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Sun 7 Mar 2010 12:00 AM

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Goldman Sachs is innocent, this time at least

For once, the whipping boys and girls of finance are innocent, says Mark Gilbert.

Goldman Sachs is innocent, this time at least
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For once, the whipping boys and girls of finance are innocent.

The European Union is investigating Goldman Sachs Group Inc's role in the financial sleight of hand that helped Greece use swaps to postpone the day of economic reckoning past its ascension to euro membership. Goldman says, rightly, there was "nothing inappropriate" in the transactions it facilitated.

Most of the elements of a crime are present. There's a victim - trust in the common-currency project. There's a weapon, in the form of the derivatives that trimmed €2.37bn ($3.2bn) off the nation's debt burden. And there's a perpetrator, the Greek government, which knew its finances were too shaky to ditch its currency, the drachma.

There also seems to be an accomplice - Goldman Sachs, which had the financial-engineering skills to crack open Greece's budget deficit and spirit enough of its obligations away to a future date to ensure it qualified to join the euro.

What's missing is any broken law. The architects of European integration knowingly and with malice aforethought added the words "additional measures" in a footnote to the blueprint, letting Italy fudge its numbers to get into the club.

That's the same loophole Greece was able to exploit, in line with the rules, aided and abetted by Goldman Sachs. So while German chancellor Angela Merkel said this month "it's a scandal if it turned out that the same banks that brought us to the brink of the abyss helped fake the statistics," she's wagging her finger at the wrong party.

The DNA of investment bankers drives them to find and exploit malleable clauses, bend rules, take maximum advantage of the unintended consequences of legislation. Chastising Goldman Sachs for flexing its muscles on behalf of a customer is akin to slapping a kitten for its adventures with a ball of wool.

Society doesn't want to outlaw investment banking (not yet, anyway), any more than it wants to euthanise wool-bothering kittens. The trick is to keep the knitting supplies locked in a cupboard; the EU cannot leave the door ajar for reasons of Italian political expediency, and then complain when the floor ends up resembling a Jackson Pollock.

Creative accounting - which is just a polite way to talk about cooking the books - is nothing new for countries. Italy used a yen-denominated swap to give its finances a one-time puff and avoid the ignominy of failing to qualify for the euro.

In the UK, so-called public-private partnerships and private finance initiatives allow the government to shift the burden of costly infrastructure onto the balance sheets of companies that tender successfully to manage and build the projects. The companies get access to rampant profit potential, in return for the government suppressing its debt burden.

Greece is a particularly apt subject for the old joke about lies, damned lies and statistics. In September 2004, the nation had to revise up its deficits for 2000, 2001 and 2002. The gap for the first year was more than doubled to 4.1 percent, while that of the two later years almost tripled to 3.7 percent.

Put bluntly, it turned out that the country had missed the three percent deficit threshold for euro membership in every single year since joining the common currency - transgressions that went unpunished. So no one should be surprised that Greek finance minister George Papaconstantinou (pictured) confessed to "some sleight of hand" in Greece's 2009 deficit numbers.

The Greece debacle is likely to hasten and worsen increased oversight of the derivatives market. In particular, contracts where the buyer doesn't have any skin in the game are akin to writing auto insurance for people who don't own a car and don't even have a driver's licence, but who nevertheless fancy a bet on the likelihood of a car crash.

Financial authorities will probably outlaw such behaviour, ignoring the difficulties of differentiating between efficient risk management and risk creation. Moreover, governments are clearly uncomfortable with the concept of investors being able to bet against a country's creditworthiness in the credit- default swaps market. This may spur an unwelcome and unnecessary intervention by the dead hand of regulation.

The trick Goldman Sachs employed to help Greece massage its debt figures hinged on using historical, rather than prevailing, currency rates in a series of swap transactions. While that undoubtedly comes under the heading of fast-and-loose, it's not illegal; swaps are over-the-counter contracts between consenting adults, so no matter how divorced the values are from reality, it really isn't anybody else's business.

Goldman Sachs has become the lightning rod for public anger about the global bailout of the finance industry. The vexation is appropriate; there's too little humility and too much arrogance, and scant recognition that every financial firm, no matter how clever its partners, would be dead without an ocean of taxpayers' money keeping the system afloat. In the case of Greece's swaps, though, Goldman Sachs has done nothing wrong. The European Union's forensics squad should be looking closer to home for its culprit.

Mark Gilbert is a columnist for Bloomberg News. The opinions expressed are his own.

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Simon 10 years ago

I see from what angle this article is coming from...the fact no LEGAL law was broken at the time, however, GoldmanSachs IS guilty of helping and insighting and cohersing Greece into evading the EU rules of the day with regards to debt burden. Should Goldman Sachs have exercised a 'duty of care' to the people of Greece and the EU? I would say so...but the Banksters care for nothing but profit. If there were nothing in it for the banks they wouldn't have helped Greece at all or proposed the evasion. They took debt off the balance sheet, legally, but they would have known it was dangerous and not in the spirit of social responsibility. Bottom line is...they would have always have found a way around the rules as long as there was a $ in it for them. Whether it was in the interests of the nation wouldn't have mattered...the nation being its client! It definately wasn't Illegal at the time it was done BUT it definately WASN'T DISCLOSED...which means it wasn't a transaction Greece or GoldmanSachs wanted anyone to know about. If you are afraid to disclose transactions that you are fully aware would be frowned upon...then morally you know it shouldn't have been done iun the first place. If thats the case then both Greece and Goldmansachs diserve to be mistrusted. Why should the EU bail out Greece? Why should the population of all the other nations tax payers pay for Greeces misjudgement? Having said all that...conspiracies aside...the EU shouldn't be in place at all because none of the countries actually meet the actual criteria of membership! I could go on ...but lets leave it there

SR 10 years ago

We can safely assume Goldman knew full well that they were aiding and abetting Greece to transgress EU rules. If that is the case, what does it say about their integrity as a financial institution? Awnser, they apparently have none! Should we then assume that they can’t act with integrity? If that is the case, OK then, bring on the draconian regulatory handbrake even if it is a total overkill. If Banks can’t be trusted to act responsibly, they should be regulated to the hilt.

gordon 10 years ago

they are all doing it, even Germany does it., They sold some autobahn to a private equity group then leased it back. This way it is no longer on the books as a liability/debt but only as a running costs. This helps to reduce the state deficit.. They are all doing it.