The holes in Goldman’s Greek defence
Goldman Sachs’ statement on its financial deals with Greece, which made the debt of this financially stretched nation seem smaller than it actually was, will not – I think – silence the many critics of the world’s most successful investment bank.
In a series of deals, Goldman did two things for Greece.
During December 2000 and January 2001, it “swapped” some of Greece’s Yen and Dollar debts into euros, using a “historical implied foreign exchange” rate rather than the market rate. In other words, it used invented exchange rates, rather than market rates, whose effect was to make it seem that Greece’s liabilities in its own currency were less than was actually the case.
Second, Goldman took on responsibility for paying the coupon – or fixed rate of interest – on a newly issued Greek bond, and received “cash flows based on variable interest rates”. Now, this is a rather opaque statement, but it implies that Greece sacrificed the certainty and comfort of fixed rate interest payments for variable ones.
So what was the effect of all of this?
Well Goldman say the deals “reduced Greece’s foreign denominated debt in euro terms by €2.367bn and – in turn – decreased Greece’s debt as a percentage of GDP by just 1.6 per cent, from 105.3 per cent to 103.7 per cent”.
Okay, so far, so factual.
What are Goldman’s justifications for entering into transactions whose primary purpose was to make it look as though Greece’s indebtedness was smaller than it actually was?
Well, there seem to be three.
First, it suggests that everyone was at it. Goldman says “Greece entered into a series of hedging agreements designed to transform foreign debt into euro, a common practice by many European member states with foreign debt outstanding”.
Why single out Goldman and Greece, if loads of other banks and EU countries were playing the same game, or a similar one?
Second, Goldman says that “the Greek government has stated (and we agree) that these transactions were consistent with the Eurostat principles governing their use and application at the time”. Or to put it another way, they did not breach the European Union’s accounting rules of the time.
And third, the deals “had a minimal effect on the country’s overall fiscal situation”. As Goldman points out, in 2001 Greece’s debt to GDP ratio was 103.7 per cent of GDP with a value of $131bn. In 2008, Greece’s national debt was 99 per cent of GDP with a value of $357bn.
In that context, deals that reduced the appearance of Greece’s debt by €2.367bn – or $3.2bn at current exchange rates (as opposed to “historical implied” ones) – seems a drop in the ocean, neither here nor there.
However, there does seem to me to be a gap in Goldman’s explanations and justifications – which is that they do not address the question of whether the deals were the right thing for a firm of its size and reputation to be doing.
Yesterday, one of Goldman’s managing directors, Gerald Corrigan – the former president of the New York Fed – told British MPs that “with the benefit of hindsight . . . the standards of transparency could have been and probably should have been higher”, in respect of such transactions.
But that seems to shift the blame to regulators who created a loophole; it’s not an examination of Goldman’s corporate conscience.
And here, I think, is what will concern those politicians and regulators who are currently wrestling not only with the narrow question of how to ensure that European countries borrow only what’s prudent, but are also contemplating a redesign of the financial system to prevent a repetition of the kind of banking crisis we saw in the autumn of 2008.
Goldman’s Greek defence carries the following momentous implication (albeit one that many will say is blindingly obvious): Goldman is in effect saying that banks will always go for the seemingly profitable deal, unless they are formally prohibited from doing so; and that it’s naive to expect them to do the “right thing”, in a nebulous ethical sense, unless they are obliged to do that right thing.
Which may reinforce the case of those – like the US president – who argue that the only safe bank is one that is subject to the tightest possible constraints on what it can do and has been cut down to a safe size.
But don’t expect Goldman to say three cheers for that.
