Sunday, February 19, 2012


We retrace the events of the Goldman-Greece-Draghi controversy. The June 2011 ECB President nomination hearing at the Committee on Economic and Monetary Affairs of the European Parliament will serve as a point of reference.

2010 - Simon Johnson has doubts about Draghi

In February 2010 Simon Johnson raised the alarm about a possible connection between the then presumed successor to Trichet and Greece's secret loan from Goldman Sachs (BaselineScenario). The Central Bank of Italy (BOI) issued a press release supposed to clear Draghi of any responsibility (BaselineScenario). Simon Johnson reacted in Mario Draghi and Goldman Sachs, again (March 2010) by saying it was unconvincing (BaselineScenario). 

In the same year (November) Eurostat published a comprehensive report of an audit of Greece's national accounts. Tackled in the report were the Goldman currency swaps that have the characteristics of a loan but, through an accounting gimmick, were not recorded as debt.  The amounts of debt raised through this scheme were 2.8bn Euros in 2001 and, due to a "major restructuring" in 2005, jumped to 5.1bn Euros in 2006.

May 2011 - Trichet keeps secret files

J-C Trichet vetoed a legal proceeding by Bloomberg vis a vis the EU's General Court, for the ECB to release details about the Goldman-Greece deal (Bloomberg). The timing, one month before the June hearing, cannot be overlooked. The pretext, preventing market risk, was deemed inadmissible by Bloomberg news' Editor in chief (Bloomberg). This brings two questions:
  • What statute allows the ECB to derail a legal proceeding?
  • What were the details that were not in the 2010 Eurostat report, but were in the ECB files? 

14-15 June 2011 - Ex-Chair of ECON has doubts about Draghi

MEP Pascal Canfin and the former chair of the ECON Committee (EU parliament), Pervenche Berès, alleged that Draghi must have known quite well of the masking scheme because he was in charge of dealings in government debt. They asked him, basically, how he could have stood by and did nothing about it. They asked him what, with the benefit of hindsight, he makes of these practices. They clearly threw him a line by asking him to speak up against regulatory capture and the collusion of government with big finance (like this?). They deplored that he had thus far failed to do so (Le Monde). 

15 June 2011 - Hearing

At the hearing, MEP Pascal Canfin said he was unconvinced by his earlier defense (via the BOI, we assume) and asked him what he had to say about it. He answered with two arguments.

No connection to the deal

The first argument is that since the deal was done in 2001, before he joined the firm (2002), he could not have any implication in it. Let's see about that. The bank was reportedly lead underwriter in the following years and continued to be the counter-party to the deal. Moreover the 2010 Eurostat audit shows that the size of the secret loan nearly doubled in 2006, as a result of a major restructuring that took place in 2005. Draghi joined the BOI in January 2006. In short, the first argument is contradicted by the Eurostat audit.

The negative consequences of the deal are compounded by market abuses in connection with the firm's special knowledge of Greece's finances, according to some sources (Washington blog, Diplomatic World). In 2010 Ben Bernanke testified before the Senate Banking Committee in Washington, saying the Fed would investigate these transactions (Bloomberg).

No dealings with any government

The second line of defense of the nominee is that, out of personal preference, he only dealt with corporate clients, not governments, hence he could not have had any implication with the deal.  This does not seem credible from career or business standpoints. In any case, it is contradicted by a press release from Goldman at the time of his hiring, and a news brief from Bloomberg announcing his appointment at the BOI in 2006.

15 June 2011 - MEP Pascal Canfin's doubts not resolved

Pascal Canfin, a member of the ECON Committee, reacted to the hearing in a webcast (English subtitles).

The Goldman-Greece connection

On this particular issue, the MEP said (at 2:24) the hearing did not clear the air and that it generated, instead,  mistrust towards Draghi.

According to the MEP there are multiple oral accounts from employees of Goldman Sachs, EU treasury agencies, mutual and hedge fund managers, that support the hypothesis that Draghi promoted debt masking schemes to governments, reported by a French media outlet. The NY Times relayed these accounts when Draghi took office, in October 2011 (article)1:
Goldman and Mr. Draghi have each said that he had no involvement in the Greece-Goldman initiative, although one Goldman executive based in Europe, who was not authorized to speak publicly, said Mr. Draghi had discussed similar initiatives with other European governments.
Regulatory capture

Remember that the MEP and the ex-Chair of ECON (now Chair of Employment and Social Affairs) had expressed reservations not only about the Goldman-Greece connection, but on the broader issue of regulatory capture.  In his reaction to the hearing the MEP said (at 1:40) that Draghi held the view that a credit event (defaulting on debt) for Greece should be avoided in order to protect American banks that sold insurance against a default. This position was judged inadmissible by the MEP2.

