Honesty can land you in jail in Greece

I wrote before about Greece, how they qualified to the EU by fudging the numbers and how Goldman Sachs made a truckload of money by helping doing this.

The following is from an article in The Spiegel:


He was hired to bring Greece's debt statistics in line with European norms. Now, chief statistician Andreas Georgiou faces jail time for allegedly producing inflated budget deficit numbers. He says he was merely being honest, and he has plenty of support in Europe.

When Georgiou decided in the summer of 2010 to take over leadership of the revamped, newly independent Greek statistics service ELSTAT, he never imagined that the position could land him a jail sentence. But at the end of January, felony charges were filed against Georgiou and two senior ELSTAT staffers for allegedly inflating the 2009 deficit. In other words, at a time when the rest of the world was furious that Greece had artificially improved the country's budget statistics, Greek prosecutors are accusing Georgiou of doing the opposite. Prosecutors acted after a 15-month investigation into allegations made by a former ELSTAT board member. If found guilty, Georgiou faces five to 10 years in prison.

At stake in the ELSTAT case is more than the credibility of a senior statistician, one who previously worked for 20 years at the International Monetary Fund. The entire bailout of Greece was based on the numbers provided by ELSTAT on the deficit figures for 2009 onwards.


Malaysia has it's own case with the chief economist of Bank Islam being suspended, days after he gave a lecture predicting different scenario's of the coming election, some of which involved the opposition winning.

Goldman Sachs earned 600 million Euro to help Greece fudge the numbers

Stunning revelations in an article on Bloombergs website.

Basically Goldman Sachs received 600 million Euro (= RM 2.4 Billion, RM 2,400,000,000.00!) to structure a deal enabling Greece to fudge the numbers to meet the European Union requirements.

Greece’s secret loan from Goldman Sachs Group Inc. (GS) was a costly mistake from the start.

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.

“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.

Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed.

Goldman Sachs DNA

“Like the municipalities, Greece is just another example of a poorly governed client that got taken apart,” Satyajit Das, a risk consultant and author of “Extreme Money: Masters of the Universe and the Cult of Risk,” said in a phone interview. “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised -- it’s part of the DNA of that organization.”


Barry Ritholtz writes about this case, and another on in the US, and warns about these very difficult to understand financial structures, and comes up with “The Inviolable Rules for Dealing with Wall Street”:

1. Reward is always relative to risk: If any product or investment sounds as if it has lots of upside, it also has lots of risk. If you can disprove this, there is a Nobel Prize waiting for you.

2. Asymmetrical information: In all negotiated sales, one party has far more information, knowledge and experience about the product being bought and sold. One party knows its undisclosed warts and risks better than the other. Which party are you?

3.Good advice is priceless: I know, easier said than done. The Street buys the best legal talent, mathematicians and strategists that money can buy. Make sure you have expert advisers and lawyers working for you as well.

4. Motivation: Always ask, what is the motivation of the outfit selling me this product? Is it the long-term stability and financial health of my organization — or their own fees and commissions?

5. Legal documents are created to protect the preparer (and its firm), not you or yours: In the history of modern finance, no large legal document has worked against its drafters. Private placement memorandums, sales agreement, arbitration clauses — firms use these to protect themselves, not you.

6. Performance: How significantly do the fees, interest rates commissions, etc., have an impact on the performance of this investment vehicle over time? Determining for yourself what the actual cost of money is will avoid more heartache in the future.

7. Shareholder obligation: All publicly traded firms (including investment banks and bond underwriters) have a fiduciary obligation to their shareholders to maximize profits. This is far greater than any duty owed of care to you, the client. Always ask yourself whether this new product benefits the shareholders or your organization. (This is acutely important for untested products.)

8. Reputational risk: Who suffers if this investment goes down the drain? Who gets fired or voted out of office if this blows up? Who suffers reputational risk?

9. Keep it simple, stupid (KISS): It’s easy to make things complicated, but it’s very challenging to make them simple. The more complexity brought to a problem, the greater the potential for things to go awry — not just astray, but very, very wrong.

10. There is no free lunch: Repeat after me: There is no free money, no riskless trade, no way to turn lead into gold. If you remember no other rule, this is the one that will save your hide time and again.

 The only positive thing in this whole case (and many others as well) is that there are organisations that are actively trying to uncover what exactly happened:

"Bloomberg News filed a lawsuit at the EU’s General Court seeking disclosure of European Central Bank documents on Greece’s use of derivatives to hide loans."

At least ECB still has humour

In 1996, then Greek Finance Minister Yannos Papantoniou successfully pleaded for euro banknotes to feature the name “euro” in the Greek alphabet, overcoming German protests. According to an account from Ireland’s Ruairi Quinn, then German Finance Minister Theo Waigel told Papantoniou that he’d had “enough trouble in Germany trying to sell this idea of giving up the mark, and now you want me to put funny letters on it as well.” According to Quinn, Waigel added: “It’s all irrelevant, because you’re never going to qualify” anyway.

But Greece did qualify, by fudging the numbers. When the day of reckoning came, Greece's economy imploded.

From Wikipedia: "Inspiration for the € symbol itself came from the Greek epsilon (Є)"

Bloomberg reports:

The European Central Bank is using an image from Greek mythology to improve security on new euro banknotes, four people familiar with the design said, even as Greece’s near bankruptcy fuels a debt crisis that’s threatening the future of the common currency.

Europa, the Phoenician princess abducted by Zeus who gave the continent its name, will replace architectural images as the watermark on the new notes, which the ECB wants to start rolling out next year, said the people, who spoke on condition of anonymity because the plans aren’t public yet.

Phoenician Princess
In Greek mythology, Europa, the beautiful daughter of Phoenician king Agenor and his queen Telephassa, was abducted by Zeus. Taking the form of a white bull, the king of the Greek gods seduced Europa and stole her away to the island of Crete.

So now we have "Europe", "Euro", "Є" (the symbol for the Euro) and the image of Europa on new Euro banknotes, four references to Greece. And that while Greece is nearing bankruptcy and is causing so many of ECB's problems.

At least the ECB doesn't seem to have lost it's sense of humour .....