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."

The Genius of Mutual Indebtedness

I love this guy, Nigel Farage, at least somebody who tells it as it is:

The Whole Thing is a Giant Ponzi Scheme

Quotes from Farage (UK Independent party):

• "EC president Jose Barroso is a delusional idiot and was a supporter of Chairman Mao"
• "The only buyers of Spanish bonds are Spanish banks" 
• "Listen. The Whole Thing's a Giant Ponzi Scheme!" 
• "At the end of the day, this whole thing is going bust" 
• "We have been led by a group of ex-communists to a total disaster" 
• "What we're doing in Brussels with Barroso, and the other joker Van Rumpoy, is we are actually rebuilding a model of centralized undemocratic government run by bureaucrats"

Everything Must Go! The Great European Fire Sale

This could turn very big and nasty. The debt problems in Europe are huge. Finally, 3 to 4 years after the global economic crisis, some sense of urgency has set in and governments are deleveraging after having lived way beyond their means. The amount of government bonds that have to be rolled over before the end of the year are staggering, I have seen estimates of over two Trillion Euro: 2,000,000,000,000.00.

http://www.independent.co.uk/news/world/europe/everything-must-go-the-great-european-fire-sale-7079815.html

All over Europe, nations have been looking for a quick, innovative way out of the debt trap. Unfortunately, they've all had the same idea. Tom Bawden explains, while Charlie Cooper anatomises the great European fire sale

What do Rome's 2020 Olympic bid, Portugal's Shrove Tuesday carnival, Greece's sunlight, Ireland's National Stud, Spain's national lottery and Britain's national air traffic control service have in common? Answer: they are all being either sold or cancelled by European governments desperate to whip their public finances back into shape after a decade of living beyond their means.

Such measures would once have suggested incomprehensible panic. Now everyone's at it. It would have been more surprising if Mario Monti hadn't called off an Olympic bid that could have swallowed up €9.5bn (£8bn) that his near-bankrupt nation didn't have.

But it's not just radical belt-tightening that we're seeing. A remarkable number of nations are also doing the equivalent of selling the family silver, in a Europe-wide fire sale of state assets with no obvious precedent.

Greece is probably the Continent's biggest auctioneer, with an estimated €50bn of assets up for sale (see far right). But others have had the same idea. Ireland, for example, is considering the sale of billions of euros of assets, from Dublin's historic port to the Irish National Stud horsebreeding operation.

Spain is looking to raise cash by offloading, among other things, two major airports and a large chunk of its most famous lottery ("El Gordo", or "The Fat One").

Britain is hoping to convert the Government's 49 per cent stake in National Air Traffic Services into ready cash, along with the BBC's "doughnut" Television Centre, in West London, and the iconic Admiralty Arch. The latter, on the edge of Trafalgar Square, is expected to fetch £75m and be turned into a hotel. The Ministry of Defence and the Foreign Office are also planning spectacular disposals of assets to plug holes in their finances. (And that's without mentioning the sales that have already taken place, such as that of the high-speed rail link from London St Pancras station to the Channel Tunnel, which went to a pair of Canadian pension funds for £2.1bn in November 2010.)

These desperate remedies might seem ambitious at the best of times – but this isn't the best of times. Most nations in Europe urgently need need to get their finances in order, and most have had the same idea of raising some quick cash through fire sales. And if everyone puts things up for sale at the same time, it is bound to depress prices.

That may explain why there's such a gap between the headline figures that get reported when mooted sales are announced and the sums that are actually raised. Greece, for example, has so far raised a mere €180m of its declared target of €50bn.

Yet there should, ultimately, be no shortage of buyers. China is looking to invest its riches in every nook and cranny of the world, while governments in the Middle East still seek to spend their oil wealth.

It is hard to know whether to feel cheered or depressed by this prospect. On the one hand, anything that can speed our escape from debt is to be welcomed. On the other, family silver, once sold, remains sold. As our economy is increasingly sidelined by China and India, there is a strong danger that things will never get back to the way they were.

Tom Bawden

Treaty of Debt - An Eye Opening Video on the ESM Bailout Mechanism

http://globaleconomicanalysis.blogspot.com/2011/10/treaty-of-debt-eye-opening-video-on-esm.html

Key Details of ESM Accord

Article 8 says "Authorized Capital stock 700 billion Euros"

• Article 9 says "ESM members irrevocably and unconditionally undertake to pay capital calls on them within 7 days"
• Article 10 allows the ESM board of governors to "change the authorized capital and amend article 8 accordingly"
• Article 27 says ESM shall enjoy "immunity from every form of judicial process". Thus the ESM can sue member countries but no one can challenge it. No governments, parliament or any other body or laws apply to the ESM or its organization.
• Article 30 says "Governors, alternate governors, directors, alternate directors, the managing director and staff shall be immune from legal process with respect to acts performed by them (...) and shall enjoy inviolability in respect of their official papers and documents"

There are no independent reviewers and no existing laws apply. Thus Europe's national budgets will be in the hands of one single, unelected body that is accountable to no one and immune from all legal actions.
Is this the future of the EU or will the German supreme court and other governments put an end to it?

Comments are from Mike Shedlock / Mish