Goldman Bet Against Entire European Nations – Who Were Clients – the Same Way It Bet Against Its Subprime Mortgage Clients
July 16, 2011
It is well-documented that big banks like Goldman Sachs made money by betting against investments which they themselves bundled and sold to their own clients, such as packages of subprime mortgage-related products such as collateralized debt obligations.
This practice not only was illegal and unethical, but actually worsened the subprime crisis. See this, this, this, this and this.
But did you know that the big banks did the same thing with entire European nations?
As Andrew Gavin Marshall notes:
Greece has a total debt of roughly 330 billion euros (or U.S. $473 billion).[New York Times] So how did this debt get out of control? As it turned out, major U.S. banks, specifically J.P. Morgan Chase and Goldman Sachs, “helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules.” The deficit rules in place would slap major fines on euro member states that exceeded the limit for the budget deficit of 3% of GDP (gross domestic product), and that the total government debt must not exceed 60% of GDP.Greece hid its debt through “creative accounting,” and in some cases, even left out huge military expenditures. While the Greek government pursued its “creative accounting” methods, it got more help from Wall Street starting in 2002, in which “various investment banks offered complex financial products with which governments could push part of their liabilities into the future.” Put simply, with the help of Goldman Sachs and JP Morgan Chase, Greece was able to hide its debt in the future by transferring it into derivatives. A large deal was signed with Goldman Sachs in 2002 involving derivatives, specifically, cross-currency swaps, “in which government debt issued in dollars and yen was swapped for euro debt for a certain period — to be exchanged back into the original currencies at a later date.” The banks helped Greece devise a cross-currency swap scheme in which they used fictional exchange rates, allowing Greece to swap currencies and debt for an additional credit of $1 billion. Disguised as a ‘swap,’ this credit did not show up in the government’s debt statistics. As one German derivatives dealer has stated, “The Maastricht rules can be circumvented quite legally through swaps.”[Spiegel]