The Tangled History of Draghi, Greece, Goldman Sachs and Morgan Stanley

February 20th, 2012
in Op Ed

by Guest Author, ECB Watch

Herein we retrace the events of the Goldman-Greece-Draghi controversy and relate it to the Draghi-Morgan-Stantley disclosure issue. The June 2011 ECB spider-webSMALLPresident nomination hearing at the Committee on Economic and Monetary Affairs of the European Parliament will serve as a point of reference.

Before the hearing

Prior to nomination hearing (June 2011), there had been a series of posts at Baseline Scenario (Simon Johnson, James Kwak), notably this one, raising the alarm about a possible connection to the falsification of Greek debt data while at Goldman Sachs. Apparently, Draghi felt compelled to clarify, in a statement released by the Central Bank of Italy (BOI).

Follow up:

MEP Pascal Canfin and the former chair of the ECON Committee (EU parliament), Pervenche Berès, wrote an article in Le Monde, alleging that he must have known quite well of the masking scheme because he was in charge of dealings in government debt. They asked him, basically, how he could have stood by and did nothing about it. They asked him, what, with the benefit of hindsight, he makes of these practices. They clearly threw him a line by asking him to speak up against regulatory capture and the collusion of government with big finance—prescient, it turns out—, which, they deplored, he had thus far failed to do. Instead, he reacted with defiance at the hearing, as we see next.

J-C Trichet took the bold step, one month before the June hearing—can't overlook the timing—, of vetoing a legal proceeding by Bloomberg vis a vis the EU's General Court, for the ECB to release details about the Goldman-Greece deal. The alleged reason? Preventing market risk. Keep in mind that in November 2010, Eurostat published a comprehensive report of the regularization of Greece's national accounts with respect to the Goldman currency swaps (amongst other irregularities). What sort of details, then, were not in the audit report, but were in the ECB files?

At the hearing

At the hearing, MEP Pascal Canfin said he was unconvinced by his earlier statements (BOI, we assume) and asked him what he had to say about it. He answered with two arguments.

The first argument is that since the deal was done in 2001, before he joined the firm (2002), he could not have any implication in it. Yet, the size of the masking scheme nearly doubled in 2006, as a result of a major restructuring in 2005, while still working for Goldman. The bank was reportedly lead underwriter in the following years and allegedly engaged in market abuses in connection with their special knowledge of the Greek finance (the Fed said it would look into in 2010, but the outcome is now seems overdue).

His second line of defense is that, out of personal preference, he only dealt with corporate clients, not governments. This is does not make much sense and is contradicted by two press releases, one from Goldman at the time of his hiring, and the other from Bloomberg in 2005, just before joining the BOI in January 2006.

Just after the hearing

Unlike the written statement, the oral Q&A was left out of the report, prepared by the ECON Committee, that was sent to MEPs for them to vote on the nomination. Admittedly this is standard practice (we checked for the nomination of Trichet), but the red flag should have been brought to the attention of the MEPs. For anyone who was curious to know more than the report, ECON's press release would have been the next stop, but it sugar coated the problem.

First, the contentious issue is presented as involvement with Goldman Sachs and whether this could negatively affect his perceived integrity as ECB president.. What is implied, here, is that guilt by association is the problem; an obvious fallacy that reasonable MEPs would/should reject. But the actual reason of the discord, instead, was the infamous Goldman-Greek deal, and his connection thereof1, which have far reaching ethical and economic consequences (Greece's debt crisis).

Second, the press release said:

"Mr Draghi vehemently defended himself, saying that [...] his track record since [Goldman Sachs] in clamping down on the banking sector and warning about the build up of risk proved that he would not be in the pocket of the financial industry."

By default, one has to assume this answer was satisfactory. Yet, Pascal Canfin said the opposite in webcast, shortly after the hearing. It's fair to assume P. Berès thought the same, and it's hard to believe the attendees of the hearing did not recognize that Draghi's answer was flimsy.

  1. The fudge is quite subtle because, admittedly, the press release refers to the actual issue by giving an account of Draghi's defense: "Mr Draghi vehemently defended himself, saying that he was not involved in the bank's work with governments". Let's put the two statements together: "Draghi defended himself from his past involvement with Goldman Sachs by saying he was not involved in the bank's work with government". Without knowing what is in question about his "past involvement", it makes no sense.

Days after the hearing

Soon after (on the 23rd of June), the chair of the committee, Sharon Bowles (ALDE), issued a press release endorsing Draghi, that said
I was impressed by the answers he gave to my committee drawing on his past experience, not just repeating ECB lines. On Greece of course he did follow the ECB 'no credit event, no haircuts' line but was fulsome in explaining the effect such an event would have on banks. Many other answers were also interesting and thought provoking.
Indeed the NY Times published an article (the 14th of June) titled Mario Draghi holds ECB line against restructuring for Greece. What's the reason for "of course", and what were the lines we was not repeating?

MEP Pascal Canfin would have probably agreed with the qualification of thought provoking on the issue of a the effect such an event would have on banks but for bad reasons. In an interview (at around 1:40, English subtitles) he said that the 'no credit event' line was to protect American banks that sold insurance against a default; a position that the MEP judged inadmissible.

It is noteworthy that, in February 2012, Joseph Stiglitz published an article at Project Syndicate that contains1
the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe’s taxpayers, and creditors who acted prudently and bought insurance.
This is compatible with what MEP Canfin had said Draghi had said. It would be more straightforward to read the hearing's full transcript but is no longer to be found online2, and ECON has ignored a request for documentation in the past (unlike the UK Treasury Select Committee).

