Thursday, March 22, 2012

Sham parliamentary investigations of the GR/Goldman scandal

The EU Commission was at the forefront of the response to the revelation in 2010 of irregularities in Greece's government statistics and in particular the 2.4bn Euros secret loan it received from Goldman Sachs in 2001 (Bloomberg).

Has it delivered, and has parliamentary oversight been adequate?

The Eurostat audit completed in November 2010 is thorough, as promised. But some the hard facts  about the irregularities it brings to our knowledge, such as a 2005 'significant restructuring' with the help of the bank, have evaded scrutiny in a number of cases in which the search for truth was officially on the agenda (in one case literally). Jump to our section 'Preview', just below, to watch a video illustrating this point.

This raises questions of whether public trust was upheld in addressing the alleged fraudulent nature of these transactions. The bank's defense and the nomination of the ECB-President, who was Vice-President of the London branch for 2002-2005, also fall under a veil of suspicion.

We documented this at length in an article published in December 2011 (MarketOracle) and revisit it in light of a 2010 EU hearing that we only recently examined. Also included is the work of the special committee supposed to investigate the cause of the financial crisis, 'CRIS'. Much of what we said then is confirmed by this new evidence but it shifts more weight to the EU Commission, notably the DG of ECFIN,  Olli Rehn.


Asked in April 2010 before an EU parliamentary panel about a 2005 restructuring of the secret loan granted in 2001 by Goldman to Greece, the bank's spokesman Gerald Corrigan replied (approximately):
"I don't know anything about you reference to 2005. Most but not all of the credit risk exposure had with Greece was sold to other market participants."
An audit by Eurostat shows that the amount of unreported debt increased as result of the 2005 event from 2.8bn Euros in 2001 to 5.1bn Euros in 2006. It was arranged by Goldman Sachs who was still, at the time, the counter party to the contract.


In June 2011, Goldman Sachs came up in the nomination process of the president of the ECB. The contentious issue was Draghi's possible connection to Greece's secret loan from the bank.  It's difficult to dispute his defense was inconsistent, but the Committee for Economic and Monetary affairs (ECON)  made sure to sugar coat the problem to expedite the vote by the European parliament (ECB-Watch).

As if this wasn't disquieting enough, it was later found that the ECB president failed to disclose a relevant personal factor to take into consideration for his nomination (ECB-Watch). In another article we point out that many ECON members came short of full honest disclosure about conflict of interest (ECB-Watch).

At the forefront of the legislative response to the financial crisis, in theory, ECON failed to produce a thorough and reliable account of the deal that created a precedent of fraudulently managed government debt in the EU.

The latter has made news again recently, revealing for the first time that "[Greece] didn’t understand what it was buying and was ill-equipped to judge the risks or costs" (Bloomberg). That information should have come from official sources, not at random long after the promised investigations.

As for the EU Commission, Olli Rehn has created a powerful precedent in stating that the Goldman/Greece deal was legal. It contains multiple flaws.

EU Parliament

An important occasion to address the problem head on was a hearing organized by Sharon Bowles at the request the leader of ALDE, Guy Verhofstadt. It was named The fiscal crisis in the European Union - lessons from Greece and took place in April 2010 (ECON/7/02578). Hence the title of this article. 

We have put together related documents into one here. It includes a non official, rough, transcript. We asked the press liaison of ECON who told us there was no official transcript. The broadcast, furthermore, is only for Windows.

Goldman Sachs spokesman Edward Gerald Corrigan's written deposition contains no information about the bank's operations with Greece. Instead, it highlights the supposedly great work done by the Counterparty Risk Managment Policy Group (CRMPG) that he chairs. This same group is alleged by a CFTC official to have successfully pushed backed the institution's attempts to regulate OTC derivatives during the Clinton administration, a major factor in the financial crisis (PBS, SEC).

Corrigan's intervention begins in the second session of the hearing. Walter Radermarcher, head of Eurostat, stays. Commissioner Olli Rehn leaves the auditorium.

