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.
for The Daily Reckoning Australia