By Marshall Auerback and L. Randall Wray for Wall
Street Pit, February 21, 2010
In recent weeks there has been much discussion about what to
do about Greece. These questions become all the more relevant as the country
attempts to float a multibillion-euro bond issue later this week. The Financial
Times has called this fund-raising a critical test of Greece’s
credibility in financial markets as it battles with a spiraling debt crisis and
strikes. The “credibility” of the financial markets is an important
consideration in a country which has functionally ceded its sovereign ability
to create currency, and thus remains dependent on the vagaries of the very
banking institutions which helped create the mess in the first place.
Maybe Greece should secede from the European Union and
default on its euro debt? Or go hat-in-hand to the International Monetary Fund
(IMF) to beg for loans while promising to clean up its act? Or to the stronger
Euro nations, hoping for charitable acts of forgiveness? Unfortunately, all of
these options are going to mean a lot of pain and suffering for an economy that
is already sinking rapidly.
And it is questionable whether any of them provide long term
viable answers. Polls show that given the perception of fiscal excesses of
Greece and the other countries on the periphery, the public in Germany opposes
a bailout of these countries at its expense by a significant margin. Periphery
countries such as Ireland that have already undertaken harsh austerity measures
also oppose the notion of a bailout, despite—nay, because of–the tremendous
pain already inflicted on their own respective economies (in Ireland’s case,
the banks are probably insolvent as well). The IMF route is also problematic,
given that Greece probably doesn’t qualify under normal IMF standards, and many
euro zone nations would find this unpalatable from an ideological standpoint,
as it would mean ceding control of EU macro policy to an external international
institution with strong US influence.
The Wall Street Journal recently highlighted an article by
Simon Johnson and Peter Boone, lamenting that the demands being foisted on Greece
and other struggling Euronations would “massively curtail demand, lower wages
and reduce the public sector workforce. The last time we saw this kind of
precipitate fiscal austerity—when nations were tied to the gold standard—it
contributed to the onset of the Great Depression in the 1930s”. Where we
disagree with Johnson and Boone is the suggestion that the IMF be brought in to
craft a solution. Any help from this organization will come with tight strings
attached—indeed, with a noose around Greece’s neck. Germany and France would be
crazy to commit their scarce euros to a bail-out of Greece since they face both
internal threats from their own taxpayers and external threats from financial
vampires who are looking for yet another nation to attack.
Here’s a more appropriate action: declare war on Goldman
Sachs (GS) and other global financial firms that created this mess. Send the
troops, the planes, the tanks, and the ships. Attack every outpost of the
saboteurs on European soil. Blockade the airports and ports. Make Wall Street
traders and CEOs fear for their lives, or at least for their freedom to travel.
Build some Guantanamo-like facility to hold these enemy financial combatants
until they can be tried, convicted, and properly punished.
Ok, if a literal armed attack on Goldman is too far-fetched,
then go after the firm using the full force of the regulatory and legal
systems. Close the offices and go through the files with a fine-tooth comb.
Issue subpoenas to all non-clerical staff for court appearances. Make the
internal emails public. Post the names of all managers and traders on Interpol.
Arrest anyone who tries to board a plane, train, or boat; confiscate their
passports; revoke their visas and work permits; and put a hold on their bank
accounts until culpability can be assessed. Make life at least as miserable for
them as it now is for Europe’s tens of millions of unemployed workers.
We know that the Obama administration will not go after the
banksters that created this global financial calamity. It has been thoroughly
co-opted by Wall Street’s fifth column—who hold most of the important posts in
the administration. Europe has even more at stake and has shown somewhat more
willingness to take action. Perhaps our only hope for retribution lies there.
Some might believe the term “banksters” is too mean. Surely
Wall Street was just doing its job—providing the financial services wanted by
the world. Yes, it all turned out a tad unfortunate but no one could have
foreseen that so many of the financial innovations would turn into black swans.
