Friday, February 26, 2010

Goldman Sachs Under the Microscope

A few days ago I noted that Goldman Sachs might be investigated regarding some financial shenanigans involving Greece. Sure enough, only according to Bernanke it's the Securities and Exchange Commission that is doing the investigating, not the European Commission.

It was all perfectly legal, if ethically questionable;

In 2001 Goldman arranged so-called currency swaps, a complex derivative instrument, that allegedly allowed Greece to make its debt figures look lower and meet the European monetary union's deficit limits. These transactions at the time were not required to be reported and, as such, essentially enabled Greece to borrow funds and conceal the real size of its debt.

There are also questions about how Goldman and other investment firms entered into subsequent trades involving derivatives that allowed them to profit from a deterioration in Greece's credit quality.

While Goldman's actions may have been completely legal, Greece's government has decried the fact that it has become "prey to speculative forces," and the drama has roiled global markets. Experts say the calamity in Greece raises ethical questions about some of the banking firm's dealings.

Slavery was legal in this country once upon a time. Still is in some parts of the world. But that doesn't make it moral. Of course a good business person is not necessarily going to quibble about morality when the law is on her side. Just ask the folks running Illinois and Chicago.

ETA Let's add a little deja vu to this.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

Anyone here want to join this melee and see what their Vegas bookie is giving as odds that Greece will default?

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