In his opening statement (1:51), Corrigan talks in broad strokes about sovereign debt management, essentially reiterating his written statement, as if invited to speak in capacity of consultant, not someone coming clean on the bank's practices.

Questioned on the matter that was actually relevant to his presence, he rejected the notion of concealment (2:16).

He presented the deal primarily as a 'rational' means to hedge a currency exposure arising from liabilities in foreign currencies, recognizing that there was a fly in the ointment using historical rather than market exchange rate (2:34).

Head of Eurostat Walter Radermacher followed with a question about a restructuring that took place in 2005 (2:38). Due to the latter, the audit shows, the amount of unreported debt increased from 2.8bn Euros in 2001 to 5.1bn Euros in 2006. Corrigan said he didn't know anything relating to 2005, and switched to a different aspect of the deal in a
long winded statement (2:39). This exchange was shown in the preview. He stated the obvious in saying that if the rules that came to address the loophole in 2008 had existed in 2001 the deal would have been recorded as a loan. (2:43).

Are we to believe Corrigan came so unprepared to a parliamentary hearing for not knowing about the 2005 restructuring?1

Sharon Bowles, who chaired the meeting, only seemed concerned with staying on schedule throughout. She simply does not see it as her duty to challenge the participants. No further initiative as regards the Goldman/Greece issue have come from ECON.

This section looks at the Eurostat interpretation of the transactions, given in a 2010 report, and compares it to Corrigan's.

Concealment motive behind off-market swaps

To make his case that 'concealment' is an inappropriate description of the deal (2:16), Corrigan makes some comments (not clear) about historical rates vs market values and pre-existing liabilities denominated in foreign currencies, while recognizing that it was a 'fly in the ointment' (2:34).

Swaps that come on top of existing liabilities are the norm. Contracts specified using market exchange rates are also the norm. What is not the norm is the use of an off-market, in this case historical, exchange rate. It is with respect to this particular provision of the contract agreed between Goldman and Greece that the question of concealment has to be examined.

There were two sets of off-market swaps that balanced each other, from a financial standpoint, but whose impact on the debt figure was different. One was a currency swap that was in the money as a result of using a historical rather than market exchange rate, causing and immediate debt relief at inception. The other was a Euro only interest swap, out of the money for Greece, that would gradually increase the debt figure over a long period of time.

Eurostat is clear that in-the-money off-market currency swaps should, according to the updated regulation, contain a component that has to be treated as a loan. That is the economic reality. Keep that in mind for later, when we re-encounter the accounting treatment in section EU Commission.

Had a market exchange rate been used to hedge against the presumed existing currency exposure, there would have been no need for the second set of swaps. Under this alternative, which is the norm, the actual and reported debt figures would also have matched when the transactions were entered into. This refutes any notion that concealment, in the 2001 contract, was secondary or not intended.

Breaches of compliance

The audit report says
At the beginning of the year 2010, it became known that Greece had entered in 2001 into currency off-market swap agreements with Goldman Sachs, using an exchange rate different from the spot prevailing one. The Greek authorities had not informed Eurostat on this issue and no opinion on the accounting treatment has been requested from Eurostat as it should be the case for transactions that are not explicitly covered by its rules.
Eurostat amended the standard in 2008:
In 2007, in response to a specific case concerning a Member State raised in an EU-level meeting, further guidance was needed on the treatment of [...] off-market swaps and swap cancellations. In June 2008, Eurostat published an EDP guidance note, discussed within the framework of the relevant technical working group.
Eurostat then asked all member states to return a questionnaire on their swaps operations. According to the audit report:
In 2008 the Greek authorities wrote to Eurostat that: "The State does not engage in [...] FOREX swaps, nor in off market swaps (swaps with non-zero market value at inception)."
The contentious transactions fall exactly under this description, which means that Greece misleadingly denied their existence in 2008.

