When Matt Taibbi wrote Inside the Great American Bubble Machine for Rolling Stone, he described Goldman Sachs this way:
The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
At the time, Goldman’s people responded "We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance in being a force for good."
That was before it was revealed that Goldman and others had advised the government of Greece how to conceal the extent of its debt by selling its future tax/fee revenues to private investors while pretending to European financial regulators that it’s debts were within safe guidelines. The discovery of that charade in Greece (and elsewhere) has exacerbated a financial crisis in Europe.
Now the New York Times reports that Goldman also set up a market to take bets on the Greek government defaulting, which is having the same effect Goldman may have had on A.I.G. — pushing both towards failure.
As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.
Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe’s debt crisis, as traders focus on their daily gyrations.
A result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece’s debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety — and the whole thing starts over again.
And of course, Goldman then makes money when the swaps are traded on its market, and that trading has exploded, increasing the default risks.
Trading in Markit’s sovereign credit derivative index soared this year, helping to drive up the cost of insuring Greek debt, and, in turn, what Athens must pay to borrow money. The cost of insuring $10 million of Greek bonds, for instance, rose to more than $400,000 in February, up from $282,000 in early January.
On several days in late January and early February, as demand for swaps protection soared, investors in Greek bonds fled the market, raising doubts about whether Greece could find buyers for coming bond offerings.
“It’s the blind leading the blind,” said Sylvain R. Raynes, an expert in structured finance at R&R Consulting in New York. “The iTraxx SovX did not create the situation, but it has exacerbated it.”
From Simon Johnson at Baseline Scenario:
Yesterday, Jerry Corrigan of Goldman Sachs told the UK parliament that there was “nothing inappropriate” in the way Goldman helped arrange for Greece to hide its debts. This was helpful – it essentially acknowledges that the much vaunted “reputation effects” of issuing securities with a top tier investment bank are worth less than zero. Mr. Corrigan affirmed that it is completely acceptable for Goldman and its peers to mislead investors and deceive the markets.
So you can strike out one more purported reason why we should keep massive global financial institutions. They do not enhance transparency, they do not bring clarity, they do not keep governments accountable. Instead, they are paid a great deal of cash to mislead people. What is the social value of that exactly?
Two thoughts: First, Matt Taibbi was too kind. And second, I’m reading these articles and wondering if any of the officials that would be in charge of the proposed "systemic risk council" would have found any of this problematic, since none of them saw any problems in the bubbles, shadow banking, and derivatives trading that created our own crisis. It’s not the lack of institutions that leaves us exposed; the systemic risk lies in the world views of the people we have running our government.
Yves Smith/Naked Capitalism, The NYT’s Latest Goldman/AIG Salvo
Edward Harrison, guest post at Naked Capitalism (and see links there), A Banker’s Perspective on the Greek Derivatives
PBS/Frontline, The Warning