  1. Anecdotally, the same NY Times article says Draghi produced a deep treatise on government debt. No, he didn't. He was co-editor, which means, for this type of publication, that his input was minimal (read the table of contents). 
  2. It is noteworthy that, in February 2012, Joseph Stiglitz published an article at Project Syndicate, Capturing the ECB, that contains: "the ECB may be putting the interests of the few banks that have written credit-default swaps before those of Greece, Europe’s taxpayers, and creditors who acted prudently and bought insurance.". This is compatible with what MEP Canfin had said Draghi had said3. It would be more straightforward to read the hearing's full transcript but is no longer to be found online4.  
  3. The market abuse allegation that can be found in connection to the deal Goldman-Greece deal, is that the investment bank was shorting Greece (at some point in time) on the basis of to insider knowledge. This may seem in contradiction with the view of Stiglitz. The fact that a "few banks" (including Goldman) sold CDS insurance on Greek sovereign debt, does not imply they were long Greece. Only the net position would tell us that, across a borad range of financial instruments, which likely has evolved over time. In any case, it's the net position on Greek-debt CDS contracts specifically, that should determine whether the parties prefer a voluntary exchange or not, for Greece. Naturally, the reasoning becomes more complicated when you consider that an involuntary exchange for Greece could induce other countries to do the same. 
  4. It used to be: "Hearing of Mario Draghi nominated to take over the European Central Bank 14-06-2011". Retrieved 26 June 2011. UPDATE: EuroparlPress-econ has since kindly pointed out this link, but watching the hearing requires a Windows platform (and, under Mac, Flip4Mac produces incomprehensible sounds). 
15-16 June 2011 - ECON Committee's endorsement

Unlike Draghi's written statement submitted to the ECON Committee, the oral Q&A of the hearing was left out of the report that was sent to MEPs for them to vote on the nomination. This is standard practice (we checked for the nomination of Trichet), but the red flag should have been brought to the attention of the MEPs.  For anyone who was curious to know more than the report, ECON's press release would have been the next stop, but it sugar coated the problem.

The Goldman-Greece connection

The contentious issue is presented as involvement with Goldman Sachs and whether this could negatively affect his perceived integrity as ECB president.. What is implied, here, is that guilt by association is the problem; an obvious fallacy that reasonable MEPs would/should reject. But the actual reason of the discord, instead, were the infamous Goldman-Greek deal, and his connection thereof1, which have far reaching ethical and economic consequences (Greece's debt crisis).

The fudge is quite subtle because, admittedly, the press release refers to the actual issue by giving an account of Draghi's defense: "Mr Draghi vehemently defended himself, saying that he was not involved in the bank's work with governments". Let's put the two statements together: "Draghi defended himself from his past involvement with Goldman Sachs by saying he was not involved in the bank's work with government". Without knowing what is in question about his "past involvement", it makes no sense.  

Regulatory capture

Second, the press release ended by saying:
"Mr Draghi vehemently defended himself, saying that [...] his track record since [Goldman Sachs]  in clamping down on the banking sector and warning about the build up of risk proved that he would not be in the pocket of the financial industry." 
This is supposed to convey the impression, we assume, that the hearing ended, on this issue, on a satisfactory note. This clashes with Pascal Canfin's reaction to a specific position of Draghi with regards to the prospect of a default by Greece.

23 June 2011 - ECON Chair's endorsement

The chair of the committee, Sharon Bowles (ALDE Group), issued a press release endorsing Draghi, that said 
I was impressed by the answers he gave to my committee drawing on his past experience, not just repeating ECB lines. On Greece of course he did follow the ECB 'no credit event, no haircuts' line but was fulsome in explaining the effect such an event would have on banks. Many other answers were also interesting and thought provoking.
Indeed the NY Times published an article (the 14th of June) titled Mario Draghi holds ECB line against restructuring for Greece. But what is implied by "of course", and what were the lines we was not repeating?

On the same day, the EU parliament published the explanation of votes of some MEPs under "Report: Sharon Bowles (A7-0229/2011)". They contain virtually no reference to the red flag, which is to be expected, since it wasn't officially communicated to the MEPs.

At the French national assembly, two MPs expressed concern about the Goldman-Greece-Draghi connection and deplored his stonewalling at the hearing (transcript). The French Secretary of Trade (Pierre Lellouche) dismissed the criticism on the basis of the consensus in favor of his nomination.

