I was beginning to think that EU was going to be the only hope for sorting through the mess Goldman Sachs has made of the financial markets of the world. I’ve mentioned the Issa documents which show how deeply Goldman Sachs was involved with the failure of AIG. We’ve also seen mounting evidence that Greece was part and parcel of the Goldman Sachs side bet operations also. It’s looking more and more that the side bets weren’t placed as hedging or insurance tools which is technically their function in financial markets. Hedging is a tool for locking in a rate of return when prices could possibly move against you. I used to hedge commercial mortgage originations with GNMA contracts back in the early 1980s. This was because interest rates were moving around so much, that we needed to insure the market wouldn’t move against us while we contracted with the home buyer. Farmers use hedges to lock in a price in the future for their crops when they harvest based on the costs they incur at planting. Businesses that sell things overseas and collect money in foreign currencies later, also using hedging. I won’t go into the details of how these things work or how you value them, because this is a real math exercise, but believe me in certain instances and markets, hedging works like a form of insurance. It’s to help a business manage its risk.
In the case of Goldman Sachs, it looks like they put together deals that they knew were problematic then used the side bets to reap the rewards of the shoddy deals. In other words, the purposefully seemed to invest in things that were going to blow up, sucked markets and the investors into thinking the deals were okay, and then waited to collect the true profits from the side bets. Oh, and they also seemed to have put the same sidebets on their own stock during the entire financial crisis. If this is found to be true, I can’t even imagine how big the consequences are going to be. If you want another take on this go see Naked Capitalism. It appears Yves Smith actually worked there for awhile and she’s talking about the experience.
However, my original thought was that it was going to be the EU that actually went after them. It appears–according to today’s NY Times–that the FED is looking into this too.
Ben S. Bernanke, the Federal Reserve chairman, told Congress Thursday that the Fed was “looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece.”
Mr. Bernanke said the Securities and Exchange Commission was also concerned about how derivatives — financial instruments that are largely unregulated and do not trade on public exchanges — have contributed to Greece’s problems. “Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive,” he said.
The S.E.C., in a statement, said that it could “neither confirm nor deny the existence of an investigation,” but added that it was cooperating with United States and international regulators in examining “potential abuses and destabilizing effects related to the use of credit-default swaps and other opaque financial products and practices.”
It is about time some one look into these activities. Not to be left out of the loop, Congress appears to have gotten a bit more educated on the situation, despite its heavy reliance on the FIRE lobby for campaign contributions.
Senator Christopher J. Dodd, Democrat of Connecticut and the chairman of the Senate Banking Committee, also took aim at credit-default swaps, which allow banks and hedge funds to wager on whether a company or country might default.
Critics say the swaps have contributed to Greece’s problems and increased the odds of a financial collapse.
“We have a situation in which major financial institutions are amplifying a public crisis for private gain,” he said.
The Fed inquiry was begun about three weeks ago, according to an official involved in the investigation who was not authorized to comment publicly. Fed examiners are focusing on whether Goldman and other banks complied with guidance the Fed issued in 2007 outlining how to manage the risk of complex financial vehicles. The investigation is still in its early stages, he added, as officials sift through records detailing how the derivatives were created, what compliance procedures were followed and what internal analysis was performed. The Fed is also looking at whether Wall Street made additional financial arrangements for Greece that have not been disclosed.
The Greek situation is bad. The country may default and because it’s part of the monetary union, it’s bringing the Euro down and the interest premiums up. If Greek sovereign debt (debt guaranteed by the government) goes into default, the costliness to Greece and the contagion that creates for the rest of the EU cannot be understated. Given that, even Goldman Sachs with all its White House connections will not be able to escape the number of Captain Ahab’s that will go after the Great White Vampire Squid. I can imagine there will be a lot of folks that will be glad to supply the harpoons.