And hasn’t Wall Street learned its lesson and changed its practices? Fat
chance. We know from internal emails that everyone on Wall Street saw this
coming—indeed, they sold trash assets and placed bets that the trash would
crater. The crisis was not a mistake—it was the foregone conclusion. The FBI
warned of an epidemic of fraud back in 2004—with 80% of the fraud on the part
of lenders. As Bill Black has been warning since the days of the Saving and
Loan crisis, the most devastating kind of fraud is the “control fraud”,
perpetrated by the financial institution’s management. Wall Street is, and was,
run by control frauds. Not only were they busy defrauding the borrowers, like
Greece, but they were simultaneously defrauding the owners of the firms they
ran. Now add to that list the taxpayers that bailed out the firms. And Goldman
is front and center when it comes to bad apples.
Lest anyone believe that Goldman’s executives were somehow
unaware of bad deals done by rogue traders, William Cohan reports that
top management unloaded their Goldman stocks in March 2008 when Bear crashed,
and again when Lehman collapsed in September 2008. Why? Quite simple: they knew
the firm was full of toxic waste that it would not be able to continue to
unload on suckers—and the only protection it had came from AIG, which it knew
to be a bad counterparty. Hence on March 19, Jack Levy (co-chair of M&As)
sold over $5 million of Goldman’s stock and bet against 60,000 more shares;
Gerald Corrigan (former head of the NY Fed who was rewarded for that tenure
with a position as managing director of Goldman) sold 15,000 shares in March;
Jon Winkelried (Goldman’s co-president) sold 20,000 shares. After the Lehman
fiasco, Levy sold over $6 million of Goldman shares and Masanori Mochida (head
of Goldman in Japan) sold $56 million worth. The bloodletting by top management
only stopped when Goldman got Geithner’s NYFed to produce a bail-out for AIG,
which of course turned around and funneled government money to Goldman. With
the government rescue, the control frauds decided it was safe to stop betting
against their firm. So much for the “savvy businessmen” that President Obama
believes to be in charge of Wall Street firms like Goldman.
From 2001 through November 2009 (note the date—a full year
after Lehman) Goldman created financial instruments to hide European government
debt, for example through currency trades or by pushing debt into the future.
But not only did Goldman and other financial firms help and encourage Greece to
take on more debt, they also brokered credit default swaps on Greece’s
debt—making income on bets that Greece would default. No doubt they also took
positions as the financial conditions deteriorated—betting on default and
driving up CDS spreads.
But it gets even worse: An article by the German newspaper,
Handelsblatt, (“Die Fieberkurve der griechischen Schuldenkrise”, Feb. 20, 2010)
strongly indicates that AIG, everybody’s favorite poster boy for financial
deviancy, may have been the party which sold the credit default swaps on Greece
(English translation – here).
Generally, speaking, these CDSs lead to credit downgrades by
ratings agencies, which drive spreads higher. In other words, Wall Street, led
here by Goldman and AIG, helped to create the debt, then helped to create the hysteria
about possible defaults. As CDS prices rise and Greece’s credit rating
collapses, the interest rate it must pay on bonds rises—fueling a death spiral
because it cannot cut spending or raise taxes sufficiently to reduce its
deficit.
Having been bailed out by the Obama Administration, Wall
Street firms are already eyeing other victims (and for allowing these kinds of
activities to continue, the US Treasury remains indirectly complicit, another
good reason why one shouldn’t expect any action coming out of Washington).
Since the economic collapse is causing all Euronations to run larger budget
deficits and at the same time is raising CDS prices and interest rates, it is
easy to pick off nation after nation. This will not stop with Greece, so it is
in the interest of Euroland to stop the vampires now.
