
sizzzzlerz 11y ago
Goldman Sachs: the gift that keeps on taking and taking and...
shiven 11y ago
Honest question: Can someone explain, in plain english, why it would be a bad idea to just kick Greece out of the EU? What's wrong with some good old anarchy and lynching a few dozen former politicians who led the Greeks to this abyss in the first place? As an outsider, I am shocked by the hullaballoo going on to keep Greece in the EU. Why not let them reap what they sowed, as a nation?
- marcosdumay 11y ago
  As far as I know, if Greece does nothing very wrong (and defaulting isn't) there's no rule allowing other countries to kick them. Anyway, Greece does not want to get out because on the EU they can travel and commercialize. That's the easy one. Germany and the other creditors, by their side, do not want it because Greece may not pass trough that anarchy you talk about, but instead may get at the other side better than it is now. If that happens, the EU and their own economies are gone.
- Lazare 11y ago
  First, there's the currency (the euro), and the political and economic union (the EU). There's a lot of overlap, but they're not the same. There's a lot of debate about Greece and the euro, and while the current Greek government was elected on a platform of staying in the Euro, right now Greece is rapidly heading towards being ejected from it. But there's no real prospect (for now, anyhow) of them leaving the EU. > why it would be a bad idea to just kick Greece out of the EU? If you mean the EU, well, nobody really wants them to exit the Euro, but nobody wants them to exit the EU. It would also be ridiculously illegal; there's literally no process by which a country might be ejected. If you mean the Euro, well, that's an interesting question. The general consensus is that Greek exit would hurt the remaining members and Greece fairly severely; a real case of cutting off your nose to spite your face. Some have suggested (and I agree) that a Greek exit would be worse for the remaining Euro-members than it would be for Greece. > What's wrong with some good old anarchy We're talking about people lives; pensions, savings, jobs, dreams. I don't think your flippancy is really appropriate. In any case the victims of a Greek exit won't be politicians and bankers; it will be ordinary people, in and outside of Greece. > lynching a few dozen former politicians who led the Greeks to this abyss I don't think you understand politics. > Why not let them reap what they sowed For EU leaders, this isn't about Greece, it's about the Euro and the greater project of European integration. They don't want Greece out of the Euro, and they sure as hell don't want them out of the EU. What they want is to keep Greece in the EU, without pissing off their voters too much. It looks like, at the moment, Greece will exit the EU despite what people want.
j_lev 11y ago
http://faculty.chicagobooth.edu/anil.kashyap/research/papers/A-Primer-on-the-Greek-Crisis_june29.pdf http://faculty.chicagobooth.edu/anil.kashyap/research/papers... this recent summary is the best I have seen in the last couple of days.
harry8 11y ago
Where there is unconscionable conduct by a bank, Goldman Sachs are there. Where there is large scale fraud, Goldmans are there. Where politicians buy themselves a year of office at the expense of many years of misery for the people - Goldman's advising. Why do these guys have a banking license in the EU?
- mikhailfranco 11y ago
  They are not punished, but praised and rewarded. Draghi was head of GS Europe at that time, now he is head of the ECB, with the power of ELA, OMT and Q€ to control the fate of nations.
- Ntrails 11y ago
  When Gordon Brown launched the PPP scheme to essentially finance infrastructure development off the balance sheet, it was not an investment bank to blame - but a politician looking to fiddle the books to look good. GS are a symptom, not a cause. They have a license is because they did and do what the people in power wanted, and until you can come up with a way to change the people in power and the incentives they have to stay there...
zevkirsh 11y ago
it's funny how few people on this comment board fail to realize we in the west are all greece soon. too much leverage leads to an insolvent society, just as too much debt leads to an insolvent individual. the history of the world is largely intertwined with stories of debt------who is under the control of whom else? the answer to too much monetary debt is always monetary debasement. as the money supply is turned to toilet paper, as we have seen in the 20th century with zimbabwe and other countries------------the answer is that societies reform themselves. the result is other types of debt and relationships arise to fill the gap, while poverty sweeps over the nation. no financial trickery can solve this problem, at best one can hope to mitigate it. firms like goldman sachs seek to exaccerbate it as financialization is rooted in crisis capitalism, generating and encouraging crisis in order to take advantage of it. the entire wall street edifice has transititoned over the years from semi responsible stewards of financial wealth, to a parasitic casino that is built upon the practice of crisis capitalism, bribery and price manipualtion.
fasteo 11y ago
Lots of comments trashing GS. I generally agree with all of them, but in an effort to be critical, I end up thinking that GS just executes what their customers don't have the guts/knowledge to do by themselves. Not that they are not legally/morally liable, but GS is not the only one to blame. As with everything in life, nothing is black or white.
anonbanker 11y ago
all the guys at the top know that if you want to cook the books, you use Goldman Sachs and PriceWaterhouseCoopers to keep you afloat.

