THE BLOG

The Real Culprits of the Euro Crisis

06/09/2010 05:12 am ET | Updated May 25, 2011
  • Joshua Rosner Managing Director at independent research consultancy Graham Fisher & Co

So here we go again. To uncover the real culprits of the current euro
crisis we first have to follow a common thread of this crisis --
government borrowers who need capital hire bankers. Those bankers, in
an effort to help countries, like Greece, raise capital at the lowest
cost, employed loopholes that they wired into legal and accounting
rules, hiding the economic truths of the issuer from investors. To
assure investors that everything is good, the bankers then hired and
paid the rating agencies to put their seal of approval on the
transactions. Had they been honestly apprised of the condition of the
issuer, the investors would have charged a much higher rate of
interest. Instead, bankers who owed investors a duty to fully disclose
risks misled them. This is the crisis, this is the crime and here lies
the blame.

The regular and hackneyed refrain: "It's the hedge funds," has become
the enduring symbol of the financial crisis and of the misleading
rhetoric of the truly guilty parties. Hedge funds did not cause this
crisis, if anything they and their clients (retirement funds by and
large) have been twice wronged -- first by dishonest issuers of
securities, and now by governments who refuse to acknowledge their own
culpability. The parties that caused the crisis through their
collusion have sought to shift culpability to those who were harmed by
their collusion - the public as individuals and also investors through
retirement and savings accounts that are invested in pension, mutual
and hedge funds. Rather than accept responsibility for complicity (and
the disaster that complicity wrought) public officials that sold their
independence to the purchased perspectives of the oligarchy of global
banks, now seek to join the sirens beckoning investors to crash back
into the rocks.

Greece's agreement to accept austerity will not end the crisis, will
not end the economic stress of the population and will not likely
prevent eventual default. But betting on the default is not the crime,
nor is it the larger part of the reason that the debt costs of that
country have risen. Former Greek governments, in an effort to lower
their cost of debt issuance and paint a picture pretty enough to
justify their entry into the European Monetary Union, hired investment
bankers to help them manipulate their financial statements,. This is
the moral crime. The rating agencies failures either to recognize, or
worse their decision to ignore this manipulation. These are not
theoretical offenses; they are real and they have real victims. As a
result of this seeming collusion, individual investors -- were under-
compensated for the risks they took.

As was the case with Bear Stearns, Lehman and all the others, once the
truth was uncovered investors fled and new investors demanded returns
on their investments that compensated them for the new understanding
of the known risks and for those risks that might still remain hidden.
Instead of accepting a higher cost of capital for their client it
appears that banks agreed to create an image of artificial demand by
themselves over-subscribing for a Greek debt issuance. That, at least,
is to be inferred from statements made by bankers, as recently quoted
in the press, to the effect that private banks and their funds have
been among the biggest subscribers to the latest Greek bond issue.
Equally, the high level of demand for credit default swaps would
suggest that the banks were aware of the high levels of risk they were
exposing themselves to with this strategy, and that they thus sought
to hedge their bets by buying derivative protection against a Greek
default. When markets again re-priced on the knowledge that parties
were looking to protect themselves from the risks of a default, those
European governments sought to find a scapegoat. Instead of
congratulating the investigators that uncovered the crime these same
governments, who failed to recognize the fraud in the first place,
have chosen to continue their complicity rather than prosecuting the
offenders.

Enron, WorldCom, Tyco, Wachovia, Washington Mutual, Fannie Mae and
Freddie Mac, CDOs, Lehman, Bear Stearns, AIG, , GM, Chrysler, CIT, ,
California, Greece,. These are not distinct incidents nor are they
even tied to separate crisis. Make no mistake the economic problems we
have confronted in the past three years are the most acute moments of
an ongoing crisis that is being misdiagnosed.

Rather than banks and investment banks matching capital with
borrowers, they have turned to the activity of manufacturing
artificial demand for financial products. Rather than acting in the
interest of their peoples, supported by the fair application of law,
public officials have decided that they can apply the law arbitrarily
to hide their complicity. The crisis will not end until they and all
of us recognize the real crime.

Joshua Rosner is a Partner at independent research consultancy Graham
Fisher & Co