Fallout From Goldman-Greece Affair Widens: Impact On The European Central Bank

By Simon Johnson

As controller of the euro, the European Central Bank (ECB) wields great power in Europe and has a wide global reach.  The race to become the ECB’s next president – with a term that starts next year – has been intense and hard fought.  The final selection is down to two men: the ultra hawkish Axel Weber, head of the Bundesbank, who sees inflation dangers at every turn; and the relatively more moderate Mario Draghi, head of the Bank of Italy, chair of the Financial Stability Board, and experienced international economic diplomat. 

Unfortunately for those hoping that Draghi could still prevail, he is also formerly senior management at Goldman Sachs and serious questions are emerging regarding what he knew and did during Goldman’s alleged “let’s help Greece circumvent EU budget rules” phase in the early 2000s.

Specifically, Draghi joined Goldman Sachs in January 2002, after a distinguished public service career – including 10 years in a key position (Director General) at the Italian Treasury.  His formal titles were Managing Director, Vice Chairman of Goldman Sachs International, and member of the “Group’s Commitment Committee”; his job, according to Goldman’s press release, was to “help the firm develop and execute business with major European corporations and with governments and government agencies worldwide.”

Did this involve Greece?

A German foreign affairs spokesman said yesterday, with regard to the Goldman-Greece transactions,

“Goldman Sachs broke the spirit of the Maastricht Treaty, though it is not certain it broke the law”

and

“What is certain is that we must never leave this kind of thing lurking in the shadows again.”

Presumably this means that Mr. Draghi will have to answer a series of embarrassing questions, should he wish to continue pursuing the presidency of the ECB, along the following lines. 

  1. Was he aware of the Goldman-Greece deal(s)?  (Given that he was involved in management for Goldman – and that these deals reportedly made $300m for the firm – he surely knew what was going on.)
  2. Did he attempt to stop it or prevent further such deals?  If not, why not?
  3. Does he approve of such deals today?  It not, why did he approve earlier in the decade?
  4. Did he or his associates engage in any such transactions for Italy when he was at the Ministry of Finance?
  5. Are there are other Greece-type deals, involving other EU countries (or anyone else), that he would care to discuss in detail?

These questions and many more will be asked by the German authorities, at first quietly and if necessary then out loud – both because they are (with good reason) upset at the prospect of bailing out Greece, and also because they insist Mr. Weber should run the ECB.

You can pretty much count Mr. Draghi out of the running for the ECB job, and it would not be a surprise if he soon steps down from chairing the Financial Stability Board.

Being associated with Goldman Sachs is now beyond awkward.  For someone aiming high in the public sphere, work experience at the top levels of Goldman is fast becoming a toxic asset.

53 responses to “Fallout From Goldman-Greece Affair Widens: Impact On The European Central Bank

  1. “…he is also formerly senior management at Goldman Sachs and serious questions are emerging regarding what he knew and did during Goldman’s alleged “let’s help Greece circumvent EU budget rules” phase in the early 2000s” – meaning, it doesn’t seem likely that he could even get past the first question, much less the other four questions (you raised above).

    Globlization is having some unintended effects (the conspiracy club often refer to it as a part of “The New World Order”).

  2. Really, anyone with an association to GS is toxic in my book, so Draghi should rightly be out of the running.

    If Draghi had any integrity (which is doubtful if he worked at a senior level at GS), then he should withdraw from the running.

    If Weber is a hawk, and that means he sees the good in deflation, then they can’t bring him in soon enough. The debt needs to be washed out, whether through payment (debtors living through austere times), or default.

    (If “hawk” means something else, then please enlighten me.)

  3. Does Goldman Sachs need a law that tells them how many squares of TP it should use when wiping in order to comply? There’s just some things that don’t benefit anyone and undermine the economy, but there not a whiff of consideration for that. Nothing really surprises me anymore, but it still sucks.

  4. The Goldman association is also rumored to have eliminated John Thornton from contention as Obama’s pick as US Ambassador to China, something Thornton plotted, schemed and lobbied for quite aggressively.

  5. Let’s not be coy – If GS helped Greece hide debt (probably illegally) and used this knowledge to buy Greek sovereign CDS protection, *after* it profited from both the subprime crisis and the AIG bailout….then GS senior management should be tried at Nuremburg and shot!

  6. So, how many more people at the ECB were doing “god’s work” for the Vampire Squid?

  7. Funny… Volcker in his recent interview by Chrystia Freeland at the Financial Times (herself a worldly lady), stopped short of using the phrase “New World Order.” He says: “New world” with a little wry smile.