137 points by Thorondor 11y ago

hussong 11y ago

(2010)

Thorondor 11y ago
Edited, thanks.

mmphosis 11y ago

http://www.spiegel.de/international/germany/germany-faces-billions-in-losses-if-greece-goes-bust-a-1041369.html http://www.spiegel.de/international/germany/germany-faces-bi...

allendoerfer 11y ago
As described in the different scenarios Germany would face only very few billions of liabilities in any given year. In total the numbers are high, but for the actual yearly budget, these amounts are peanuts. Even small German city-states are used to waste amounts of this size to build shiny concert halls [0] or airports that have crazy ventilation systems hidden below the floors. [0] https://en.wikipedia.org/wiki/Elbe_Philharmonic_Hall https://en.wikipedia.org/wiki/Elbe_Philharmonic_Hall

PythonicAlpha 11y ago

The whole story of Greece is not very nice. Many sides have had their share in this. The Greek government of this time has made some severe errors. But I see an even bigger share in the EU (also German) politicians of that time (before the Euro was installed). It is a fact, that those politicians sold the Euro to the German population (I guess to others the same way) with the argument, that no country will ever have to pay for an other Euro country. They said, that there are so many security measures installed ... But the weakest spot in those "security measures" where the politicians themselves. They wanted Greece to be inside the Euro, so they turned a blind eye to any warning signs. Of course they also turned a blind eye to every other country, because according to the "security measures" that where announced, nearly no country would have got the Euro ... (even Germany violated the terms) So, I see the biggest failure in the politicians, that just wanted to have this adventure -- without really managing the risks .... It is really an ugly business, and we will see, where all this disaster (the Euro) leads us to. In now 5 years of so-called crisis-management, they even did not manage to "rescue" Greece ... (they just prolonged the pain) and other countries can still become in trouble soon. With a bigger country, the troubles will be proliferated. For me, the whole case is a (n other) portent of the incapacity of today's politicians.

secfirstmd 11y ago
Also, the fact that France and Germany both broke the 3% deficit rule that they had so strongly insisted on. They never had to pay a penalty for this. So there was one rule for the big countries and another for everyone else. As I an Irish person, it makes me a bit bitter that ultimately part of whole problem for our economic recession was the Euro interest rates were ultimately too low for the economy we were running in the Celtic Tiger. Around 2003 or so onwards, we needed a higher interest rate to take the steam out of our economy. However, Germany and France had done pretty poorly for so long, we were locked into an interest rate and currency which was being dictated by them. Ultimately only we are to blame (no one put a gun to our heads and asked us to play real-life Monopoly) and we won't shirk it like other countries (even though we should have thrown a few of the banks and bond-holders to the wall) but it irritates me that these fact is not mentioned more often.
- allendoerfer 11y ago
  New York has the same currency as Alabama. The US has no and will never have a unified economy and neither will we. We have to learn from our mistakes and install some systems to actually enforce these laws. Unfortunately those people that invaded your island back in the days hinder us bit :)
  - secfirstmd 11y ago
    The Vikings! Yes they are a pain in the ass :)
iamcurious 11y ago
>For me, the whole case is a portent of the incapacity of today's politicians. Yes. Hilbert said "Physics is too hard for physicists.". Politics is many order of magnitude harder. I would give one arm for reducing the difficulty of politics to even chemistry hard.
- PythonicAlpha 11y ago
  Maybe chemists would be better politicians. Maybe nearly any educated person ...

