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How Goldman Sachs Profited from the Greek Debt Crisis

By       Message Robert B. Reich     Permalink
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Reprinted from Robert Reich Blog

From youtube.com/watch?v=U9LgpDetKAo: Investment Bank Goldman Sachs
Investment Bank Goldman Sachs
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The Greek debt crisis offers another illustration of Wall Street's powers of persuasion and predation, although the Street is missing from most accounts.

The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldman's current CEO, Lloyd Blankfein.

Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it. And just as with the American subprime crisis, and the current plight of many American cities, Wall Street's predatory lending played an important although little-recognized role.

In 2001, Greece was looking for ways to disguise its mounting financial troubles. The Maastricht Treaty required all eurozone member states to show improvement in their public finances, but Greece was heading in the wrong direction.

Then Goldman Sachs came to the rescue, arranging a secret loan of 2.8 billion euros for Greece, disguised as an off-the-books "cross-currency swap" -- a complicated transaction in which Greece's foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.

As a result, about 2 percent of Greece's debt magically disappeared from its national accounts. Christoforos Sardelis, then head of Greece's Public Debt Management Agency, later described the deal to Bloomberg Business as "a very sexy story between two sinners."

For its services, Goldman received a whopping 600 million euros ($793 million), according to Spyros Papanicolaou, who took over from Sardelis in 2005. That came to about 12 percent of Goldman's revenue from its giant trading and principal-investments unit in 2001 -- which posted record sales that year. The unit was run by Blankfein.

Then the deal turned sour. After the 9/11 attacks, bond yields plunged, resulting in a big loss for Greece because of the formula Goldman had used to compute the country's debt repayments under the swap. By 2005, Greece owed almost double what it had put into the deal, pushing its off-the-books debt from 2.8 billion euros to 5.1 billion.

In 2005, the deal was restructured and that 5.1 billion euros in debt locked in. Perhaps not incidentally, Mario Draghi, now head of the European Central Bank and a major player in the current Greek drama, was then managing director of Goldman's international division.

Greece wasn't the only sinner. Until 2008, European Union accounting rules allowed member nations to manage their debt with so-called off-market rates in swaps, pushed by Goldman and other Wall Street banks. In the late 1990s, JPMorgan enabled Italy to hide its debt by swapping currency at a favorable exchange rate, thereby committing Italy to future payments that didn't appear on its national accounts as future liabilities.

But Greece was in the worst shape, and Goldman was the biggest enabler. Undoubtedly, Greece suffers from years of corruption and tax avoidance by its wealthy. But Goldman wasn't an innocent bystander: It padded its profits by leveraging Greece to the hilt -- along with much of the rest of the global economy. Other Wall Street banks did the same. When the bubble burst, all that leveraging pulled the world economy to its knees.

Even with the global economy reeling from Wall Street's excesses, Goldman offered Greece another gimmick. In early November 2009, three months before the country's debt crisis became global news, a Goldman team proposed a financial instrument that would push the debt from Greece's healthcare system far into the future. This time, though, Greece didn't bite.

As we know, Wall Street got bailed out by American taxpayers. And in subsequent years, the banks became profitable again and repaid their bailout loans. Bank shares have gone through the roof. Goldman's were trading at $53 a share in November 2008; they're now worth over $200. Executives at Goldman and other Wall Street banks have enjoyed huge pay packages and promotions. Blankfein, now Goldman's CEO, raked in $24 million last year alone.

Meanwhile, the people of Greece struggle to buy medicine and food.

There are analogies here in America, beginning with the predatory loans made by Goldman, other big banks, and the financial companies they were allied with in the years leading up to the bust. Today, even as the bankers vacation in the Hamptons, millions of Americans continue to struggle with the aftershock of the financial crisis in terms of lost jobs, savings, and homes.

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http://robertreich.org/

Robert Reich, former U.S. Secretary of Labor and Professor of Public Policy at the University of California at Berkeley, has a new film, "Inequality for All," to be released September 27. He blogs at www.robertreich.org.


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