Government Sachs

Reddit

Last week, Greek Finance Minister George Papaconstantinou slipped. He said not what he should have said, nor what he wanted to say. Unwittingly, he said something that was true: his country’s budget was “out of control.” He begged for more time to straighten it out. “We’re trying to change the course of the Titanic,” he said. The EU ministers gave him a month.

Mr. Papaconstantinou was speaking of Greece. But he described much of Europe, Britain, Japan and the US. And, in his fortunate metaphor, he prophesied. The big ships can’t be turned around. They’re going to sink.

Greece has been taking on water for many years. But this was the first time a finance minister of any country signaled to lenders that they should head for the lifeboats. Then, looking around, the press noticed that one of the lifeboats had already been launched. In it were no crying widows and no shivering orphans. Just one very satisfied Lloyd Blankfein, chief executive of Goldman Sachs. He had sold the Greeks their debt, said the papers; now he has sold it short.

Der Spiegel was first to break the story. Then, it came out in The New York Times. And then Bloomberg was on Goldman’s case. It wasn’t the mess that the Greeks had gotten themselves into that attracted the press attention, it was who had helped them get into it. Greece has been in default to its creditors in one out of two years since it got independence in the early 19th century. It is almost the definition of a poor credit risk. By what crook and what hook did the slippery Hellenes manage to get themselves into the Euro Club?

Creativity in art makes for masterpieces. Innovation in industry may lead to success. But when the financial industry schemes and canoodles, it invariably leads to disaster. Goldman Sachs, the most cunning of Wall Street’s financiers, is fundamentally a debt monger. Like a liquor store or a drug dealer, it earns money to the extent it is able to move its merchandise. The more the customer wants, the more Goldman earns. Whether the purchase is good for the customer or not is not Goldman’s concern. But just look at where the moneylenders have been most creative and you will surely find something you should not own.

In the present example, Goldman earned a total of $300 million. Immediately, the pundits kvetched that its work was both criminal and noxious. As to the noxious charge, Goldman needs no defense. Greece has always been a notorious drunk. Goldman is merely a bartender. The money monger seeks neither the ruin of his customer, nor his reformation.

As to the criminal charge, Goldman says it was perfectly legal to structure the deal with Greece the way it did. Moreover, the authorities in Brussels have been aware of it for years…and even seemed to approve of it. Member states were allowed to “use derivatives to adjust deficit ratios,” The Financial Times revealed last Wednesday. Goldman arranged for Athens to swap cash for a stream of income coming from an airport and a lottery. Was it debt or equity? Had Goldman lent Greece money…or had it bought part of the national patrimony? It really makes no difference; whatever you call it, the Greeks had impaired their balance sheet. Goldman had merely made a buck helping them do it.

Goldman need not worry about persecution; it has friends in high places. Such as Mario Draghi. Mr. Draghi has a long and impressive résumé. Not only has he been a managing director of Goldman Sachs, in charge of business development in Europe, he’s also served as director general of the Italian Treasury and lately, Italy’s central bank governor. And now he’s up for the post of head of the ECB, to replace Jean-Claude Trichet, who is scheduled to step down next year. He is Goldman incarnate – banker, servant of the people, one of the financial world’s high priests from whose hands come unction, salvation…and cash.

In the US, Goldman is so tight with the feds it is known as “Government Sachs.” But what’s new? Governments always turn to rich, well-connected moneymen for finance. The Rothschilds largely financed Britain’s continental allies in its war against Napoleon in the early 19th century. Then, in the early 20th century, JP Morgan financed the British in WWI. In both cases, the lenders found innovative and often complex ways to keep the money flowing. Now, we are in the early 21st century and Goldman is providing the money.

But this time it is different. Borrowers are not at war. Instead, they borrow to blow themselves up. There is no foreseeable end to their borrowing. The Greek affair is peanuts. America’s ink is so red it looks as though it has cut an artery; this year’s deficit alone is $1.6 trillion. Japan, the world’s second largest economy, now borrows more than it raises in tax revenues. And while the Greeks run a deficit of 13% of GDP, in the UK the deficit is even higher at 14%.

Goldman is right; this is a good time to sell government debt. Better to get into the lifeboats too early than too late.

Regards,

Bill Bonner
for The Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

Latest posts by Bill Bonner (see all)

Reddit

Comments

  1. “When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes… Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
    Napoleon Bonaparte, 1815

    Reply
  2. Wow,the worlds finances are on a razors edge.So much debt and nowhere enough income to pay for it.If it couldnt be payed when the world was booming,how could it ever be payed now.Greek workers now strike and are outraged at the state their government has placed them.What about the US,where are the protests ,where is the outrage,is the propaganda machine so good that the public is blind.there is a financial implosion coming.Where will the billionaires hide their funds,no good on paper saying you have a billion,surely they have to buy real assets,even as deflated as those assets may become.it seems another credit crunch will come.businesses unable to roll over loans will suffer,more unemployment.The banks greed is a cancer on society.and of course all this debt leads to war,there is money to be made in war.

    Reply
  3. Important to remember it is not about the actual money loaned but who controls that debt and how that influence neuters the moral high ground, leaving us with bizarre thought process that stymies the intellect. Dan’s got it right but the sole gain they are left with is rudderless in a bankrupt society that has eaten all its seed corn.

    Reply

Leave a Reply

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au