Congress Needs to Clip Goldman's Wings

The New York Times' front page exposé on the role that Goldman Sachs has played in the Greek tragedy unfolding in Europe right now raises a huge number of concerns both for the U.S. economy and the financial reform measures now in Congress.

To recap, Greece and a number of other European Union (EU) countries are dangerously in debt. EU rules say member countries cannot have budget deficits that exceed three percent of GDP. Greece's debt is closer to 12 percent. Other countries including Spain, Ireland, Italy and Portugal are also in trouble. These countries are "too big to fail." A default by any one of them would rock the global markets, putting an end to the hopeful signs of an EU recovery and potentially leading to a "double dip" recession here in the United States.

Greece and perhaps the other EU nations have been hiding the extent of the debt for years. This week, it was revealed that they have been able to do this with the aid of major U.S. players like Goldman Sachs. The German magazine Der Spiegel broke the story that Greece did a billion-dollar currency swap with Goldman Sachs in 2002 that did not show up on the nation's books as debt.

Deals of the Gods?

Yesterday, the Times reported that there was a series of Goldman Greece deals that those chuckleheads at Goldman named after figures in Greek mythology. One of the deals was called Aeolos, after the god of the winds.

"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," reports the Times.

Off Book Deals

It walks like a loan, talks like a loan, but because it was actually a complex derivative deal, it was secret, bilateral, and off-book. No one knows how many of these deals there are underpinning the EU's debt numbers or the U.S. debt for that matter.

What the Times story missed is that right now neither the House financial reform bill nor the Senate proposal cover these types of currency swaps. While both bills attempt to to bring some degree of transparency to derivatives trades, they do not cover currency swaps. Why not? Well, this is a bit odd: the Federal Reserve does not want these deals covered.

While there is no evidence that the Federal Reserve is engaging in these types of currency swaps with banks from other nations, their objections to having these deals be made on open, transparent exchanges should ring some alarm bells. The U.S. also has substantial debt. Why tempt fate or creative accountants to borrow off book?

Flying Too High

Like Icarus, Goldman and other big banks, like JP Morgan, who have engaged in these massive deals, are flying a little to close to the sun. As concern about the Greek situation mounts, and as the worrisome implications for the health and well-being of the U.S. economy are become clearer, the big banks are doing their best to illustrate why major financial reform is needed and why no derivative trading should be off book.

The Senate needs to clip Goldman's wings and make sure that all derivatives are traded on an open exchange to provide the maximum level of transparency for the U.S. and the world.

Mary Bottari

Mary Bottari is a reporter for the Center for Media and Democracy (CMD). She helped launch CMD's award-winning ALEC Exposed investigation and is a two-time recipient of the Sidney Prize for public interest journalism from the Sidney Hillman Foundation.

Comments

Gosh.. What do Goldman Sachs thinks they are? Are they equivalent to Uncle Sam? And why do they need to care for the average Joe, or how Joe thinks about them?I suppose those who will get the fat bonus from GS or other banks will laugh at average Joe for their generous and stupid bailouts.

All this is handled in accordance with the interests of each political or nation involved, they see the economy of the people, only for its own economy.

Seriously, what is it that the Fed is so afraid of? Revealing the fact that they are incompetent, out of control, or thieves? We already knew that. There is only one reason for secrecy and we all know what that reason is, so get over yourselves, open it up, and let's start cleaning up the mess like adults, shall we? It's time for Congress to also come clean and root out the rot at the top. Instead, they act like two-year-olds fighting over the ball - that is, the ones who aren't acting like rats leaving a sinking ship. Oddly enough, the murkier things become, the clearer the motives involved. Get them all out, every last one of them. They had their chance and they blew it. Time to 'fess up and take their medicine.

It's time for Congress to also come clean and root out the rot at the top. Instead, they act like two-year-olds fighting over the ball - that is, the ones who aren't acting like rats leaving a sinking ship. Oddly enough, the murkier things become, the clearer the motives involved. Get them all out, every last one of them. They had their chance and they blew it. Time to 'fess up and take their medicine.

Engineered by the same Goldman Sachs involved in provoking the US supprime mortgage crisis, chances now stand that the Greek debt crisis has a big potential to destabilize the EU but also to kick back to the US economy as well ... The world economies and finances are so interconnected within the global economy, that it became literally impossible for a financial shock like the one in Greece to remain without consequences for the other (remote) countries as well ... Stay tuned for what will happen next, and how EU will decide to go about it - the issue might reveal some interesting aspects and connections

It sounds like Goldman Sachs was chasing that proverbial Golden Fleece again. I have to agree with Mhunter on this, it seems that Goldman Sachs "what's good for the geese is good for the gander" attitude will eventually bite them on the backside. If the levels of transparency needed for investor confidence were recognized it may have had resonating consequence's on all financial levels in the Greek economy so it's only natural that it got covered up. The irony in this is that these financiers seem to enjoy investing in 'impending doom' equity options, and if the trend continued long enough the shot term gains would be marred in the long term although that long term will never come! With oxymoron investment strategies and attitudes like these there's definitely going to be another financial earthquake on the not to distant future.

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