How Goldman Sachs Profited From The Greek Crisis

The Greek debt crisis offers another illustration of Wall Street’s powers of persuasion and predation, although the Street is missing from most accounts.

The crisis was exacerbated years ago by a deal with Goldman Sachs, engineered by Goldman’s current CEO, Lloyd Blankfein. 

Blankfein and his Goldman team helped Greece hide the true extent of its debt, and in the process almost doubled it. And just as with the American subprime crisis, and the current plight of many American cities, Wall Street’s predatory lending played an important although little-recognized role.

In 2001, Greece was looking for ways to disguise its mounting financial troubles. The Maastricht Treaty required all eurozone member states to show improvement in their public finances, but Greece was heading in the wrong direction. 

Then Goldman Sachs came to the rescue, arranging a secret loan of 2.8 billion euros for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.

As a result, about 2 percent of Greece’s debt magically disappeared from its national accounts. Christoforos Sardelis, then head of Greece’s Public Debt Management Agency, later described the deal to Bloomberg Business as “a very sexy story between two sinners.” 

For its services, Goldman received a whopping 600 million euros ($793 million), according to Spyros Papanicolaou, who took over from Sardelis in 2005. That came to about 12 percent of Goldman’s revenue from its giant trading and principal-investments unit in 2001—which posted record sales that year. The unit was run by Blankfein.

Then the deal turned sour. After the 9/11 attacks, bond yields plunged, resulting in a big loss for Greece because of the formula Goldman had used to compute the country’s debt repayments under the swap. By 2005, Greece owed almost double what it had put into the deal, pushing its off-the-books debt from 2.8 billion euros to 5.1 billion. 

In 2005, the deal was restructured and that 5.1 billion euros in debt locked in. Perhaps not incidentally, Mario Draghi, now head of the European Central Bank and a major player in the current Greek drama, was then managing director of Goldman’s international division.

Greece wasn’t the only sinner. Until 2008, European Union accounting rules allowed member nations to manage their debt with so-called off-market rates in swaps, pushed by Goldman and other Wall Street banks. In the late 1990s, JPMorgan enabled Italy to hide its debt by swapping currency at a favorable exchange rate, thereby committing Italy to future payments that didn’t appear on its national accounts as future liabilities.

But Greece was in the worst shape, and Goldman was the biggest enabler. Undoubtedly, Greece suffers from years of corruption and tax avoidance by its wealthy. But Goldman wasn’t an innocent bystander: It padded its profits by leveraging Greece to the hilt—along with much of the rest of the global economy. Other Wall Street banks did the same. When the bubble burst, all that leveraging pulled the world economy to its knees.

Even with the global economy reeling from Wall Street’s excesses, Goldman offered Greece another gimmick. In early November 2009, three months before the country’s debt crisis became global news, a Goldman team proposed a financial instrument that would push the debt from Greece’s healthcare system far into the future. This time, though, Greece didn’t bite.

As we know, Wall Street got bailed out by American taxpayers. And in subsequent years, the banks became profitable again and repaid their bailout loans. Bank shares have gone through the roof. Goldman’s were trading at $53 a share in November 2008; they’re now worth over $200. Executives at Goldman and other Wall Street banks have enjoyed huge pay packages and promotions. Blankfein, now Goldman’s CEO, raked in $24 million last year alone.

Meanwhile, the people of Greece struggle to buy medicine and food.

There are analogies here in America, beginning with the predatory loans made by Goldman, other big banks, and the financial companies they were allied with in the years leading up to the bust. Today, even as the bankers vacation in the Hamptons, millions of Americans continue to struggle with the aftershock of the financial crisis in terms of lost jobs, savings, and homes.

Meanwhile, cities and states across America have been forced to cut essential services because they’re trapped in similar deals sold to them by Wall Street banks. Many of these deals have involved swaps analogous to the ones Goldman sold the Greek government. 

And much like the assurances it made to the Greek government, Goldman and other banks assured the municipalities that the swaps would let them borrow more cheaply than if they relied on traditional fixed-rate bonds—while downplaying the risks they faced. Then, as interest rates plunged and the swaps turned out to cost far more, Goldman and the other banks refused to let the municipalities refinance without paying hefty fees to terminate the deals.

Three years ago, the Detroit Water Department had to pay Goldman and other banks penalties totaling $547 million to terminate costly interest-rate swaps. Forty percent of Detroit’s water bills still go to paying off the penalty. Residents of Detroit whose water has been shut off because they can’t pay have no idea that Goldman and other big banks are responsible. 

Likewise, the Chicago school system—whose budget is already cut to the bone—must pay over $200 million in termination penalties on a Wall Street deal that had Chicago schools paying $36 million a year in interest-rate swaps.

