By James Kwak
Gerald Corrigan, a Goldman Sachs executive and a former president of the New York Fed, had a curious defense of the Greece-Goldman interest rate swaps. Here are some direct quotations from the Bloomberg story:
“[The swaps] did produce a rather small, but nevertheless not insignificant reduction, in Greece’s debt-to-GDP ratio,” Gerald Corrigan, chairman of Goldman Sachs’s regulated bank subsidiary, told a panel of U.K. lawmakers today. The swaps were “in conformity with existing rules and procedures.” . . .
“There was nothing inappropriate,” Corrigan told Parliament’s Treasury Committee. “With the benefit of hindsight, it seems to be very clear that the standards of transparency could have, and probably should have been, higher.” . . .
Goldman Sachs was “by no means the only bank involved” in arranging the contracts, Corrigan said. . . .
“Governments on a fairly generalized basis do go to some lengths to try to ‘manage’ their budgetary deficit positions and manage their public debt positions,” Corrigan said. “There is nothing terribly new about this, unfortunately. Certainly, those practices have been around for decades, if not centuries. We have to keep that perspective.”
In other words:
- Governments try to hide their debts.
- Goldman helped make this possible.
- Everything was legal at the time.
- Everyone was doing it.
Corrigan is probably exactly right on all of these points. But this is an admission that banks have been helping governments hide their debts, and a defense on the grounds that everyone was doing it and no regulator complained. (I imagine Goldman must be getting tired of being picked on for simply doing the same things other banks were doing — but making more money than anyone else doing it.) Note, however, that Corrigan doesn’t try to argue that helping governments hide their debts is a good thing.
The underlying problem, I think, is that accounting for derivatives has lagged far behind actual derivatives. I believe that Satyajit Das’s book Traders, Guns and Money (I don’t have my copy with me) has examples of how private companies use interest rate swaps to shift losses from the present into the distant future. If companies are doing this, we should not be surprised that governments are doing it, too. Still, that doesn’t make it right.