Most of you know I spent my life in banking, much of it on the international side. Banking, especially investment banking is the epitome of the capitalist state. Are there any ethics on Wall Street? How does one not fall into the trap set up as follows: You are supposed to serve the best interests of your client but suppose you can make a lot of money by working against your client’s best interest behind his back?
I originally posted this piece soon after the Greek debacle several years ago. With Puerto Rico now in the banker’s gun sights it seemed like a good time repeat it.
Well the Greek deal with the European troika isn’t quite yet done but appears to be on the road to getting done leaving Greece with additional years of depression level austerity and crushing debt. A decade ago Greek debt was 100% of GDP; it will peak at 200% in a couple of years.
In the opinion of the IMF such debt levels are unsustainable. Yesterday the IMF attacked the package put together by Germany and the new “northern league”. The IMF called for some level of debt forgiveness. It could mean that the IMF will not lend anymore money to Greece until some Greek debt is forgiven.
During this week there have also been articles both supporting and critical of the role played by Goldman, Sachs in the Greek drama.
Greece has been accused of masking it’s true debt levels when it entered the Euro-zone. And it appears it was Goldman, Sachs that helped them do it – or perhaps put the Greeks up to it – not that this would make the Greeks totally not guilty.
What was Goldman’s role? Well, let us remember it is all about the money.
First a bit about the culture of investment banking.
“A slovenly 32-year old junior trader with terrible social skills, zero management ability and no one reporting to him can make millions of dollars a year. He’s the guy you read about in the newspaper making three times the CEO’s salary. He’s the guy that all the other firms are trying to poach. And he’s the guy that used to be referred to admiringly as a “big swinging dick.” You learn very quickly in investment banking that status is not all about the titles, it’s all about the money.”
“Now, as an individual, your ostensible goal is to serve your clients by giving them the best advice on financial products and transactions to fit their short- and long-term goals. The payoff comes in the form a fee for capital raised, a merger completed or a financial transaction completed. The reality is you as an individual make more money – and hence have higher status – the more transactions you do, the more complex and bigger the deals you do.”
Are there any ethics in such a culture? Or only legal restrictions?
“Suppose your client wants to do a deal that you don’t think is advisable or ethical; or if you uncover damaging information about your client that makes you believe the terms of a deal need to be altered. Then suppose you can arrange a deal that you believe is not in your client’s best interests but which earns your company more money. What do you do?”
All available evidence says that the Greeks were actively looking for ways to reduce their apparent fiscal debt levels and deficit numbers without having to reduce spending or raise taxes. It’s called having your cake and eating it too.
She got rich
Enter Antigone Loudiadis – a relationship manager for the “Greek desk” at Goldman’s London office and the cross-currency swaps arranged by Goldman, the purpose of which was to hide the level of Greek debt from the European troika.
Now cross currency swaps are perfectly routine – a country has borrowed let us say US dollars but it’s currency is the Euro. The country with the foreign dollar debt swaps it for the equivalent Euros, pays interest on the Euro debt, receives interest payment on the dollar debt and then at a point in time, in the future, swaps the principal back. When transacted at spot exchange rates, cross-currency swaps of this type have zero present value at inception,
Here’s the thing though. As an individual you will always come to a point where a client is begging you to do something that is legal, makes lots of money for your company, but that you feel may be unethical.
According to “Risk” magazine the cross-currency swaps transacted by Goldman for Greece’s public debt division were ‘off-market’ – the spot exchange rate was not used for re-denominating the principal of the foreign currency debt.
Apparently a weaker level of foreign exchange rate was used when valuing the dollar principal creating a mismatch between the domestic and foreign currency swap.
Suppose a dollar equaled a euro. If I wanted to swap $1billion for a five year period, I would receive E1billion in return. Now suppose while the euro and the dollar were equal I wanted to swap $1 billion but I want the deal to state that the dollar amount is worth E1.25 billion.
This is essentially what Goldman did – arranged by Antigone Loudiadis.
