Goldman Sachs: Rewarded for Greek Debt Scheme

March 29th, 2012
in Op Ed

Written by ECB Watch

In an earlier article, EU's selective Lessons from Greece, we saw that EU Parliament's investigation of the financial crisis (CRIS), and the hearing Lessons from Greece (ECON/7/02578), lacked the resolve to address the Greece/Goldman secret loan that was allegedly improper and exacerbated Greece's ills.

Goldman Sachs' explanations contained gaping holes, and that was left unchallenged. Perhaps the most striking example of it is the the claim by its spokesman at a 2010 hearing before the EU parliament that he didn't know of the single most important restructuring of the deal in 2005:

Follow up:

These superficial initiatives by the EU, as pertaining to this particular issue, erode the credibility of the EU parliament. In contrast, the senate panel led by Levin and Coburn produced preliminary investigations of a number of cases in the mortgage crisis that were taken up by the SEC and the DOJ (McClatchy).

It is probably Commissioner Olli Rehn who planted the seed of this unsavory state of affairs. When a Director General for ECFIN says the Goldman/Greece deal is legal, that sets a powerful precedent. But it is flawed in multiple respects.

First, his judgment was pronounced with no arguments other than mentioning Greek law at the April 2010 hearing. Second, paradoxically, Eurostat says that it didn't review most of the evidence on the transactions until September of that year, due to delays by the Greek authorities. Third Olli Rehn ignored existing allegations of market abuse using special knowledge of Greece's actual, rather than reported, finances.

The thesis-without-basis is blithely disseminated by financial journalists. For example, in May 2010 Martin Wolf declared that the transactions were scandalous but perfectly legal (HuffPo). As an aside, that's a thorn in the side of a recent comment, in relation to journalists accepting soft dollar from Wall Street, that he is incorruptible because he "writes on the economy rather than on companies or personalities" (NakedCap)1.

Instead of facing scrutiny, Goldman Sachs was offered a partnership with the EU debt agency (EFSF), as we discuss next. The consequences of the EU's selective lessons from Greece are starting to emerge.


  1. "Rather than", indeed, but not in this major case. Furthermore, the statement "writes on the economy rather than on companies or personalities" could also be said of the characters in the documentary Inside job, although real dollars, rather soft dollars, would have better described their situation.

From 'illegitimate' to rewarded

A boycott of Goldman Sachs as punishment for its role in Greek debt crisis (we assume) appeared in an amendment resulting from the CRIS committee on the financial crisis (refer to the earlier article). However, it was a one liner without a supporting legal opinion. It was revoked by the chairman (Wolf Klinz), but nothing came to take its place.

On a related note, John Mann (Labour) of UK's Treasury Select Committee, the equivalent of the EU parliament ECON committee, and former Treasury spokesman in the Lords Matthew Oakeshott (LibDem) call for barring the bank access to the UK government bond market (Mirror).

The absence of a proper debate about the legitimacy of the bank to operate in the EU (at least in government debt markets) is unfortunate, but that shouldn't prevent EU debt agencies from exercising caution with this company. They are supposed to chose their partners for issuing debt conditional on technical requirements but also ethical behavior.

The emergency fund set up by the EU to deal with the government debt crisis is the European Financial Stability Facility (EFSF). It is funded and guaranteed by the member states of the EU. In spite of the above considerations, it granted Goldman Sachs primary dealer status (press release).

Getting a head start in this market may translate into a potentially lasting competitive advantage. Only three other banks were awarded this privilege. To see how lucrative that might turn out to be, EFSF bonds are the precursor of Eurobonds. If it materializes, their market could potentially rival in size US Treasuries. Mario Monti, who as of 2011 sat on the International Advisory Board of Goldman Sachs, is using his clout in the Eurozone to push for Eurobonds (DMN).

Olli Rehn said at the hearing Lessons from Greece in April 2010 that the transactions were "illegitimate" but "legal". The contradiction in terms illustrates what passes for due process at the EU Commission. Indeed, most of the evidence on the transactions wasn't examined until September 2010 by Eurostat, and the final report was delivered in November. Parliament sits still throughout. The EU Commission rewards Goldman Sachs with a contract via the newly set up European Financial Stability Facility in 2011.

Whereas the affair first made headlines in 2010, it has recently been revealed that "[Greece] didn’t understand what it was buying and was ill-equipped to judge the risks or costs" (Bloomberg). Had EU institutions done their job right, this kind of information would have already been laid bare in a report, instead of coming from news agencies at random.

The cost of impunity

Haven't we sometimes been told that preventing future crisis is what ultimately matters, and that we have look forward, not backward? Let's go with it, for argument's sake, and never mind Goldman and Greece's debt scheme. How well, then, has the European supervisory framework that CRIS was instrumental in shaping, done so far?

Dexia was a large lender to municipalities which was already bailed out in 2008 by France and Belgium. In 2011 it became insolvent after borrowing wholesale and overstretching its lending capability, calling for another bailout (Spiegel). Shortly before that, the European Banking Authority, a pillar of the new supervisory framework, had given it high scores on a stress tests.

It's too early to entirely blame the new supervisory framework for not catching it in time. But that doesn't leave CRIS (and the old framework, that is, member states) off the hook. Pending a proper EU executive body, it was the one that had its nose in the causes of the financial crisis.

According to a person called to witness in an investigation, an ex-CEO of Dexia allegedly confuses "making money for clients" with "smooth ride in elevator in free fall" (French Assembly). That's eerily reminiscent of the sort of recklessness that has been heard about the mortgage crisis.

Supervisory agencies have traditionally been overly friendly with the actors they are supposed to oversee. It's coming out in the open in the case of the FSA (HS), but the same could be said of its French counterpart (Libé). Tackling regulatory capture should have been the number one priority of CRIS. Instead, overlooking the Goldman/Greece problem reinforced the sense of impunity.

As the crisis repeats itself before our eyes, in a recent debate on insider trading, the former Chair of CRIS, Wolf Klinz, said: "worried that the rules on whistle blowing proposed in the regulation could create the wrong kind of incentive for staff" (Europarl). For comparison, the US regulator, faulted before for its leniency, now has a whistle blower program (SEC).


The fallout of Brussels based Dexia indicates that, while supposedly focused on the causes of the financial crisis, CRIS, led by Wolf Klinz, did not see problems similar to the mortgage crisis brewing in its own backyard. Meanwhile, the Greek-Goldman impropriety was swept under the carpet, courtesy of Commissioner Olli Rehn with the silent complicity of the ECON committee of the EU parliament, chaired by Sharon Bowles. For details, see our earlier article. The cherry on the cake is the EU Commission offering Goldman Sachs a privileged position in the emerging EU consolidated debt market.

This article is an expansion of a previous post


Further information:

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