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Intervention by Denise Caruso Read Intervention by Denise Caruso, Executive Director of the Hybrid Vigor Silver Award Winner, 2007 Independent Publisher Book Awards; Best Business Books 2007, Strategy+Business Magazine

archive for February, 2010

WALL STREET SCREWS EUROPE

by ~ February 14, 2010

Anyone who read Frank Partnoy’s book F.I.A.S.C.O will immediately appreciate the context of this story: The NYT reported today how Wall St. banks Goldman Sachs and JP Morgan assisted the Greek government in hiding hundreds of billions of dollars in debt, while collecting over $300 million in fees for themselves. According to the Times:

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.

As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels….

In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

As the Times article later calls out, the rest of Europe is livid. Countries like Germany are likely going to have to flit the bill for this—just as they were nearly finished paying for reunification with East Germany. An article in Der Spiegel (link refers to the English version) discusses bluntly Goldman’s role in the shenanigans. According to the Spiegel article:

In the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn’t show up in the Greek debt statistics. Eurostat’s reporting rules don’t comprehensively record transactions involving financial derivatives…. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

In an interview between a Spiegel reporter and HSBC chairman Steven Green, the tension is palpable. The interviewer begins with the question “Mr. Green, when was the last time you were ashamed to be a banker?” The interviewer goes on to ask, “You are not just the group chairman of Britain’s HSBC, the world’s largest private bank. In your free time, you also serve as a lay preacher in the Anglican Church. Have you ever prayed: ‘Please God, rescue capitalism’?”

As the Spiegel interview bears out, yelling at the bankers is a cathartic (a nice Greek word) but fruitless exercise. Like Iago in Shakespeare’s Othello, bankers respond with complete dispassion when discussing the suffering they’ve enabled and insist on the legality of the trades and their innocence in these matters. Back to the Times article:

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast….

In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.

Does trust depend on a society’s ability to create a law for every possible act of treachery? Could Moses have brought down the 10,000 commandments from the mountain? Maybe over-the-counter derivatives trades are legal by some literalist interpretation of securities law. But clearly the people who wield the power of such financial instruments pose greater risks to society than Jihadists. In my view, these kinds of over-the-counter trades ought to be illegal and subject to the worst kinds of penalties on the books.

WHY CELL PHONES SHOULD BE SUBSIDIZED

by ~ February 11, 2010

There was a lot of discussion yesterday about the court battle over government access to geolocation data for cell phones. This conjures up all the jokes about how it’s easier to find cows in Canada than to find illegal aliens in the US. The irony is that in the US, people pay for—and pay taxes on—their own tagging devices. I say if the government really wants to track us like cattle, cell phones should be a government subsidy.

HOUSE WEB SITES HACKED AFTER STATE OF THE UNION

by ~ February 1, 2010

Politico reported last week that 49 congressional web sites were hacked, which only became apparent just after the State of the Union Address last week. Web sites displayed simple hacker-speak web pages and many of the sites were completely unavailable for hours.

This should be great fodder for the Black Hat folks meeting in DC (actually Arlington, VA) this week.