  1. The market abuse allegation that can be found in connection to the deal Goldman-Greece deal, is that Goldman was shorting Greece (at some point in time) on th basis of to insider knowledge. This may seem in contradiction with the view of Stiglitz. The fact that a "few banks" (including Goldman) sold CDS insurance on Greek sovereign debt, does not imply they were long Greece. Only the net position would tell us that, across a borad range of financial instruments, which likely has evolved over time. In any case, it's the net position on Greek-debt CDS contracts specifically, that should determine whether the parties prefer a voluntary exchange or not, for Greece. Naturally, the reasoning becomes more complicated when you consider that an involuntary exchange for Greece could induce other countries to do the same.
  2. It used to be: "Hearing of Mario Draghi nominated to take over the European Central Bank 14-06-2011" (in (French)). Europa (web portal). Retrieved 26 June 2011.

Flashback of the hearing

In the fall of 2011, Spanish newspaper Tiempo claimed in an article that it received documents containing examples of his dealings with government, from the Central Bank of Italy (BOI). We rely on an automatic translation, so we're not sure whether this was a damage control initiative or a whistle blower (the article only said it was surprising). If it was a damage control initiative, the subtext would probably be

Yes, his tongue slipped, but it doesn't change the fact that he had no connection with the deal. Need proof? There is no evidence to the contrary.

And BOI would have a point. As much as Draghi's strange attitude has raised the level suspicion, the smoking gun remains elusive ... except if you include as evidence Pascal Canfin's assertion ("témoignages malheureusement purement oraux ...") that there are multiple oral accounts from Goldman Sachs employees, EU treasury agencies, mutual and hedge fund managers, that support the hypothesis that Draghi promoted debt masking schemes to governments.  The NY Times reported something similar1:

Goldman and Mr. Draghi have each said that he had no involvement in the Greece-Goldman initiative, although one Goldman executive based in Europe, who was not authorized to speak publicly, said Mr. Draghi had discussed similar initiatives with other European governments.
The Spanish article says that Draghi had told Handesblatt (affiliated with the WSJ) in 2010 that there was more than one deal between Greece and Goldman Sachs. Was he thinking of the 2005 "major restructuring", as an important Eurostat audit describes it, by any chance? It seems to elude attention each time you'd expect that it would, on the contrary, be the focus of attention (notably in Goldman's communication, see here and here).

  1. Anecdotally, the same NY Times article says Draghi produced a deep treatise on government debt. No, he didn't. He was co-editor, which means, for this type of publication, that his input was minimal (read the table of contents).

Undisclosed conflict of interest

This written statement, included in the nomination report,
4. [...A]re there any other relevant personal factors [...] that need to be taken account of by the Parliament when considering your nomination?

[Draghi] No.
is misleading because Draghi's son has been a bond trader at Morgan Stanley for some years, reported by the newsmagazine Nouvel Observateur in January 2012. For instance, Morgan Stanley could potentially profit or unduly influence the markets (MS is a primary dealer in the EU), from an information leaked by Draghi to his son. The section on conflict of interest (4.1) of the ECB code of conduct (2002/C 123/06) specifically addresses "potential advantage for their families".

Further to a discussion at Global Economic Intersection, it is necessary to clarify that a conflict of interest is neither an impropriety (corruption, breach of duty/confidentiality etc.), nor does it presume that the the characters of the parties involved are in question.1

In principle, there is virtually no downside from disclosing this conflict of interest. An answer such as this one, given in the above discussion,
I have relatives and acquaintances who are employed by major banks and financial institutions but they will have no influence over my decisions in the proposed position
would have been perfectly fine. The written answers, including the one above, must have been carefully pondered by Draghi, who probably relied on trusted advisers. We have to assume, therefore, that the aforementioned principle did not apply to Draghi, that is, there was a downside from disclosing the conflict of interest. What might have it been is a puzzle.

Obviously, the downside of not disclosing the conflict of interest, when it is uncovered, is that it reinforces the likelihood that full disclosure was not on Draghi's mind during the nomination process. That, in turn, indirectly reinforces the likelihood that Draghi withheld information about this connection to the Goldman-Greece deal.

  1. Sometimes people use the expression potential conflict of interest, as opposed to an actual conflict of interest, the latter designating an impropriety resulting from a (potential) conflict of interest.


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  1. John Schranz Email says :

    The public hearing of Mr Draghi in the european Parliament IS available on the Parliament's webpage contrary to what this article claims. It can be viewed here:

  2. Admin (Member) Email says :

    The author has rewritten the first part of the section "Flashback of the hearing" to improve clarity. The article has been updated.

  3. Admin (Member) Email says :

    @John Schranz:

    The following comment was supplied by the author by e-mail:

    No, not contrary to what this article claims. I didn't talk of viewing the hearing, but reading the transcript. But I tried viewing it, after installing the required plugin (Flip4Mac), and I hear all the translations at the same time. John Schranz, who is Press officer at European Parliament covering economic and monetary affairs, should perhaps consider getting us the transcript. And, while we're at it, it would be nice if he could also send us a document that was requested by email on 12/28/11:

    the transcript of the public hearing "Lessons from the crisis in Greece : Economic surveillance, statistics and off-balance sheet operations"organized by the ECON Committee, held in Brussels on Wednesday 14-04-2010?

  4. Admin (Member) Email says :

    @John Schranz:

    This editor spent four hours yesterday trying to access the video referenced in your comment but has been unsuccessful. We also would like to see the written transcript, rather than a video which is labeled with the caution that the translations contained may not be accurate representations of the testimony.

    John Lounsbury



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