EU Commission

During the hearing, asked about a procedure to bring the implicated civil servants and bankers to court, Olli Rehn dismissed the suggestion because he had asked his aides and they told him that the transactions, while illegitimate, were legal in the member state (Greece).

Member state law?

'Illegitimate' and 'legal' are not compatible, but let's go with only 'legal' in the member state, that is Greece.

The entities in Greece that communicate with ECFIN and that might have been competent to express a preliminary opinion as to the merits of a possible case were not likely to be neutral because they were implicated themselves.

The Greek Public Debt Management Agency (PDMA) was the entity engaged in the transaction. In 2001 it was led by Christoforos Sardelis (Bloomberg). The present Director General is Petros Christodoulou. He is a Goldman Sachs alumni who worked at the National Bank of Greece (NGB). The latter took over Goldman Sachs's position in the deal shortly after the 2005 restructuring. The Bank of Greece (BoG), which has a supervisory role, was managed by Lucas Papademos from 1994 to 2002 (InvestWatchBlog). He was appointed PM of Greece in 2001. Finally, the Greek statistical office, until it was reformed in 2010, played a crucial role.

To sum up, the government agencies that have been implicated are likely to give a biased opinion on the merit of a possible legal case. Even if the opinion was obtained from another source, defining legality from the member state's perspective is unnecessarily restrictive. It is quite likely there are avenues for the EU Commission to submit the case to an EU court.

Accounting principle violated

Perhaps the justification of legality, in the mind of Olli Rehn's aides, was that the ability to conceal debt using a combination of off-market swaps specifically was not prevented in the accounting standards at the time. That would be poor judgment. The right question to ask is whether they violated existing principles. If they did, Olli Rehn's position is an invitation to creative accounting in the future.

One of the core principles of ESA95 (the standard) that seems relevant in our case is this one:
When transactions are set-up in such a way that the legal appearance contradict the economic reality (the real economic effect of the transactions), it is preferable to report in national accounts the economic reality
On the face of it, the accounting treatment used by Greece of its arrangement with Goldman did violate this core principle.  Although it is from the 2002 manual (Eurostat), the latter is in reference to a critical regulation that came into force in 2000 (475/2000). The contentious deal was made in 2001.

Market abuse ignored

The accounting treatment is one of many facets of the problem.

Several actions of the bank, with its special knowledge of Greece's actual debt, allegedly fall under the umbrella of market abuse. Both the commission and the parliament have authority to request an inquiry from ESMA, which, in turn, can optionally refer the matter to member states. Let's briefly review some analyses that have circulated.

The bank did not disclose the masking scheme to (some) investors it sold Greek debt to (Bloomberg). That alone would be a breach of primary dealer duty. According to former international banker, Michel Clerin (LinkedIn),  Goldman hedged the Greek deal with Defpa (DW). He was hinting, perhaps, that they were slighted because they were not privy to Greece's actual debt risk.

According to the same source, Goldman offered Greece a new debt masking scheme 2009, but it turned it down. Greece accused Goldman, underwriter of Greek debt, of helping hedge fund manager Paulson speculate against Greece using CDS, causing jitters in the market. Soon after, China refused to buy Greek debt from Goldman. An explanation as to the relevance of this fact is provided in Libération (via Eurosavant).

The transactions were securitized in February 2009 via a Special Purpose Vehicle (Titlos) that paid EUR 5.5 billion to NBG who had, by then, taken over Goldman's counter party position for a few years. However, Goldman was the arranger of Titlos. Arguments were put forward that the complex mechanics of Titlos exacerbated  Greece's debt problems (ZH).


Olli Rehn's judgment that the transactions were illegitimate but legal was pronounced in April 2010. Yet, the audit he had strongly sponsored (Bloomberg) didn't complete until November 2010. More precisely, the report states that
"[because of] recurrent delays by the Greek authorities to provide Eurostat with a complete and adequate information on all swap transactions, that most issues related to swaps were only resolved during the Eurostat mission on 27-28 September 2010"
In other words, Olli Rehn reached a judgment before the evidence he had asked was even submitted to the Commission. He did say that should upcoming missions find out there is suspicion of illegal act he would take appropriate measures. Whether the irregularities reported in this article were known in April on subsequently, he chose to ignore them in taking 'appropriate measures'.

