Lots of stories about the conflicts that Goldman has at Riski… here is just one… (HT ZeroHedge for highlighting the video embedded above)
Source: Goldman Sachs, Greece Didn’t Disclose Swap, Investors ‘Fooled’, Bloomberg, February 17, 2010
Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.
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.”
Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.
Legal ‘At the Time’
Goldman Sachs, Wall Street’s most profitable securities firm, is being criticized by European politicians including Germany’s ruling Christian Democrats, who have questioned whether the firm helped Greece hide its deficit to comply with the currency’s membership criteria. Greece is also being faulted by fellow euro-region countries for failing to disclose the swaps to EU regulators.
The swaps used by Greece to manage debt were “at the time legal,” Greek Finance Minister George Papaconstantinou said on Feb. 15. The government doesn’t use the swaps now, he said.
Eurostat, the EU’s statistics office, this week ordered Greece to hand over information on the swaps transactions by the end of this week in an investigation that may extend to other EU countries.
Goldman Sachs earned about 735 million euros ($1 billion) underwriting Greek government bonds since 2002, data compiled by Bloomberg show. Goldman Sachs underwrote 10 bond sales. Prospectuses for six of them, obtained by Bloomberg, contain no mention of the swaps. The other four couldn’t be obtained.
Repost from Jesse’s Cafe…
~~~ “Personally I doubt that the US is capable of self-reform at this time.
The corruption of the socio-political system runs deep, and is embedded in the national consciousness as a reflexive set of slogans (the big lies) that substitute for practical thought and effective policy formation.
The examples of thinkspeak are numerous. People become parrots for their favorite corporate news/opinion channel, to which they become emotionally addicted, because otherwise, reality is too painful and complex to face. And so they are blinded and cut off from productive and even civil discourse, trapped within deep wells of subjectivity.
The major media in the States are owned by a few corporations. The Congress listens to its large contributors and ignores the public except at election time, when it inundates them with expensive media campaigns, political spin, false promises, and propaganda. And then it is back to business as usual.
“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorizes it and a moral code that glorifies it.” Frederic Bastiat
What will it take? It took the Japanese about twenty years of economic privation to finally get rid of the LDP political party that had ruled the country since the Second World War. It may take ten years of stagflation and economic hardship for the American people to wake up and put an end to the crony capitalism that has captured its two party political system. A good start would be to continue to defeat incumbents from both parties, and to start electing viable third party candidates.
But that demands a more thoughtful venue than is currently the norm. It really does seem that bad to a relatively objective observer.
Eleven Lessons From Iceland
13 February 2010
…What can be done to reduce the likelihood of a repeat performance – in Iceland and elsewhere? Here are eleven main lessons from the Iceland story, lessons that are likely to be relevant in other, less extreme cases as well.
Lesson 1. We need effective legal protection against predatory lending just as we have long had laws against quack doctors. The problem is asymmetric information. Doctors and bankers typically know more about complicated medical procedures and complex financial instruments than their patients and clients. The asymmetry creates a need for legal protection through judicious licensing and other means against financial (as well as medical) malpractice to protect the weak against the strong.
Lesson 2. We should not allow rating agencies to be paid by the banks they have been set up to assess. The present arrangement creates an obvious and fundamental conflict of interest and needs to be revised. Likewise, banks should not be allowed to hire employees of regulatory agencies, thereby signalling that by looking the other way, remaining regulators may also expect to receive lucrative job offers from banks. (I would add a prohibition of movement between regulators and the banks without a significant hiatus of at least four years. – Jesse)
Lesson 3. We need more effective regulation of banks and other financial institutions; presently, this is work in progress in Europe and the US (Volcker 2010). (Too slow, too driven by the banks themselves in the US – Jesse)
From the New York Times… “Testy Conflict With Goldman Helped Push A.I.G. to Edge”
~~~ “…When A.I.G. asked Goldman to submit the dispute to a panel of independent firms, Goldman resisted, internal e-mail messages show. In a March 7, 2008, phone call, Mr. Cassano discussed surveying other dealers to gauge prices with Michael Sherwood, Goldman’s vice chairman. At that time, Goldman calculated that A.I.G. owed it $4.6 billion, on top of the $2 billion already paid. A.I.G. contended it only owed an additional $1.2 billion.
Mr. Sherwood said he did not want to ask other firms to value the securities because “it would be ‘embarrassing’ if we brought the market into our disagreement,” according to an e-mail message from Mr. Cassano that described the call.
