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How Much Does it Take?

February 25, 2010

Bloomberg News reports that new documents obtained by Rep. Darrell Issa (R-CA) suggest that Goldman Sachs was the underwriter of some of the most toxic securities against which it then bought credit default swaps from ill-fated American Insurance Group (AIG) at the height of the Wall Street subprime feeding frenzy.  

As the article states it, 

The public can now see for the first time how poorly the securities performed, with losses exceeding 75 percent of their notional value in some cases. Compounding this, the document and Bloomberg data demonstrate that the banks that bought the swaps from AIG are mostly the same firms that underwrote the CDOs in the first place.

Goldman presumably did not contact the buyers of the notes they underwrote to warn them of their own bet against them.  The cynical transfer of risk to the customer is bad enough.  The profit-taking on their misfortune adds insult to injury.

This article, first reported on Bloomberg’s website and in the April issue of its magazine, was then followed by revelations that Goldman helped the Greek government expand its borrowing capacity by using off-balance sheet transactions that essentially hid the extent of their indebtedness.  According to the Feb. 25, 2010 New York Times, 

In 2000 and 2001, Goldman helped Athens quietly borrow billions by creating derivatives that essentially transformed loans into currency trades that did not have to be disclosed under European rules. The instruments, called currency swaps, helped Greece stay within the limits on deficit spending that were crucial to Greece joining the euro, the common European currency now used by 16 countries.

According to Bloomberg on Feb. 17, 2010, Goldman later was part of underwriting $15 billion in bonds sold by the Greek government after helping the Greeks hide the full extent of their indebtedness with the currency swap.  

No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

Failing to disclose the swap may have allowed Goldman, a co-lead manager on many of the sales, other underwriters and Greece to get a better price for the securities, said Bill Blain, co-head of fixed income at Matrix Corporate Capital LLP, a London-based broker and fund manager.

“The price of bonds should reflect the reality of Greece’s finances,” Blain said. “If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled.”

Astoundingly, even in the face of this continuing cascade of evidence of Wall Street’s amoral “take the money and run” attitude, the US Senate remains mired in negotiations to bring forth a financial reform package that could address these and other depradations.  What is it going to take to get us off the dime on this?


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