  8. Everyone knows that three squares are optimal. The Vampire Squid clearly used two while handling Greece.

  9. Beer is not meant to be sent through one’s nose. Good one!

  10. While I’ve been convinced that this whole thing is a political problem for quite a while, the scale of the political problem is astonishing as more of it unfolds.

    The fan is on high, and something that passed through a black swan has been tossed at the blades…

  11. Doctor Hallenstein

    Goldman greases the skids. Ah, so many levels.

  12. I like you mmamin. You’ve got that soft and cuddly thing going. LOL. Honestly though, I’m with you. I can’t help but envision the French Revolution sans the guillotines quite a bit lately.

  13. How about ECB’s next president? Axel A. Weber, head of the Deutsche Bundesbank

    April 28 (Bloomberg/excerpt) — “Milan’s financial police seized 476 million euros ($620 million) of assets belonging to UBS AG, Deutsche Bank AG, JPMorgan Chase & Co. and Depfa Bank Plc amid a probe into alleged fraud linked to the sale of derivatives. The police froze the banks’ stakes in Italian companies, real estate assets and accounts, the financial police said in a statement today.

    The City of Milan is suing the four banks after it lost money on derivatives it bought from the lenders in 2005.”

    http://tinyurl.com/yef2c2n

  14. I don’t think Goldman’s alleged role in the Greek crisis bothers Goldman at all. Their role in Greece just inflates the fear that they are always the power behind the curtain. Be. Very. Afraid. We run everything.

  15. My thought for the evening:

    All financiers must first pass an exam in moral philosophy before they can acquire a licence to ply their trade.

    Some questions:

    What is the purpose of an economy?
    How much money is enough money?
    What is the good life?
    What qualifies as personal wealth?
    What qualifies as anti-social behaviour in finance?

    Apologies. I am a lightweight … I just have one of those glorified high school diplomas known as a B.A. :)

  16. hat tip to Akerloff and Shiller for identifying this animal spirit known as “anti-social behaviour”

  17. It’s a little dificult to believe that nobody in European finance knew anything like this (and other deals yet unknown) was going on.

    There were people aware of bad practices in the US timebomb mortgage/securitization scam long before it all blew up.

  18. True that mmamin. Either we live by, honor, abide, and inhabit a world of laws or we don’t. If we don’t then in practical application – there are no laws. In a world where there are no laws, – there are no laws for anyone predatorclass Goldman Sachs biiiiaaatches!

  19. great comment

  20. At Nuremberg, they were hanged, very slowly. A “mistake” of the “unexperienced” American executioneer…

  21. Banksters are the most corrupt civil servants who ever were..

  22. Am I the only one who finds this Greek Tragedy an overblown farce? Does anybody think these OTC derivative toys can be permitted without producing an endless series of such events? Perhaps it is time to get serious about the problems: reg arbitrage, tax evasion, financial fraud, destabilizing speculation? Bretton Woods worked for 25 years largely because of capital controls. Like it or not we will have to choose: free capital or free people. Where is Keynes when we need him?

  23. Simon says: “Did he attempt to stop it or prevent further such deals? If not, why not?”
    [[[[[[[[[[[[[[[[[

    Because he made an assload of money, that’s why.

  24. Not a whiff of consideration, perhaps…. But whiffs of something else, for sure…

  25. Well, lets take it away from them, then. It’s a two-fer:

    1. Solves the governance problem

    2. Solves the fiscal problem

  26. Could it be that GS will soon be considered by all to be too Evil to succeed?

    I think Blankfein got confused about who’s work they were doing.

  27. Teaching Greece and the other debt PIIGS to fly

    Tuesday, Feb. 16, 2010 6:52AM EST – Globe & Mail – Nouriel Robuini – excerpts

    “Greece’s fiscal problems are but the tip of a global iceberg. The next instalment of the global financial crisis will be rising sovereign risk, especially in advanced economies that run massive budget deficits and accumulate large stocks of public debt as they socialize private financial losses to revive growth.

    Indeed, history suggests that severe recession and socialization of private losses often lead to an unsustainable buildup of public debt. Moreover, financial crises triggered by excessive debt and leverage in the private sector are followed by sovereign defaults and/or high inflation to wipe out the real value of public debts.