Maarten88 11y ago

I hope that money will never be paid back, just to teach the people who accommodated this a lesson. Of course Goldman Sachs themselves cashed in on the deal immediately, and they probably used their client's money, so for them this has been a "successful trade". Will they ever stop, will they ever be kept accountable for what they do? I fear nothing will happen to them, again.

PythonicAlpha 11y ago
It will be like it happened to the German banks: When in trouble, tax payers will bail them out.
- arbitrage314 11y ago
  People like to rip on Goldman, and indeed, they deserve it. One thing which should be noted, though. There were two banks that didn't need a bailout back in '08-'09: Goldman Sachs and JP Morgan. They were forced to take the money by none other than Goldman's ex-CEO: Hank Paulson.
  - jessaustin 11y ago
    Goldman (and Paulson) profited hugely by the bailout of AIG. This bailout was focused on securities issued by AIG that GS held, and certainly wouldn't have taken place had the securities been held by e.g. Lehman. Let's rip Goldman for that one, too. Counterparty risk is a bitch, unless you own the Treasury Department.
    - PythonicAlpha 11y ago
      In the case of Greece: As much I remember, one big German bank held many debts of this country in 2010, but the CEO of that bank also was the adviser of the German chancellor. No wonder, the so called rescue-umbrella did also rescue this banks money.
    - deleted 11y ago
      [deleted]

lucozade 11y ago

Does anyone know of any reference that covers the actual trade that was done? This implies a seriously off-market x-cry swap. I would be interested in the terms esp notional and rate. This article doesn't really explain much (other than that GS has savvy bankers which is nice to know)

ShinyThings 11y ago
This is the closest I was able to find; it's a Risk.net article from '03: http://www.risk.net/risk-magazine/feature/1498135/revealed-goldman-sachs-mega-deal-greece http://www.risk.net/risk-magazine/feature/1498135/revealed-g... Short answer: it was a 15-20yr CCS in about $10bio notional; the upfront payment amount isn't clear; and Goldman bought 20yr Greece CDS from Depfa to hedge the credit risk. And Nick Dunbar, who originally wrote the Risk article, followed up ten years later with a whole lot more detail: http://nickdunbar.net/2012/01/24/goldman-swap-shows-greece-was-europes-subprime-nation/ http://nickdunbar.net/2012/01/24/goldman-swap-shows-greece-w...
lucozade 11y ago
@ShinyThings. Thank you. Exactly what I was looking for. BTW your account is coming up as dead. In case you weren't aware.

arbitrage314 11y ago

"This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives." Sounds like Eurostat needs to hire some smarter people.

makomk 11y ago
They almost certainly knew - it wasn't exactly a secret at the time - they just didn't care for political reasons. All the political momentum was for further European integration.
- stefantalpalaru 11y ago
  > All the political momentum was for further European integration. And for selling military equipment to Greece: http://www.theguardian.com/world/2012/apr/19/greece-military-spending-debt-crisis http://www.theguardian.com/world/2012/apr/19/greece-military...
- mjklin 11y ago
  I lived in the UK during 1996-97 and there were plenty of stories in the news about the "poorer" countries being allowed to join the EU. Greece being the chief among them. You're right, they knew but they didn't care.

sizzzzlerz 11y ago

Goldman Sachs: the gift that keeps on taking and taking and...

shiven 11y ago

Honest question: Can someone explain, in plain english, why it would be a bad idea to just kick Greece out of the EU? What's wrong with some good old anarchy and lynching a few dozen former politicians who led the Greeks to this abyss in the first place? As an outsider, I am shocked by the hullaballoo going on to keep Greece in the EU. Why not let them reap what they sowed, as a nation?