A deal involving interest-rate swaps that Goldman struck with Oakland, California, more than a decade ago has ended up costing the city about $4 million a year, but Goldman has refused to allow Oakland out of the contract unless it ponies up a $16 million termination fee—prompting the city council to pass a resolution to boycott Goldman. When confronted at a shareholder meeting about it, Blankfein explained that it was against shareholder interests to tear up a valid contract.

Goldman Sachs and the other giant Wall Street banks are masterful at selling complex deals by exaggerating their benefits and minimizing their costs and risks. That’s how they earn giant fees. When a client gets into trouble—whether that client is an American homeowner, a US city, or Greece—Goldman ducks and hides behind legal formalities and shareholder interests.

Borrowers that get into trouble are rarely blameless, of course: They spent too much, and were gullible or stupid enough to buy Goldman’s pitches. Greece brought on its own problems, as did many American homeowners and municipalities.

But in all of these cases, Goldman knew very well what it was doing. It knew more about the real risks and costs of the deals it proposed than those who accepted them. “It is an issue of morality,” said the shareholder at the Goldman meeting where Oakland came up. Exactly.

Disclosure: None.

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Michael Ilesco 7 years ago Member's comment

Gentlemen,

The 4th paragraph that begins with "In 2001, Greece was looking for ways to disguise its mounting financial troubles." is the most important. Let me translate this in plain English. Greece was looking for ways to deceive its EU partners about the true status of its balance sheet. Their preferred strategy was cross currency exchange. In cross currency exchange there are two willing partners. Since the goal of the Greek government was deceit, the search for the second participant had to be done away from the public eye. Anybody who thinks that the Greek government at that time was a victim of GS must be living in a parallel world. Doctors, lawyers and investment bankers will not divulge anything related to their patients or clients unless ordered in the court of law to do so. Faced with public accusations they can not even defend themselves.

Graeme Wilson 6 years ago Member's comment

bollocks!

Mohammed Abdul Nayeem 7 years ago Member's comment

It exposes the heinous attitudes of some modern day Bankers who have no regard for morality and Client's interest at their hearts.

Artis Tran Pham 7 years ago Member's comment

I cannot believe that EU's financial administrators got fooled by the GS's tricks to make up Greece's national budget and state incomes. Somewhere they were complacent and deliberatery ignore those tricks, led by superior geostrategical considerations. But in the end, who pays for the bail out of Greece?

Nick Jumney 7 years ago Member's comment

Please see these videos about Goldman Sachs and the destruction of Greece: https://www.youtube.com/watch?v=V2SyP6rmJ1Y

https://www.youtube.com/watch?v=XbSGDsVpz9g

Constandinos Pappas 7 years ago Member's comment

Al Capone was jailed for tax-evasion worth a few dollars. Thanks to a Judas accountant of his --if I recollect well?

I wonder who will be Goldman Sachs' Judas.

Goldman Sachs is, of course, an empire of a bank.

History tells empires do fall.

Question: who will pay the bill when that happens?

Constandinos Pappas 7 years ago Member's comment

Et voila! Now Goldman Sachs has come to surface... Ole! Messrs Goldman Sachs, which has planted its personnel in governments around the world in order to control them, has a lot to be accounted for and if something drastic does not take place soon, financial criminality against countries and people will skyrocket and many more will come to regret it. Of course, this is an old common secret -but faggot heads of state, PMs and governments prefer to not know anything about it. What a farce...!

Eliyahu Ben Abraham 7 years ago Member's comment

But the Eurozone too shares a lot of the blame for the misguided "bailouts" of Greece startiing in 2010. These were just arrangements for creditors to lend more to Greece in order to get payment from Greece for their earlier loans. And Merkel and shoybleh are to blame for pushing the harmful "bailout" terms.

as for the world economic crisis which exploded in 2008, much was the fault of Obama's ACORN outfit that was the Federal govt in the US to grant mortgages to people who could not pay them back. So obama too bears his share of the blame.

Jim Moloney 7 years ago Member's comment

This article is heavily edited, I've got a printout in front of me as I write of the 4 page article from same writer Robert Reich dated July 16th. in which he writes qoute'' Perhaps not incidentally,Mario Draghi, now head of the European Central Bank and a major player in the current Greek drama, was then managing director of Goldman's International division. This week on Al Jazeera their's a 1 hour program about Goldman Sachs with an interview of Draghi in front of the press as a canditate for the head of ECB before EU members who were promoting his becoming new head of ECB once Triche retired, a French jouranalist question him on the ethics of fixing Greeces books, he denied that he had anything to do with it it was before his time. for those who have access to Al Jazeera, its on air all this week, it also showed Roamo Prodi, Aldo Mori are ex Goldman, a previous Greek PM who was involved in deal. Pictures went up on a screen of all the people at top of EU who have deep Goldman connections, Peter Sutherland of Ireland was in picture. Tune in and see for yourself I have it recorded.

Thomas Y 7 years ago Member's comment

It normally take two hands to clap! The Greeks should have a serious thought before execution!