July-August 2011 - EU Commission responds to a criticism

On 21 July 2011, MEP Willy Meyer expressed, in a question for written answer (EU Parliament), the following concern:
Does the Commission have information on Mario Draghi's involvement, whilst he was Goldman Sachs' European vice-chair, in the dealings between the bank and the Greek Government over the concealment of accountancy fiddles?
EU Commissioner Olli Rehn  answered, on 22 August 2011, that transactions in derivatives between the Greek debt agency and Goldman Sachs dated back to 2001, implying that the President of the ECB had no connection to them (EU Parliament). This was the first argument presented by Mario Draghi before the ECON Committee in June,  which is contradicted by the 2010 Eurostat audit. Oddly enough,  Olli Rehn backs up his claim by citing the same audit.

A written question (French National Assembly) on this topic, dated 19 July 2011, and addressed to the French MOF (François Baroin), remains unanswered. 

October 2011 - Damage control by the Bank of Italy

In the fall of 2011, Spanish newspaper Tiempo claimed in an article, that it received from the Bank of Italy (BOI) documents containing examples of Draghi's dealings with government. Recall that Draghi's second line of defense was that he had no dealings with any government. So there is an implicit admission by the BOI that this statement made at the hearing was incorrect.

BOI's move, however, appears to be a damage control initiative (we rely on an automatic translation so we're not sure):
"Draghi did not keep any relation with the Greek Government and never signed documents for government bonds that country."
Indeed, the smoking gun remains elusive, but Tiempo downplays this new argument as follows :
Still, the source close to the successor of Trichet confirmed that while he was vice president of Goldman Sachs in London, Draghi nobody ever delegated its powers.
In other words, Draghi was hierarchically responsible for any dealings with Greece, even if he didn't sign any document.

Let's recap. Draghi's strange answers at the hearing raised the suspicion that he was not open about his connection to the Goldman-Greece deal. There is no smoking gun he was implicated, but the post hearing release of documents by the BOI proves that Draghi took liberties with the truth. The BOI's argument falls short of refuting that he was implicated.

The Spanish article says that Draghi had told Handesblatt (affiliated with the WSJ) in 2010 that there was more than one deal between Greece and Goldman Sachs. He was perhaps thinking of the 2005 "major restructuring" described in the 2010 Eurostat audit. Yet, recall that the first argument of his defense was that since the deal was initiated before he joined the company, he could not have been implicated. The 2005 restructuring seems to elude attention each time you'd expect that it would, on the contrary, be the focus of attention (notably in Goldman's communication, see here and here).

February 2012 - A new irregularity at the hearing uncovered

It was uncovered in February 2012 that Draghi had failed to disclose a personal relevant factor to take into consideration for his nomination. See Draghi-Morgan-Stanley. Although independent from the Goldman-Greece affair, it reinforces the perception that full disclosure was not on the ECB candidate's mind at the hearing.


  1. Reuters, Jan 29, 2013: ECB's Draghi met Italy minister over Monte Paschi case


    "As governor of the Bank of Italy from 2005 until late 2011, Draghi was responsible for supervision of the banking sector when Monte Paschi got into trouble"

    1. PS:

      I notified Reuters via Pedro da Costa that the correct time span of Draghi's tenure at BOI was 2006—2010, rather than 2005. As of today, the error hasn't been corrected.

      This matters because in 2005 Draghi was at Goldman Sachs (International) and that is the year the Greek masking debt deal was renegotiated.


      Bloomberg, Dec 29, 2005: Italy Names Mario Draghi Governor of Central Bank (Update9)

    2. PS2: I meant '2006—2011'

  2. Archives:

    - Bloomberg - Dec 29, 2005 - Italy Names Mario Draghi Governor of Central Bank (Update9)

    - Twitter - Jan 29, 2012 - ECB's Draghi met Italy minister over Monte Paschi case - Between @pdacosta and @ECB_Watch

    - Reuters - Feb 7, 2013 - Draghi defends his oversight of Monte Paschi


    "You should discount what you read in blogs"—Draghi

  3. From vows to moralize to personal gain via Draghi.

    Le Monde - Sep 25, 2008 - Transcript of Sarkozy's 'Toulon speech' about the financial crisis: "Moralization of financial capitalism is my priority."

    Bloomberg - Apr 27, 2011 - Sarkozy Backing of Draghi for ECB Post Puts Pressure on Merkel to Follow

    Le Figaro - Apr 21, 2013 - [Sarkozy cashes in $100K for giving a speech at a Goldman sponsored conference]