Greek crisis: investors ‘fooled’ by Goldman Sachs

Goldman Sachs is heading for further public opprobrium today following claims that the firm managed $15 billion worth of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its budget deficit.

Bloomberg reports that Goldman failed to mention the arrangement, a lapse that may have allowed Goldman and Greece to get an inflated price for the bonds. "The price of bonds should reflect the reality of Greece's finances," says Bill Blain at Matrix Corporate Capital in London. "If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled."

Goldman Sachs, Wall Street's most profitable investment and securities firm, whose CEO Lloyd Blankfein (above) is reportedly due to pick up a $100m bonus for 2009, has declined to comment on this latest allegation. Since 2002 it has earned approximately $735 million euros underwriting Greek bonds. Two days ago, the Greek Finance Minister George Papaconstantinou said the swaps devised by Goldman to manage debt were "at the time legal" but are no longer used.

Through Eurostat, the EU's statistics office, furious European regulators are demanding that Greece hand over information on the swaps transactions by the end of this week. Investors clearly think there is more bad news to come: the cost of Greek debt relative to German bunds has soared again. "When people start to fear that the numbers aren't accurate, they fear the worst," said Simon Johnson, professor of economics at MIT.

Goldman's Greek business was relatively simple. According to Bloomberg, the firm arranged for about $10 billion of debt to be
issued by Greece in dollars and yen. That was swapped into euros using a historical exchange rate, a mechanism that suggested a reduction in debt and generated about $1 billion in an up-front payment from Goldman to Greece.

But as with so many financial transaction, it is hard to prove wrongdoing. Legal experts say Goldman could face legal liability if it could be proved the firm knowingly hid risk, and therefore knew or had reason to know that the bond disclosure documents were misleading. "That would be a tough hill to climb, in terms of burden of proof," says law professor Thomas Hazen. "There'd have to be some sort of smoking-gun memo."

At minimum it appears that the Goldman swap allowed Greece to improve its budget and deficit position and this improved investors' perception of risk in investing in Greek debt. "From what we know, this is an egregious example of a conflict of interest," says MIT's Johnson.

The fear now is that other European nations were sold the Goldman package and their problems have yet to surface. Whether the
Goldman-Greece deal was legal or not, investors were fundamentally misled says Matrix's Blain. "Investment banks are guilty of being part of a wider collusion that fudged the numbers to make the euro look like a working currency union. The bottom line is foreign exchange and bond investors bought something sellers knew not to be the case." ·