It's fashionable to hate Goldman Sachs. And easy, because of resentment out of envy.
The Wall Street firm does one thing exceedingly well - the bastards make astonishing amounts of money pretty much all the time. As rivals go bankrupt or get rescued, it soars. As markets crash, it finds fortunes. In 2009, the bleakest year since the Depression, Goldman hauled in $100-million (U.S.) in net trading revenue on 131 days. In last year's 263 trading days, it lost money only 19 times. In 2009 it made a record $13.4-billion. The average slob could live like a rock star on one minute of Goldman's profit.
How does Goldman do it? Talent, speed, aggression and luck, to be sure. But also, we now know, a willingness to paint itself a paler shade of white. To wit: The cross-currency swap it arranged for debt-soaked Greece.
The year was 2001, when Greece, its people sick of the drachma and its endless devaluations, lunged at the opportunity to adopt the euro. (It has since become the common currency of 16 of the European Union's 27 countries.) But the small country had a small problem: Its relative debt and budget deficit figures were uncomfortably high by eurozone admission standards.
A phone call to Goldman's liabilities Fix-It team worked wonders. The mechanics of the deal concocted by Goldman are hard for mere mortals to understand, but the concept was elegantly simple. The off-market swap created a hefty upfront payment by Goldman to Greece. Effectively Athens borrowed cash without having to record it as a loan.
The swap shaved some €2.4-billion ($3.4-billion Canadian) from Greece's debt, according to a recent Goldman statement, decreasing the country's debt-to-GDP ratio by 1.6 per cent - not a lot at the time, but pleasing enough to the eurozone gnomes. Goldman is getting its loot back with a balloon payment at the end of deal and reportedly earned $200- to $300-million (U.S.) in risk fees, amounts not denied by the firm.
Presto! Greece was in the eurozone. The currency worked wonders for the Greek economy, which expanded smartly during much of the last decade. Then, last fall, Greece's new socialist government, led by George Papandreou, checked the debt sums and realized they were the product of an ouzo-fuelled fantasy. Greece's budget deficit last year was 12.7 per cent, double the previous figure and the EU's highest. Greece found itself mired in a debt crisis, one that sent the euro plummeting, spiked bond yields in Spain and Portugal and may yet result in a Greek bailout to prevent a sovereign debt default.
A hunt for the culprit began and Goldman, the "great vampire squid" in Rolling Stone magazine's memorable description, was found flopping around in the shallows. The allegations that Goldman aided and abetted a debt sleight of hand triggered a political uproar in Europe and more than a few uncomfortable comments in the United States.
U.S. Federal Reserve boss Ben Bernanke called financial instruments employed to sex up a country's financial condition "counterproductive" and said he is looking into Goldman's Greek adventure. The EU is investigating too, and you can bet the EU countries that are repelled by flashy financings will quietly steer business away from Goldman's slick buccaneers. German Chancellor Angela Merkel said last month that "it's a scandal if it turned out that the same banks that brought us to the brink of the abyss helped fake the statistics."
But hold on. Trying to nail Goldman is futile because Goldman is not the guilty party. It did nothing legally wrong. Contrary to some initial reports, the Greek swaps were disclosed, even if Greece and Goldman did not rent electronic billboards to announce them; a full account on the episode in fact appeared in Risk magazine in mid-2003. What's more, it was Greece that wanted to understate its debt problems. At the time, the Eurostat reporting and measurement rules were sufficiently porous that Greece got away with the use of derivatives to fiddle their deficit ratios.
Greece wasn't the only country to play the hide-and-seek debt game. Other wannabe euro members and debt miscreants - Italy and Portugal among them - did the same. Merrill Lynch and JPMorgan competed with Goldman to help them do so. Eurostat in effect acknowledged its sins by changing the rules governing Greek-style debt deception in 2008.
You can't blame Goldman for engaging in creative financing within the law. That's what it was born to do and will continue to do. But what's legal is not necessarily right. Even Goldman said as much, or seemed to. Appearing before a British parliamentary committee, Goldman senior banker Gerald Corrigan said: "With the benefit of hindsight, the standards of transparency could have been and should have been higher."
Whose transparency was he referring to? Goldman's, Eurostat's or Greece's? Let's hope he meant all three.
Goldman prides itself as the cleanest machine on Wall Street. It tolerates no deviation from its principles of integrity. Note that in, 2007, it gladly let - perhaps encouraged - Lord John Browne, the former chief executive of BP, resign from the Goldman board after he admitted to lying in court to prevent publication of stories about his romantic life. While embarrassing, the lies were inconsequential and affected neither BP nor Goldman.
Yet Goldman moved with alacrity to help Greece disguise the true size of its debt. Legal, yes. Profitable to Goldman and its client, yes. Ethically questionable? No doubt. Goldman should have given the Greek deal a pass.
Eric Reguly