The effect of this was to create an up front payment by Goldman to Greece at inception, (in the example above it would amount to E250 million) and an increased stream of interest payments to Greece during the lifetime of the swap. Goldman would recoup these non-standard cash flows at maturity, receiving a large ‘balloon’ cash payment from Greece.
These transactions allowed them to take U.S. Dollar and Yen-denominated debt and transfer them into Euros at exchange rates which made the level of Yen/Dollar debt look lower until the swap transaction came due and Greece was forced to make a balloon payment to Goldman.
Under Ms Loudiadis’s guidance, Goldman swapped debt issued by Greece in dollars and yen for euros which were priced at a historical exchange rate that made the debt look smaller than it actually was. The swaps reportedly made about 2 per cent of Greece’s debt disappear from its national accounts.
The size and structure of the deal enabled the bank to charge a far bigger fee than is usual in swap transactions, and Goldman persuaded Greece not to test the transaction with competitors to ensure it was getting good value for money.
Now none of this was illegal. Additionally there were no EU rules regarding this sort of thing. The EU was interested in the level of borrowings – of “debt” – it was not interested and didn’t look at foreign exchange swaps. The fact is that these transactions made Greek “debt” look lower than it actually was.
Greece knew it (although now it claims not) – but Goldman knew it as well and has not received nearly the same amount of criticism.
In Goldman’s “defense”, other investment banks would have offered the same deal to Greece if Goldman had not. And Greece was not the first to use this scheme – Italy did it first before Greece was admitted to the Euro. And it was not illegal – no one will go to jail. And it wss not against Eurozone regulations – they did not yet exist to cover these transactions.
“Italy played this game as far back as 1996. And, that’s the crux of the matter. As a banker, you never re-invent the wheel. If a deal works and makes lots of money, you shop that deal around to everyone you can until it doesn’t. If you don’t, your competitors will.”
As Goldman Chairman Lloyd Blankfein says “We are doing God’s work!”.
Continuing their nefarious ways, it is reported that Goldman sold the balloon payments due at the end of the transactions to Greek banks. And then bet against Greece by buying a credit default swap from a major German bank. If Greece defaulted and left the Euro-zone German banks would not only eat their own losses; they would eat Goldman’s as well.
Brilliant, as they say in England. Simply brilliant. And totally routine.
Goldman made hundreds of millions of dollars on these deals – helping Greece hide the true level of it’s debt. “It has its tentacles in nearly everything that can be monetized. Its muscular trading department (almost 50 percent of revenues) controls the world’s supply and demand for most industrial commodities, including aluminum, oil, copper, coal, wheat, natural gas, nickel and tin. Its powerful investment banking business enjoys worldwide power and influence among most of the world’s elected governments and dictators. Its investment management business has few rivals, and today GS has over $1 trillion in assets. Goldman is a veritable money machine. It has more ex-government administrators, ex-Cabinet members, politicians and ex-politicians, ex-administration and administration advisers, state and county commissioners and ex-commissioners, and judges and ex-judges on retainer than it has employees on its payroll.”
From “Risk” magazine:
The morality of all this
“What other purpose can these transactions serve other than to mask the true indebtedness of Greece? Did anyone actually break the law? If these are legal transactions, does Goldman Sachs have any responsibility inform the EU of the deals? Should Goldman’s bankers have refused Greece’s wishes, knowing that some other banker would collect the fees? Why does this matter now other than in regards to Greece’s credibility in future sovereign debt deals?
These are all good questions. But, the Wall Street Journal article gets to the heart of things and why the deals happened.
Ms. Loudiadis became a Goldman partner in 2000. A cerebral Oxford University graduate, she was eventually named co-head of the company’s investment-banking group in Europe, making as much as $12 million in annual compensation, according to someone familiar with the matter. She lives an exclusive neighborhood in West London known for its sprawling white stucco homes.
From a banker’s perspective, that’s what this is all about – money, and the status that goes with it.”
The only losers in this capitalist game were the millions of poor Greeks, those who wouldn’t know an off-market currency swap from Iggy Azalea. They remain homeless and on the bread lines.
Athenian poverty – this is the “ethics” of Wall Street billionaires.