Goldman Sachs appears to be testing the limits of its special talent for avoiding all accountability following revelations of its role in exacerbating the Greek debt crisis.
The bank has come under heavy criticism from European political officials over its role in helping Greece hide its debts, and on Wednesday, Greek labor unions staged a historic strike that shut down the country's national infrastructure in response to economic policies urged by bankster elites. The European turmoil has forced US officials to take notice, and scrutiny of the bank is now coming from the unlikeliest of quarters, with Ben Bernanke telling Congress on Thursday that the Federal Reserve is looking into Goldman and questions surrounding the bank's swap transactions with Greece.
Bernanke was vague about what, exactly, the Fed is investigating, and it is possible that the inquiry will go nowhere. But the fact that the Fed chair would make remarks that amplify concerns about Goldman's role in Europe is a sign that the political winds have shifted significantly since Matt Taibbi's "vampire squid" metaphor first captured the public imagination last summer. The populist outcry against bankster fraud and collusion finally shows signs of steering the authorities towards a more oppositional, watchdog role.
The truly scandalous story with respect to Goldman Sachs and Greece -- that the bank may have been speculating heavily in the Greek debt markets at the same time it was trying to help the country hide its debt -- is also starting to gain traction. During his testimony, Bernanke raised concerns about speculative activity in the Greek debt markets and said that the SEC was investigating, and Phil Angelides, chair of the Financial Crisis Inquiry Commission, said that he was particularly concerned about Goldman's role in betting against securities that it had helped create.
On Thursday the New York Times published a story with the headline "Banks Bet Greece Defaults on Debt They Helped Hide." The article reported that a company backed by Goldman and other banks set up a new index in September of this year that investors could use to bet on the likelihood that Western European countries like Greece would default on their debt.
This is history repeating itself: the very same company that created this index set up a similar index in early 2006 that allowed investors to bet on the likelihood of defaults in the subprime bond market. That index was a collaboration between Markit and CDS IndexCo, a consortium of 16 banks, including Goldman Sachs, which has since been acquired by MarkIt. The acting chairman of CDS IndexCo was Goldman Sachs managing director Bradford S Levy, suggesting that Goldman has significant power within Markit now.
Guess which investors cleaned up on that index in 2006 and 2007? Goldman Sachs and partner-in-crime John Paulson, the hedge fund manager who made billions betting against the subprime sector.
The sovereign index and its subprime predecessor would be less troubling if there was some transparency around Markit, the pricing mechanisms it uses, its owners (including Goldman Sachs), and so forth, given the critical informational role it plays in markets which threaten global financial stability quite frequently. The Department of Justice opened an investigation of the company for possible anti-trust violations last summer.
If Goldman is, in fact, using swaps to bet heavily on the likelihood of a Greek default at the same time that it is helping the country hide its debts, the parallels to its corrupt, cynical, and incredibly greedy housing bubble investment strategy extend beyond the Markit index. The game plan is fairly simple: stuff some entity full of hidden liabilities by devising securities that mask true levels of exposure, collect enormous fees for doing it, then find ways to make enormously profitable bets against the financial carcass created in the process.
Goldman Sachs and John Paulson did this with AIG, devising complex securities known as "synthetic CDOs" which were composed entirely of bets on a set of mortgage pools. Paulson (not to be confused with former Treasury Secretary Hank Paulson) picked the mortgage pools, selecting the ones that were most likely to experience high levels of foreclosure. Goldman then created the securities and sold them to investors like AIG. The bets were essentially designed to fail, with Paulson (and Goldman) on the winning end. The hidden exposure was massive enough to take down AIG, threaten the world financial system, and necessitate a government bailout. These bailout funds were then passed through to Goldman Sachs.
Greece is far less likely to implode than AIG, and the liabilities that Goldman tucked into its national accounts are less severe. But now that the country is dealing with the prospect of financial ruin, Paulson and Goldman appear to share the same vulture flight pattern, once again. Paulson & Co is reported to have been speculating heavily in Greek debt markets with a team of 20-30 traders focused on the country. Goldman is also rumored to have been one of these speculators.
According to the Wall Street Journal, Paulson has since exited his large bearish bet on Greek debt. But in a sign that Paulson's Greek adventures haven't ended, Goldman recently took representatives of his hedge fund on a "field trip" to Greece:
On Jan. 28 and 29, analysts from Goldman Sachs Group Inc. took a group of investors on a field trip to meet with banks in Greece. The group included representatives from about a dozen different money managers, say attendees, including Chicago hedge-fund giant Citadel Investment Group, the New York hedge fund Eton Park Capital Management, and Paulson, which sent two employees, say people who were there. Eton Park declined to comment.
During meetings with the Greek deputy finance minister and executives from the National Bank of Greece, among other banks, some investors raised tough questions about the state of the country's economy, according to these people.
Greece appears to have been negotiating for its economic future with Goldman Sachs and its network of hedge fund colluders, many of whom have taken large speculative positions on Greek debt. This amounts to an unofficial diplomatic mission, a negotiation between a sovereign country and the sociopathic financiers who hold sway over its economic fortunes. Is Europe really ok with that?
The Wall Street Journal article goes on to report on a Manhattan dinner party where a group of hedge fund managers discussed their bearish bets on the Euro. The article suggests that the funds are partnering on their trades, and includes a somewhat confusing sentence: "There is nothing improper about hedge funds jumping on the same trade unless it is deemed by regulators to be collusion." So it isn't collusion unless regulators have "deemed" it as such? And Madoff wasn't actually running a Ponzi scheme before the SEC noticed?
The growing turmoil in Europe and Bernanke's comments may signal that we've reached a tipping point -- that these financial firms will no longer be able to avoid all substantial inquiries into their business practices, and that they'll no longer hold sway over economic policies here and abroad. Not that Bernanke himself will follow through. But the need for a significant, public investigation of these individuals and their firms has become so pressing that even the most compromised US officials are paying it lip service.
Whether it happens here or in Europe, Goldman's day in court is drawing near.
The Morning Email helps you start your workday with everything you need to know: breaking news, entertainment and a dash of fun. Learn more