The Goldman spokesman disputed this account, saying instead that Goldman was willing to consult third parties but could not agree with A.I.G. on the methodology…”~~~
Yup… this editorial sums up how America feels… President Obama time to swap that black hat for a white one… rein in the banks… start with insisting on Senate hearings on Glass-Steagall… make John McCain your partner on breaking up the big banks…
WASHINGTON (MarketWatch) — The people of this country have had it up to here with the way our leaders are running our country.
And while the election of Republican Scott Brown to the U.S. Senate seat held by the Kennedy brothers for nearly 60 years is clearly a repudiation of the Democrats’ leadership, Republicans shouldn’t get so smug about this victory. See full story on Brown’s victory in Massachusetts.
We are fed up with the lot of you.
You promised to change the way Washington works, but you didn’t do it. Your answers to our problems are inadequate, or they make things worse. As usual, you’re taking care of everyone but us. Despite the worst economic crisis in generations, nothing has changed.
This country is in trouble, maybe big trouble. Our economy doesn’t work for us any more. Jobs are hard to find, health care is hit or miss, and the idea of a comfortable retirement seems a cruel joke. We legitimately worry that we’re bequeathing our kids and our grandkids a life that’s going to be much tougher than ours.
We did everything we were asked: We worked hard, we invested in Wall Street, we took off our shoes at the airport, we bought a house, and we borrowed and spent until we couldn’t spend or borrow any more.
You don’t get it. We don’t care about your campaign donations. We don’t care about your political fortunes, or those of your party. We don’t care who posed nude, or who’s the better candidate. We don’t care about 60 votes. We don’t care about the big companies or the special interests who fear the future. We don’t care about Senate traditions, or what those idiots on TV say.
We care about results. Fix our problems, or get out of the way. We know our problems aren’t simple. We know the answers won’t come easy. But we also know that you don’t understand. If you did, you’d hide your faces in shame.
To the Democrats: We elected you to accomplish things for us, not to give you lifetime jobs. We gave you an overwhelming majority in Congress: Use it or lose it.
To the Republicans: It might seem smart in the short run to just oppose everything, knowing that the wheel will turn and that eventually the people will give the power and the mandate to you. But it’d be much better for us if you’d actually stand for something other than protecting your own hides, or getting your own cable show.
To the voters: You deserve better. Start demanding it.
— Rex Nutting, Washington bureau chief
*Source: Why do we trust the financial priests? BBC, Robert Peston, Saturday, 9 January 2010
“The Icelanders have risen up and humiliated their political class over its handling of the financial crisis, as I mentioned on Thursday.
But there’s nothing terribly unusual about their sense of powerlessness and alienation from the writing of the rules of the banking and finance game.
When it comes to how banks are allowed to behave, sovereignty over decision-making rarely rests with citizens.
Did anyone actually ask us whether we wanted our banks rescued to the tune of £1.2 trillion during and after the crisis of 2008?
If they had, we might have said no.
So perhaps it’s a good thing that politicians and central bankers simply did what they thought was best for us, without consulting – because if the banks had gone down, the contraction in our economy would have been far far worse than it turned out to be. Better to leave it to the experts, eh?
But hang on a tick: who actually got us into this mess in the first place?
It wasn’t the fault of ordinary citizens like you and me.
It was those self-proclaimed experts who allowed our banks to become too huge, too complicated, too addicted to taking crazy risks, and too poorly endowed with life-preserving capital.
BUENOS AIRES, Jan 8 (Reuters) – An Argentine judge blocked the president’s plan to use Central Bank reserves to pay public debt and ordered the bank chief’s reinstatement on Friday, deepening a dispute that has rattled financial markets.
Moments after a court ruled to reinstate former Central Bank President Martin Redrado, he returned to the bank, waving at television cameras. A day earlier, President Cristina Fernandez fired Redrado for opposing her debt plan.
Despite the court rulings, local media said an interim bank chief was taking steps to move $6.6 billion in foreign currency reserves to the treasury. “It’s like a science fiction movie,” a central bank employee told Reuters.
The conflict has highlighted persistent political instability in Latin America’s No. 3 economy just as Fernandez’s cash-strapped government seeks to charm investors and issue global bonds eight years after a massive default.
Argentine bonds, stocks and the peso closed down due to investor concerns over the strength of Argentina’s institutions ahead of a sovereign debt swap that is expected to launch later this month. [ID:nN08135180]
Fernandez urged opponents to let her govern and defended using part of the Central Bank’s $48 billion in reserves to service the nation’s debts.
“It’s much better to use the reserves than to take out loans with an interest rate of 15 or 14 percent. It’s common sense,” she said in a televised speech.
Opposition leaders have challenged her order for the central bank to transfer billions of dollars in foreign currency reserves to state coffers.
