How Goldman Sachs Wins No Matter What

The steady stream of revelations regarding the role Goldman
Sachs has played in the fleecing of Europe should reinvigorate
efforts in Congress to rein in the reckless trading that could send
the global economy into another tailspin.

To recap, Greece and a number of other European Union countries
are dangerously in debt. EU rules say member countries cannot have
budget deficits that exceed 3 percent of their gross domestic
product. The Greek government recently revealed that its debt is
closer to 12 percent of GDP. Other countries including Spain,
Ireland, Italy and Portugal are also in trouble. Like our behemoth
banks, these countries are "too big to fail." A default by any one
of them would put an end to talks of "green shoots" and could lead
to a double dip recession.

In early February, Der Spiegel (a German magazine) broke the
story that Greece has been hiding the extent of its debt for years
with the aid of U.S. investment banks. In 2001, Goldman was paid
$300 million to structure a complex derivative deal that allowed
Greece to borrow billions while hiding the true extent of its debt.
Without this creative assist, Greece may not have been accepted
into the common currency "Eurozone."

Because the deal was structured as a currency swap (a type of
derivative) and not as a loan, it was secret, bilateral and
off-book. Goldman may have been the only party that knew about it,
leading many to speculate how it may have profited from the

Last week, the other shoe dropped. The New York Times reported
that a company backed by Goldman, JP Morgan Chase and other big
banks had set up an index in London that allows investors to gamble
on the likelihood of a Greek default. As banks and other players
rush into these trades, called credit default swaps, they make the
cost of insuring Greek debt rise, making it harder for the country
to borrow and bringing it closer to the brink.

Sound familiar? In 2002 the same firm created a similar index
that allowed investors to bet on the likelihood of defaults in the
subprime bond market. The "savvy" investors at Goldman made a
fortune off the collapse of the market. It's a sure bet that they
will do so again if Greece goes down.

Recent revelations about the extent to which Goldman sold toxic
mortgage-backed securities to its clients while betting against
those securities in the market prompted Phil Angelides, chair of
the Financial Crisis Inquiry Commission, to suggest that this
business model was "like selling a car with bad brakes and then
taking out an insurance policy on the driver."

Federal Reserve Chair Ben Bernanke told Congress that the
government was looking into Wall Street's use of credit default
swaps to bet on a Greek collapse. "Using these instruments in a way
that potentially destabilizes a company or a country is
counterproductive," Bernanke said. But the Fed has advocated a
light hand in regulating derivatives and has fought to keep
currency swaps exempt from reform bills.

With some predicting a major economic shock if the EU's debt
crisis is not resolved promptly, this business model is worse than
"counterproductive" -- it is cataclysmic.

This week the U.S. Senate is turning its attention to bank
reform. Congressional reform plans for derivatives trading are full
of loopholes. Go to to send a message or find a
toll-free number to tell your members of Congress where you stand.
All derivatives should be traded on an open exchange. Derivatives
that act like insurance should be regulated like insurance and
abusive derivatives should be banned. Without strong new rules on
these weapons of mass destruction, another derivative-fueled
financial crisis is certain.

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