The New York Times' front page expose on the role that Goldman Sachs has played in the Greek tragedy unfolding in Europe right now raises a huge number of concerns both for the U.S. economy and the financial reform proposals now in Congress.
To recap, Greece and a number of other European Union (EU) countries are in debt, dangerously in debt. EU rules say member countries cannot have budget deficits that exceed three percent of GDP. Greece's debt is closer to 12 percent. Other countries including Spain, Ireland, Italy and Portugal are also in trouble. These countries are "too big to fail." A default by any one of them would put an end to the nascent EU recovery and possibly lead to a "double dip" recession here in the United States.
Greece has been hiding the extent of its debt for years with the aid of big U.S. banks. Der Spiegel broke the story that Greece did a billion-dollar currency swap with Goldman Sachs in 2002 that did not show up on the nation's books as debt. Without it Greece many not have been accepted into the common currency "Eurozone."
Doing the Work of the Gods?
Yesterday, the Times provided more details about these deals. Those chuckleheads at Goldman called one Aeolos, after the god of the winds.
"Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country's airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics," reports the Times.
It walks like a loan and talks like a loan, but because it was actually a complex derivative swap, it was secret, bilateral, and off-book. The people of Greece knew nothing, and at the current moment, no one knows how many of these deals are out there masking EU debt or U.S. debt for that matter.
Congress Needs to Clip Goldman's Wings
What the Times story missed is that right now neither the House financial reform bill nor the Senate proposal cover these types of currency swaps. Why not? Well, this is a bit odd. The U.S. Federal Reserve does not want these deals covered.
Although there is no evidence that the Fed is engaging in these types of currency swaps with banks from other nations, their objections to placing these deals on open exchanges should ring some alarm bells. The United States also has substantial debt. Why leave the door open for this type of highly risky accounting?
Congress and the Obama administration need to stop listening to Ben Bernanke and start listening to Gary Gensler, the head of the Commodity Future Trading Commission, who has been pushing a reluctant administration and Congress to drag every aspect of the $605 trillion derivative market out of the shadows.
Like Icarus, Goldman and other big banks who have engaged in these massive deals are flying a little to close to the sun. To prevent the next meltdown, Senate Banking Chair Chris Dodd must clip Goldman's wings and make sure that all derivatives, without exception, are cleared by regulators and traded on an open exchange to provide the maximum level of transparency for the United States and the world.