With Washington unlikely to do anything to constrain
Goldman, it looks like the European Union, which is launching a major audit,
just might banish the bank from dealing in government debt. The problem is that
CDS markets are essentially unregulated so such a ban will not prevent Wall
Street from bringing down more countries—because they do not have to hold debt
in order to bet against it using CDSs. These kinds of derivatives have already
brought down an entire continent – Asia – in the late 1990s, and yet
authorities are still standing by and basically doing nothing when CDSs are
being used again to speculatively attack Euroland. The absence of sanctions
last year, when we had a chance to deal with this problem once and for all, has
simply induced even more outrageous and fundamentally anti-social behavior. It
has pitted neighbor against neighbor—with, for example, Germany and Greece
lobbing insults at one another (Greece has requested reparations for WWII
damages; Germany has complained about subsidizing what it perceives to be
excessive social spending in Greece).
Of course, as far as Greece goes, the claim now is that
these types of off balance sheet transactions in which Goldman and others
engaged were not strictly “illegal” under EU law. But these are precisely the
kinds of “shadow banking transactions” that almost brought down the global
financial system 18 months ago. Literally a year after the Lehman bankruptcy –
MONTHS after Goldman itself was saved from total ruin, it was again engaging in
these kinds of deals.
And it wasn’t exactly a low-level functionary or “rogue
trader” who was carrying out these transactions on behalf of Goldman. Gary Cohn
is Lloyd “We’re doing God’s work” Blankfein’s number 2 man. So it’s hard to
believe that St. Lloyd did not sanction the activities as well in advance of
collecting his “modest” $9m bonus for last year’s work.
If these are examples of Obama’s “savvy businessmen“, then
heaven help the global economy. The transaction highlighted, if reported that
way in the private sector, would be accounting fraud. Fraud – “Go to jail, do
not pass Go” fraud. That senior bankers had no problem in
structuring/recommending/selling such deals to cash-strapped governments should
probably not surprise us at this point. However, it would be interesting to
know if the prop trading desks of those same investment banks, purely by
coincidence of course, then took long CDS (short the credit) positions in the
credit of the countries doing the hidden swaps. A proper legal investigation by
the EU could reveal this and certainly help to uncover much of the financial
chicanery which has done so much destruction to the global economy over the
past several years.
In this country, we have had a “war on terror” and a “war on
drugs” and yet we refuse to declare war on these financial weapons of mass
destruction. We all remember Jimmy Carter’s “MEOW”—the attempt to attack
creeping inflation that was said to sap the strength of the US economy in the
late 1970s. But Europe—and indeed the entire globe—faces a much more dangerous
and immediate threat from Wall Street’s banksters. They created this mess and
are not only profiting from it, but are actively preventing recovery. They are
causing unemployment, starvation, destruction of lives, and even violence and
terrorism across the world. They are certainly more dangerous than the
inflation of the 1970s, and arguably have disrupted more lives than Osama bin
Laden—whose actions led the US to undertake military actions in at least three
countries. That should provide ample justification for Greece’s declaration of
figurative war on Manhattan.
However, in an ironic twist of fate, it was just announced
that Petros Christodoulou will take over as the head of Greece’s national debt
management agency. He worked as the head of derivatives at JP Morgan, and also
previously worked at Goldman—the firm that got Greece into all this trouble!
Dimitri Papadimitriou has recently made what we consider to
be an important plea for moderation of the hysteria about Greece’s debt. Writing in
the Financial Times, he complained that “The plethora of articles in your
pages and others, some arguing in favour and other against a bail-out,
contribute to market confusion and drive the country’s financing costs to
record levels. It is not yet clear that a bail-out is even needed, but this
market confusion is rendering the government’s ability to achieve its deficit
goals ever more difficult.” Indeed, we suspect that the same financial firms
that helped to get Greece into its predicament are profiting from—and stoking
the fires of—the hysteria. He goes on, “what Greece really needs now is a
holiday from further market confusion being created by contradictory, alarmist
public commentary”.
Greece, Euroland in general, and the rest of the world all
need a holiday from the manipulation and destruction of our economies by Wall
Street firms that profit from speculative bubbles, from burying firms,
households, and governments under mountains and debt, and even from the crises
that they create. Governments all over the globe should use all legal means at
their disposal to ferret out the bad faith and even fraudulent deals that
global financial behemoths are foisting on us.
