Derivatives On A National Scale


Posted on : 2/11/2010 05:13:00 PM | By : Dann | In : ,

One of the unavoidable conclusions that we should draw from the fiscal meltdown of 2008 is that some people were making terribly unscrupulous decisions regarding the borrowing and lending of money.  I've been working on a longer post on the subject for a while, but for the moment consider the following.

One of the largest players in the credit default swap game was Goldman Sachs of New York.  They were busy telling their customers to invest in these derivatives while at the same time they were making investments....or more accurately making wagers....that those same derivative investments would fail.  When the house of cards finally fell, we had money that was leveraged as much as 15 to 1.

I read somewhere that one of the problems with the crash of 1929 and the subsequent depression was that money had been significantly leveraged.  I believe the ratio was...ummm.....15 to 1.  Erg.

With so much bad fiscal news, how can things get worse?

How about having Goldman Sachs create a credit swap for an entire country?  Greece, specifically.

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. "Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.

Such transactions are part of normal government refinancing. Europe's governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But 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. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.
 I am not given to reflexively calling for tar and feathers for businessmen, but in this case I may be willing to make an exception.

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