From the Financial Times and opinion piece by former US Treasury Secretary Nicholas Brady…
Refocus the regulatory debate on essentials
By Nicholas F. Brady
Published: January 4 2010 19:57 | Last updated: January 4 2010 19:57
There is an inexorable drive on both sides of the Atlantic to finalise new rules, regulations and laws to place the financial system on a sounder footing. But in their zeal to act, politicians and regulators are looking through the wrong end of the telescope. Too much attention is being paid to maintaining a status quo that allows banks to continue engaging in the full range of activities to which they have become accustomed – admittedly under a number of regulatory constraints – without dealing with the fundamental causes of today’s critical difficulties.
Policymakers are intent on announcing all manner of new capital requirements, leverage ratios, “living wills” and directives on risk management, while brushing aside warnings by both Mervyn King, the governor of the Bank of England, and former US Federal Reserve chairman Paul Volcker that our banking system is unsound. Mr King and Mr Volcker are not alone in their concern that we may now miss a unique opportunity to secure core reforms.
The Basel Committee on Banking Supervision – the key multilateral authority on setting financial rules – dumped an 88-page present on governments and banks just before Christmas and, true to form, its focus was on technical ratios designed to force banking stability. The US House of Representatives last month voted for regulatory reform legislation that is no better. The House fails to consider the distinction between things that are critical and things that are merely important. The same mistake seems likely from the European Union, which is in the throes of establishing three new regulatory authorities.
The safety and soundness of the financial system is indisputably essential; without it, we have nothing. The long history of financial collapses proves this point. While efficiency, creativity and credit availability are important, they cannot be allowed to trump safety and soundness.
From Systemic Risk the Clare Distinguished Lecture in Economics and Public Policy by Jean-Claude Trichet, President of the ECB organised by the Clare College, University of Cambridge, Cambridge, 10 December 2009
~~~ ” … However, macroeconomic stability has not been a sufficient condition for financial stability. It cannot eliminated systemic risk altogether. Macroeconomic authorities have therefore been frequently called on to provide remedial action, once booms have turned into busts. The aim of their action has been precisely to avoid the transformation of individual financial risks into systemic risk.
Ex post remedial action has often been activated as soon as the financial firestorm has threatened the stability of the economic system. But such action risks raising expectations that macroeconomic policy will always insure against tail risks, no matter how large. Expectations of this sort can contribute to an under-pricing of financial risk in subsequent phases of the financial cycles. They can encourage concentration of market positions in the financial scene.
At the same time, the instruments of counter-cyclical policy have been used so intensely – and more so from one financial cycle to the next – that authorities might have tested the extremes of their control procedures. I am borrowing here from dynamic control theory. Repeated attempts to fine tune a mechanical or electronic system after a shock sometimes leads to “instrument instability” that makes the system spiral out of manageable bounds.  Economic and financial systems, I suspect could have some structural similarities with physical systems, leading to the same kind of “instrument instability”.
Moral hazard and policy instrument instability pose questions to which we are not in a position to a firm answer at this point in time. I would like to see these questions studied and debated in eminent academic institutions like this….”
By David Brunnstrom and Timothy Heritage
BRUSSELS, Dec 11 (Reuters) – The European Union urged the International Monetary Fund on Friday to pursue a global tax on financial transactions to limit the risk of another economic crisis, despite U.S. opposition.
EU leaders also underlined the need for “sound and effective” financial sector pay at a two-day summit but, with the notable exception of Germany, did not broadly support French and British proposals to tax bankers’ bonuses heavily.
Although the leaders of the 27-nation bloc largely revived existing ideas, they signalled a desire to address voters’ outrage over a return of the big bonus culture in the banking sector so soon after it was bailed out with tax payers’ money.
“The conclusion … is to propose a global financial transaction levy. It wouldn’t be fair that some impose very heavy burdens and others don’t,” Jose Manuel Barroso, president of the executive European Commission, told a news conference.
“I think it makes sense that a sector that created such a problem for our economies, our taxpayers … also makes a contribution to the overall economy,” he said after two days of talks in Brussels.
The IMF is already considering how to limit risk in the financial system after the worst economic crisis in generations, but Washington has opposed calls for a so-called Tobin Tax — named after U.S. economist James Tobin — on financial transactions.
British Prime Minister Gordon Brown called for consideration of such a tax at a summit of the Group of 20 developed and emerging nations last month, saying the proceeds could be used to fund future financial bailouts.
But he faced opposition from U.S. Treasury Secretary Timothy Geithner, who said he was against such a tax as a way to dampen risky bank behaviour [ID:nN07223447]
Without worldwide support, experts say it would be doomed to failure. Brown acknowledged this, telling reporters in Brussels: “Global taxes will not be introduced unless all global financial centres are able to come behind it. But I believe there’s growing support for that.”