[Occupymendocino] Goldman Sachs and Gree e

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[image: Economist, professor, author and political commentator Robert
Reich. (photo: Richard Morgenstein)]
Economist, professor, author and political commentator Robert Reich.
(photo: Richard Morgenstein)

[image: go to original article] <http://robertreich.org/post/124342268010>

How Goldman Sachs Profited From the Greek Debt Crisis

By Robert Reich, Robert Reich's Blog

19 July 15



he 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.

Meanwhile, cities and states across America have been forced to cut
essential services because they’re trapped in similar deals sold to them by
Wall Street banks. Many of these deals have involved swaps analogous to the
ones Goldman sold the Greek government.

And much like the assurances it made to the Greek government, Goldman and
other banks assured the municipalities that the swaps would let them borrow
more cheaply than if they relied on traditional fixed-rate bonds—while
downplaying the risks they faced. Then, as interest rates plunged and the
swaps turned out to cost far more, Goldman and the other banks refused to
let the municipalities refinance without paying hefty fees to terminate the
deals.

Three years ago, the Detroit Water Department had to pay Goldman and other
banks penalties totaling $547 million to terminate costly interest-rate
swaps. Forty percent of Detroit’s water bills still go to paying off the
penalty. Residents of Detroit whose water has been shut off because they
can’t pay have no idea that Goldman and other big banks are responsible.

Likewise, the Chicago school system—whose budget is already cut to the
bone—must pay over $200 million in termination penalties on a Wall Street
deal that had Chicago schools paying $36 million a year in interest-rate
swaps.

A deal involving interest-rate swaps that Goldman struck with Oakland,
California, more than a decade ago has ended up costing the city about $4
million a year, but Goldman has refused to allow Oakland out of the
contract unless it ponies up a $16 million termination fee—prompting the
city council to pass a resolution to boycott Goldman. When confronted at a
shareholder meeting about it, Blankfein explained that it was against
shareholder interests to tear up a valid contract.

Goldman Sachs and the other giant Wall Street banks are masterful at
selling complex deals by exaggerating their benefits and minimizing their
costs and risks. That’s how they earn giant fees. When a client gets into
trouble—whether that client is an American homeowner, a US city, or
Greece—Goldman ducks and hides behind legal formalities and shareholder
interests.

Borrowers that get into trouble are rarely blameless, of course: They spent
too much, and were gullible or stupid enough to buy Goldman’s pitches.
Greece brought on its own problems, as did many American homeowners and
municipalities.

But in all of these cases, Goldman knew very well what it was doing. It
knew more about the real risks and costs of the deals it proposed than
those who accepted them. “It is an issue of morality,” said the shareholder
at the Goldman meeting where Oakland came up. Exactly.


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+4#
<http://readersupportednews.org/opinion2/277-75/31368-focus-how-goldman-sachs-profited-from-the-greek-debt-crisis#comment-508536>
 Activista 2015-07-19 12:09
"Goldman Sachs and the other giant Wall Street banks are masterful at
selling complex deals by exaggerating their benefits and minimizing their
costs and risks. That’s how they earn giant fees."
deception, lies is the core of present marketing in the USA .. how long
this system can last?
Great analysis by Reich


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+3#
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 wantrealdemocracy 2015-07-19 13:18
"It is an issue of morality" for sure and the banksters and our government
and our top .01% of the people in this nation HAVE NONE.

To have any morality you must be able to put yourself in someone else's
shoes. You have to treat others as you would like to be treated. You have
to have the ability to care for others and respect them and have no desire
to hurt them. Can't say that about any member of the Federal Reserve
private banking cartel. Nor can you say it about our elected officials in
the District of Criminals.

The system will last until the people rise up and say, "I'm mad as hell and
I won't take it any more!"

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