Wednesday, January 30, 2013

Dancing with the Devil: A Breach of Trust

Yet again, the Golden Child of Wall St. is revealed as a fox in sheep’s clothing.
I was engaged in a debate about the role Goldman Sachs may have played in the downfall of Greece’s economy with a relative (through marriage) who migrated from Greece to the United States when she was 10. My research on the near collapse of the US financial market clearly points to the gradual deregulation and the unethical banking practices. There are a number of factors that contributed to the fiscal crisis, particularly the securitization of subprime Housing Loans, re-packaged and sold Globally as “A” rated paper. Regardless of the fact that the underlying debt was “C” rated, banks had the audacity to sell the mortgage-backed securities as “A” rated, low risk bonds. Of course, we can’t ignore the rampant Securities and Banking fraud, which generated hundreds of charges and investigations by the SEC against Banks and Hedge Funds.
I’ve written numerous articles about the Euro crisis. Like many economists, I believe the U.S. fiscal crisis precipitated the downward spiral of a number of EU members. This is mainly because of large quantities of foreign investment in U.S. Housing securities, which went sour. Much to my surprise, in the process of gathering data surrounding the global crisis, I learned that EU members; Greece, Italy, Spain and France, carried out non-transparent, accounting practices for over a decade. No doubt the high debt ratios hidden by accounting loop-holes would have eventually brought the weakest EU members to fiscal ruin at some point anyway.Although, our financial calamity accelerated the timeline of the reveal. America's financial troubles was the equivalent of lighter fluid, igniting the masked problems of the EU’s weakest links.

Apparently the Greek-American community seem to have a different slant on how Greece's economy found itself engulfed in a fiscal and political battle for stability. The lack of transparency and debt-to-revenue ratio was certainly taking its toll on the weakest EU members. This was made worse when changing leadership was blind-sighted by the urgency of country’s debt portfolio – particularly the derivative-structured debt owed to Goldman Sachs. When the housing market collapsed, interest rates increased, drastically increasing the debt service on the Goldman/Sardelis deal
My Greek-American in-law (who shall remain nameless), vehemently contends that Goldman Sachs is the monster that brought her beloved country to its knees. This is hardly the case, since Greece's debt was already 127% of its GDP by 2009. Also, by that time, Greece was seeking a bailout for over 300 billion Euros. Nevertheless, She was referring to a secret transaction between Goldman and the Managing Director of Public Debt Management Agency (Christoforos Sardelis), back in 2001, where a masked loan of $2.8 billion Euros was signed, sealed and delivered. Executed completely under the radar. The loan, which was thought to be earmarked for the preparation of hosting the 2004 Olympics, was later revealed not to be the case. Although I admit, the unholy alliance with Goldman was a financial set back, it was not the smoking gun.

The under-the-radar transaction executed by Sardelis and Goldman was a Currency Swap. Given the variable rate structure, there was mounting debt service, as interest rates increased, making it difficult for Greece to contain. I appears that Greece’s Debt Management Agency didn’t thoroughly analyze the deal to determine the long-term impact of this type of debt structure for Greece, given their compromised economy. A simple “what if” analysis would have helped them to analyze the impact of increasing interest rates. The Currency Swap transaction belongs to the derivative family, which are always complicated to quantify or analyze given the fluctuating market, currency and structure. These are highly risky transactions, and certainly not recommended for unstable municipalities suffering from high debt, declining GDP, and 25% unemployment.

The secret deal between Sardelis and Goldman could be classified as irresponsible given the size of the debt, and the fact that it was tied to fluctuating interest rates. The operative word being, “fluctuating”. Regardless of Sardelis’ good intentions, “it takes two to tango”. Therefore, Sardelis is equally at fault. My Greek-American in-law may be reluctant to accept it, but the blame has to be shared.

Since 2010, when I initially started writing about the Euro crisis, I learned that Sardelis was motivated by the Maastricht Treaty, requiring all EU members to show “improvement” in their public finances. This Goldman swap was a "dance with the devil" and simply a desperate attempt to “hide” the debt from the country’s books to comply with the Maastricht Treaty. These swaps were one of several techniques that European governments used to meet the terms of the treaty. There were certainly alternatives techniques available, so why did Goldman push this particular structure? Whatever the case, Sardelis was out of his element, and out smarted by his trusted Bankers. It was reported in the Wall St. journal that Goldman served up fictitious, historical exchange rates for the transaction, which earned them $760 million in U.S. fees.

Attemps to Implement Austerity Measures Lead to Violent Protests.
By the time Spyros Papanicolaou took over the Public Debt Management Agency in 2005, the loan had ballooned to over 5 billion Euros. Given the role that Goldman played in the fiscal unraveling of the housing market, which sent trimmers across the globe, you would think that their CEO, Blankfein, would consider a forgiveness of some portion of the debt. Goldman and Papanicolaou did get around to restructuring the debt, but I’d be willing to bet there was no forgiveness of debt.

Goldman Sachs may soon be faced with a public image dilemma, but until then I supposed they’ll continue to carryout their Mission to squeeze clients for every possible dollar.

Back to Home Page?

K Reilly
The Cohn-Reilly Report
www.Facebook.com/Cohn.Reilly
________________________ RECOMENDATIONS

Also Check out: Socially responsible Investing site below:
SocialResponsibleInvest.com

-COMMENT HIGHLIGHTS-

________________Comment
Anonymous said......
You should never stop investigating, researching and analysing the market to be reactive and play the main role on your market. of the Yahoo community. , to all your fans. my web site: Internet Marketing Coach ________________Comment
Anonymous said......
I precisely needed to appreciate you once more. I am not sure what I would've made to happen in the absence of the entire concepts documented by you relating to my subject matter. Entirely was an absolute intimidating dilemma in my opinion, however , discovering this expert avenue you solved it made me to jump over joy. I am just happier for this work as well as hope you find out what an amazing job you have been carrying out teaching people today all through your site. More than likely you haven't met all of us. / F2/20/13

________________Comment
Anonymous said......
You should never stop investigating, researching and analysing the market to be reactive and play the main role on your market. of the Yahoo community. , to all your fans. / February 24, 2013
________________Comment
Anonymous said......
I tend not to leave many remarks, but i did a few searching and wound up here "Dancing with the Devil: A Breach of Trust".

And I actually do have 2 questions for you if it's allright. Could it be only me or does it give the impression like a few of the remarks look as if they are written by brain dead people? :-P And, if you are posting at additional online sites, I'd like to keep up with anything new you have to post. Could you make a list of the complete urls of all your shared pages like your twitter feed, Facebook page or linkedin profile?
________________Comment
Anonymous said......
Hi, I do believe this is an excellent web site. I stumbledupon it ;) I am going to return once again since i have bookmarked it. Money and freedom is the greatest way to change, may you be rich and continue to guide others.
Feel free to visit my page - justin bieber smoking weed
________________Comment
Anonymous said......
Excellent post. Keep posting such kind of information on your site. Im really impressed by it. Hello there, You have done a fantastic job. I will definitely digg it and for my part suggest to my friends. I am confident they'll be benefited from this web site. Here is my homepage ; anuncios clasificados gratis
________________Comment
Anonymous said......
Howdy! I know this is kinda off topic however I'd figured I'd ask. Would you be interested in trading links or maybe guest writing a blog post or vice-versa? My website discusses a lot of the same subjects as yours and I think we could greatly benefit from each other. If you happen to be interested feel free to send me an e-mail. I look forward to hearing from you! Wonderful blog by the way!- 2/21/13