    Greece is also the canary in the coal mine for the euro zone, where all the PIIGS economies (Portugal, Italy, Ireland, Greece and Spain) suffer from public-debt sustainability and external-debt sustainability. Euro accession and bull-market “convergence trades” pushed bond yields in these countries toward the level of German bunds, with the ensuing credit boom supporting excessive consumption growth.

    At the same time, if Greece doesn’t fully adjust its policies to restore fiscal sustainability and competitiveness, a partial bailout by the EU and the central bank will still be likely to avoid the risk of contagion to the rest of the euro zone and the consequent threat to the monetary union’s survival. A default by Greece, after all, could have the same global systemic effects as the collapse of Lehman Brothers did in 2008.

    Sovereign spreads are already pricing the risk of a domino effect from Greece to Spain, Portugal and other euro-zone members. The EU and the central bank are worried about the moral hazard of any “bailout.” But that is precisely why a credible IMF program that ties financial support to the progressive achievement of fiscal and structural reform goals is the right way to teach Greece and the other PIIGS how to fly.”

    http://tinyurl.com/yfmvewz

  28. They are NOT civil servants.

  29. Unfortunately those writing the test will be marking their own papers. :-(

  30. February 15, 2010 – Huffington Post – excerpts

    “Here’s where it gets tricky for the United States: Goldman Sachs continued its rapacious behavior even after the Federal government bailed them out — directly (using TARP funds) and indirectly (by paying 100 cents on the dollar for AIG debts that some analysts think were overstated).

    Like a drug dealer who hates to see a client get clean, Goldman sent executives to Greece in November of 2009 with another tempting offer that would have deepened the government’s debt even further.

    As Simon Johnson points out, the Federal Reserve may give Goldman the usual soft treatment for its behavior in the European Union. But Johnson points out that the European Commission, which has jurisdiction over this issue, isn’t likely to be so forgiving. He expects an audit, and offers some suggested lines of inquiry.

    This could prove to be a major embarrassment for the US, and an impediment to winning support the US will need from Europe on a range of diplomatic initiatives.”

    http://tinyurl.com/yeboyzx

  31. Nicely put Jersey Boy

  32. The pragmatist

    This shows that not only are some banks too big to be allowed to fail, but some are too big too be allowed to succeed. We must find a way to break up these huge financial institutions that believe they are above the law just because they make money for their investors.

    As people say, Goldman Sachs is not a bank, but a hedge fund masquerading as a bank. They make it clear that not only must we reinstitute Glass Steagall, we must stop investment banks from engaging in proprietary trading.

  33. Soon we’ll discover that GS financed the birth and pilgrimages of Christ while hedging it’s investment with Roman and Persian treasury paper.

    While expedient in dispensing with proper responsibility and accountability, only fools think capitalists or investment bankers are driven by ethics or virtue.

    Do you really think GS could only persuade Greece to act to circumvent the EU’s rules. Fools again.

  34. People laughed at me when I said (1 year ago) the best thing to happen right now would be for a bloodless military coup (in the UK, my country).

    But people, is there any other solution right now? I don’t think believe there is. So the military take power, sort the mess out without having to be politicians, ie make the hard decisions without having to worry about getting re-elected or pissing people off (int he short term).

    It’s important though that when they take power they say ‘April 2015 is when official elections will take place again’.

    Mark my words, it’s the only option….

  35. Thanks. Worth watching.

  36. So it’s Alex Weber, eh? Wow.

    Remind me to go long the Euro and short the DAX. (I don’t get the Germans – they still like Merkel but hate her party.)

    The tragic part is that this means that Bernanke will need to defend the dollar with high rates, or risk a dollar-run (again). The currency arbitrage is going to be perceived as core inflation risk. Bernanke & FOMC don’t have the courage to allow this, so they’ll defend the dollar with high rates. And that means the Fed deficits will explode again as we lose more tax revenue, unemployment costs go up, and social sec/medicare continue their inexorable inflation-indexed march toward swallowing up the entire US GDP.

    Meanwhile, Bernanke is having a lot of trouble financing the huge US deficit, as observed by the weakness in last week’s bond auctions – even in the middle of a flight-to-safety (courtesy of Greece). Perceived US credit risk is growing.

    If perceived US credit risk takes center stage, we’ll see US interest rates spike rapidly. The more Bernanke does to defend the dollar today, the worse it gets (although, to be fair to him – does he deserve fairness? – he can’t control the dollar-indexed US transfer payment obligations).

    I wonder how popular Austrian economic theory is in Germany? Or maybe the Germans just like buying up American beer companies with fat Euros.

