Tonight, according to a well-documented story running at the top of Zero Hedge, we're learning that Goldman-Sachs, back in the mid- to late-90s, then under the leadership of Jon Corzine and later Hank Paulson, may have arranged numerous "Enron-like" swaps deals (perhaps along with other Wall Street firms, such as Merrill Lynch) for multiple European countries, including Italy, years before it ever entered into similar dealings with Greece.
Here's a chart explaining the pervasive nature and details of these deals, as created by Gustavo Piga, author of a November 2001 International Securities Market Association/Council on Foreign Relations (ISMA/ CFR) Report, LINK TO CHART, entitled: "Derivatives and Public Debt Management."
One can't help but ask the question: Is this revelation all part of an effort to backstop Goldman's hubris-laden meme that they were "doing god's work," as Lloyd Blankfein told us in November? Because, IMHO, the reality is it just undermines the financial credibility of the European Union, in general.
On the other hand, looking at it from a layman's point of view, there have been many rumblings of a stealthy and quite significant increase in tensions between the U.S. and major European countries with regard to this matter, so this just adds fuel to that fire, too. At the very least, it certainly seems like tensions
are escalating.
Here's some quotes from the CFR's story on this matter, as noted by Zero Hedge and as culled from the Financial Times, (from CFR, February 21, 2002):
Enron and Italy: Parallels between Rome's efforts to qualify for euro entry and the financial chicanery in Texas
Benn Steil, Senior Fellow and Director of International Economics
February 21, 2002
Financial Times
The damning part of the explanation is the admission that Italy was taking a cash advance in 1997 against an expected foreign exchange profit in 1998. Under accounting rules, this is simply impermissible. Borrowers cannot use loans to anticipate capital gains on a bond.
--SNIP--
How widespread is this sort of financial chicanery among sovereign borrowers? It is very difficult to know, since these deals are done over the counter with no public paper trail. Gustavo Piga, author of the ISMA/ CFR report, uncovered the Italian transaction quite accidentally. But there are powerful reasons for concern.
First, governments have clear incentives to cook the books. The EU continues to impose fiscal expenditure restrictions on eurozone governments, violation of which can result in censure and fines. The International Monetary Fund imposes fiscal conditionality on its client governments, which naturally have a strong incentive to keep the Fund from closing the money spigot. Derivatives can be used to shuffle cash flows through time in ways that current accounting rules do not prevent.
Second, banks are only too willing to market derivatives tricks to their big client governments, particularly when it puts them at the front of the queue for future bond issues and privatisations.
Third, if the integrity of government financial data is fatally undermined, the damage to stock and bond markets will dwarf the "Enron effect" that has recently pummelled the Dow...
Sunday, from Zero Hedge:
Step Aside Greece: How Gustavo Piga Exposed Europe's Enron In 2001 - Focusing On Italy's Libor MINUS 16.77% Swap; Was "Counterpart N" A Threat To Piga's Life?
Tyler Durden
February 28, 200
...The stunning revelation: Goldman would come to the rescue again and again, likely extracting many pounds of flesh to wave its magice wand and allow countries to not only enter the EU, but to subsequently mooch billions of dollars off of its various structural funds. Without Goldman's assistance Italy would not have been let into the eurozone. And Goldman did some critical window dressing not just Italy and Greece, but very likely most of Europe! We, for one, can't wait for disclosure of all the heretofore confidential swap agreements underwritten by Goldman.
If Greece and Italy are any indication, it only took a phone call by any of these governments to former Goldman CEOs Jon Corzine (latter part of 90's) and Hank Paulson (Goldman CEO until 2006), to arrange the same kind of non-standard, off-market swaps as has now been evidenced were used by both Greece and Italy. After all, keep in mind, the whole purposes of these "Goldman" swaps is to merely reduce public debt interest payment to align with EU and EMU artificially low fiscal requirements, at the expense of debt notional, which is not as constrictive an economic barrier according to Maastricht and other supervisory requirements. When the truth finally comes out that all of Europe's finances over the past 10 years have been a sham, covered up and facilitated very legally by Goldman Sachs, the Euro will collapse under the weight of the decade of lies that have made it seem that the eurozone is an economically viable construct.
Yeah, Zero Hedge goes a bit over the top here, but, the revelations on this matter undermine the stability of the Euro, which is already under serious pressure in world markets as I write this.
In any event, Goldman certainly is not winning friends and influencing people across the pond, at least from a political standpoint.
This also puts the Naked Capitalism crosspost I provided here, on Saturday, in a brighter light. (SEE: "Smith: 'Is Goldman Finally About to be Leashed and Collared?'")
And, you can bet your bottom Euro that international pressure to leash and collar Goldman Sachs is certainly increasing by the hour (even if, as Zero Hedge also points out, it's becoming more evident by the day that Goldman knows where a lot of skeletons are hidden across the pond, too).
As always, Gretchen Morgenson weighs in--and brilliantly so--on the bigger picture, from Sunday's NY Times:
It's Time for Swaps to Lose Their Swagger
By GRETCHEN MORGENSON
Published: February 27, 2010
...United States commercial banks, those with insured deposits, held $13 trillion in notional value of credit derivatives at the end of the third quarter last year, according to the Office of the Comptroller of the Currency. The biggest players in this world are JPMorgan Chase, Citibank, Bank of America and Goldman Sachs.
All of those firms fall squarely into the category of institutions that are too politically connected to fail. Because of the implicit taxpayer backing that accompanies such lofty status, derivatives become exceedingly dangerous, said Robert Arvanitis, chief executive of Risk Finance Advisors, a corporate advisory firm specializing in insurance.
"If companies were not implicitly backed by the taxpayers, then managements would get very reluctant to go out after that next billion of notional on swaps," he said. "They'd look over their shoulder and say, `This is getting dangerous.'"
But taxpayers remain decidedly on the hook for future bailouts because Congress has done nothing to eliminate the once-implied but now explicit government guarantees backing large and interconnected companies. And on derivatives trading, lawmakers' moves have been depressingly incremental...
Yes, even Paul Krugman tells us regulatory reform is nothing short of pathetic--to the point where he posits that no "reform" might be better than the "regulatory-captured" reform legislation currently being concluded in the Senate--in today's NYT: "Financial Reform Endgame." Meteor Blades discusses this in greater detail, right HERE.
While Krugman uses the word, "endgame," in his column's headline this morning, I stated on Friday, right here, that as far as the current state of regulatory reform in our legislative branch was concerned, it was already "Game Over."
You see, in the House Manager's Memo authored by Financial Services Committee Chair Barney Frank, a special $4 trillion taxpayer committment to backstop too-big-to-fail Wall Street firms, in the event they required government supports down the road, was included in the final draft, just prior to it being referred over to the Senate in late December. (SEE: "Bankers Get $4 Trillion Gift From Barney Frank: David Reilly.")
Hmmm...$4 trillion. How much is that in Euros?
I'm sure counterparty European sovereign states seeking to place some of the blame on the firms that crafted those deals on their behalf are doing that math right now.