UK Parliament

A hearing involving Corrigan also took place at UK's Treasury Select Committee, in February 2010. The chair and active participant of the meeting was MP Michael Fallon. We have put together related documents into hone here.

EU 'too liberal'

Corrigan essentially blamed the EU for having been "too liberal", that is, allowing a loophole in 2001. This argument is supremely ironic considering Mario Draghi had advocated a "principle based" approach to fighting fraud in a speech given in 2004 before the European Corporate Governance Institute (ECGI). His speech contained references to corporate scandals such as Enron. He was then Vice-Chairman of Goldman Sachs International, the branch that arranged and took part in the deal in 2001 and increased the principal amount nearly twofold in 2005.

Corrigan claims Eurostat was consulted on the appropriateness of the accounting treatment. However, if we go by Eurostat's assessment, Greece's statistical authority had been highly unreliable (until 2010). One may legitimately wonder if Eurostat was actually correctly informed by Greece in 2001 about this particular issue. He stonewalled questions as to what other similar deals Goldman had done. He stressed several times that the Goldman/Greece deal was common place. Eurostat is now telling us that it wasn't  (IBT). 

The 2005 blind spot

There is a serious oversight in Corrigan's defense and in the accompanying press release, the already mentioned 2005 'major restructuring'.  This has to be appraised in the context of him stating that he came to the hearing having carried out an internal investigation of the matter.

In 2010 Gordon Brown asked for an investigation of Goldman Sachs' practices, in response to the US Congress exposing its role in the mortgage crisis. Goldman Sachs International is headquartered in London, and we think it's a team from that branch that arranged the deal.  It should have been on the radar of the FSA. That doesn't seem to have been the case (search). The Chairman of FSA since 2008, Lord Turner, Mario Draghi, Jean Claude Trichet, and Gerald Corrigan all have a connection with the affair and are in the group of 30 (ECB-Watch).

Special committee

The other opportunity for ECON was CRIS (Euractiv), the EU equivalent of the senate panel led by Levin and Coburn (McClatchy). Nothing of substance is to be found in the report on this matter (Europarl). It is ironic given the proclaimed scope of the committee, "Special Committee on the financial, economic and social crisis", its duration (2009—2011), and the size of its report (436 pages). 

CRIS was chaired by Wolf Klinz, and Pervenche Berès (ex-Chair of ECON) was rapporteur. An important legacy is that it was instrumental in shaping a new regulatory system, the European System of Financial Supervision (ESFS). Basically it's supposed to harmonize legislation between members states and/or centralize supervision.

In an interview, Klinz dismisses his co-worker as naive (because she is a socialist) and unsatisfied with the interim state of the report (IIEA). He said that he made sure to impress his views thereafter (14:38), and that explains why the committee lasted so long.

The draft mid term report served as a basis for motion (2009/2182(INI)) in Parliament (Europarl). It contained a measure (No 181) to boycott Goldman Sachs. There was a delegation that met with senior members of the firm, but what came out of it is a mystery. The amendment was predictably rescinded because it was one liner, that is, without a documenting basis (Europarl). Klinz was personally involved in deleting it (amendments 1427 and 1429) while other members proposed a more balanced replacement. The latter were overruled.


  1. - Institute of International and European Affairs - Oct 22, 2010 - Dr-Wolf-Klinz-mep-on-crisis-in-europe-on-the-findings-of-the-cris-committee

    About the event:

    At this event, the Chairman of the Committee, Dr Wolf Klinz MEP, the conclusions of the [CRIS] Committee's interim report, and outlined the necessary next steps in the EU’s policy response to the crisis.

    Unofficial transcript

    MP3 Backup

    - IIEA funding

    Goldman Sachs (International) was or has been one of several of IIEA's corporate sponsors.