  37. Here’s the latest on Goldman’s Vampire Sucking from financialsense- including the Rat-infested Family Tree of Ex-Goldman politicians around the world.
    Goldman now trying to privatize all the roads in the US and sell derivatives to the states!
    http://www.financialsense.com/fsu/editorials/kirby/2010/0216.html

  38. Where did we fisrt hear the expression “liar loans”???

  39. 02/16/10 12:47 PM – AP – excerpts

    “BRUSSELS — “Greece has only days to explain its use of complex financial deals that it used to mask debt and just a month to prove that its drastic budget cuts go far enough to reassure markets and EU governments, who are reluctant to bail Athens out if it can’t pay its bills.

    The EU’s top economy official, Olli Rehn, said Tuesday that he wanted the Greek government to supply answers by Friday on how it used currency swaps and how that affected debt and deficit figures.”

    http://tinyurl.com/yfzphoy

  40. Sometimes the non-specialist has a valuable perspective to offer. Money is weird, hypnotic stuff and presently it has the human race by the short curlies. If we ever invent our way out of our obsession with it, the new ideas will probably come from people who can think outside of the box. Myself, I keep thinking in the future there could be other kinds of “money” quite independent of what we call money today. I won’t go into the possibilities here, except to say there could be “local money” — or money which represents satisfaction and approval by other people.

  41. I know that the looming default of Greece is crippling the markets, and well it should, since serious shenanagans have been played with its debt and budget ala Goldman. It should be left to its own devices, and let the cards fall where they may. Yes, there will be lots of readjustment pain, but, if we go on bailing out endlessly, both governments and business entities, sooner or later it will all catch up, and my view is that this will make the time of reckoning, whether sooner or later, far more painful. We’d be much better off, in the long run, if Paulson had not been give the funds to cripple our futures ad infinitum.

  42. It’s a little dificult to believe that nobody in European finance knew anything like this (and other deals yet unknown) was going on.

    http://www.risk.net/risk-magazine/news/1591633/greek-woes-revive-seven-goldman-swap-story

  43. Feb. 17, 2010, 4:13 p.m. EST – excerpt

    NEW YORK (MarketWatch) — “German Chancellor Angela Merkel turned up the heat on banks and their involvement in the Greek debt crisis Wednesday, saying it would be a “scandal” if they had helped Greece bypass European debt restrictions, according to media reports. Greece “falsified statistics for years,” Merkel was quoted as saying in a speech to supporters. “It’s a scandal if it turned out that the same banks that brought us to the brink of the abyss helped Greece fake the statistics.”

    The New York Times on Sunday reported that Greece in 2001 had borrowed billions, with the aid of Goldman Sachs Group Inc., in a deal hidden from public view because it was treated as a currency trade rather than a loan.”

    http://tinyurl.com/I-m-shockedd

  44. Goldman Sachs, Greece Didn’t Disclose Swap Contract (Update1)

    Feb. 17 (Bloomberg) — “Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit. No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

    “When people start to fear that the numbers aren’t accurate, they fear the worst,” said Simon Johnson, a former International Monetary Fund chief economist who is now a professor at the Massachusetts Institute of Technology’s Sloan School of Management in Cambridge, Massachusetts.”

    http://tinyurl.com/cape-fearr

  45. com’on… in the short term military coup seem often apparently the easiest solution .. when some has not the balls to take the good solution. But not in the long term… So it’s not a solution. Just the solution of the less intelligents.

  46. OK, now we want to know who is the Mr. Madoff of Greece’s sovereign debt Ponzi scheme.
    Bankers are still hanging around in “business as usual mode” always saying “oh no, it’s not my fault, because to the best of my knowledge I never know what people under my supervision and control are doing…”

  47. Peter Principle

    “For someone aiming high in the public sphere, work experience at the top levels of Goldman is fast becoming a toxic asset.”

    Why, Simon almost says that like it’s a bad thing.

  48. Deutsche Bundesbank and Deutsche Bank are not the same

  49. That is conventional wisdom. But it’s wrong. They are civil servants, just no one noticed.

  50. Valerie Gagnon

    I like this perspective. Well said indeed.

  51. Valerie Gagnon

    I like this Craig: both serious and funny!

    I have just finished Fernand Braudels’ colossal ” History of Capitalism from the 13th to the 18th Century”.

    If you have not read it yet make sure you do…

    Not only is this the most brilliant and erudite work ever written on the subject but he would have appreciated your “out of the box” argumentation.