marcosdumay 11y ago
As far as I know, if Greece does nothing very wrong (and defaulting isn't) there's no rule allowing other countries to kick them. Anyway, Greece does not want to get out because on the EU they can travel and commercialize. That's the easy one. Germany and the other creditors, by their side, do not want it because Greece may not pass trough that anarchy you talk about, but instead may get at the other side better than it is now. If that happens, the EU and their own economies are gone.
Lazare 11y ago
First, there's the currency (the euro), and the political and economic union (the EU). There's a lot of overlap, but they're not the same. There's a lot of debate about Greece and the euro, and while the current Greek government was elected on a platform of staying in the Euro, right now Greece is rapidly heading towards being ejected from it. But there's no real prospect (for now, anyhow) of them leaving the EU. > why it would be a bad idea to just kick Greece out of the EU? If you mean the EU, well, nobody really wants them to exit the Euro, but nobody wants them to exit the EU. It would also be ridiculously illegal; there's literally no process by which a country might be ejected. If you mean the Euro, well, that's an interesting question. The general consensus is that Greek exit would hurt the remaining members and Greece fairly severely; a real case of cutting off your nose to spite your face. Some have suggested (and I agree) that a Greek exit would be worse for the remaining Euro-members than it would be for Greece. > What's wrong with some good old anarchy We're talking about people lives; pensions, savings, jobs, dreams. I don't think your flippancy is really appropriate. In any case the victims of a Greek exit won't be politicians and bankers; it will be ordinary people, in and outside of Greece. > lynching a few dozen former politicians who led the Greeks to this abyss I don't think you understand politics. > Why not let them reap what they sowed For EU leaders, this isn't about Greece, it's about the Euro and the greater project of European integration. They don't want Greece out of the Euro, and they sure as hell don't want them out of the EU. What they want is to keep Greece in the EU, without pissing off their voters too much. It looks like, at the moment, Greece will exit the EU despite what people want.

j_lev 11y ago

http://faculty.chicagobooth.edu/anil.kashyap/research/papers/A-Primer-on-the-Greek-Crisis_june29.pdf http://faculty.chicagobooth.edu/anil.kashyap/research/papers... this recent summary is the best I have seen in the last couple of days.

harry8 11y ago

Where there is unconscionable conduct by a bank, Goldman Sachs are there. Where there is large scale fraud, Goldmans are there. Where politicians buy themselves a year of office at the expense of many years of misery for the people - Goldman's advising. Why do these guys have a banking license in the EU?

mikhailfranco 11y ago
They are not punished, but praised and rewarded. Draghi was head of GS Europe at that time, now he is head of the ECB, with the power of ELA, OMT and Q€ to control the fate of nations.
Ntrails 11y ago
When Gordon Brown launched the PPP scheme to essentially finance infrastructure development off the balance sheet, it was not an investment bank to blame - but a politician looking to fiddle the books to look good. GS are a symptom, not a cause. They have a license is because they did and do what the people in power wanted, and until you can come up with a way to change the people in power and the incentives they have to stay there...

zevkirsh 11y ago

it's funny how few people on this comment board fail to realize we in the west are all greece soon. too much leverage leads to an insolvent society, just as too much debt leads to an insolvent individual. the history of the world is largely intertwined with stories of debt------who is under the control of whom else? the answer to too much monetary debt is always monetary debasement. as the money supply is turned to toilet paper, as we have seen in the 20th century with zimbabwe and other countries------------the answer is that societies reform themselves. the result is other types of debt and relationships arise to fill the gap, while poverty sweeps over the nation. no financial trickery can solve this problem, at best one can hope to mitigate it. firms like goldman sachs seek to exaccerbate it as financialization is rooted in crisis capitalism, generating and encouraging crisis in order to take advantage of it. the entire wall street edifice has transititoned over the years from semi responsible stewards of financial wealth, to a parasitic casino that is built upon the practice of crisis capitalism, bribery and price manipualtion.

fasteo 11y ago

Lots of comments trashing GS. I generally agree with all of them, but in an effort to be critical, I end up thinking that GS just executes what their customers don't have the guts/knowledge to do by themselves. Not that they are not legally/morally liable, but GS is not the only one to blame. As with everything in life, nothing is black or white.

anonbanker 11y ago

all the guys at the top know that if you want to cook the books, you use Goldman Sachs and PriceWaterhouseCoopers to keep you afloat.