Goldman Sachs and other big banks have been accused of helping Greece conceal its financial problems from investors and EU regulators. It also may have helped aggravate the country's fiscal troubles by helping investors bet on the possibility of a default through the use of credit default swaps.
U.S. officials are looking into the role that Goldman Sachs and other big banks played in the ongoing debt crisis in Greece.
The company has been accused of helping Greece conceal its financial problems from investors and regulators. It also may have helped aggravate the country's fiscal troubles by helping investors bet on the possibility of a default through the use of complex financial instruments called credit default swaps.
As the Greek financial crisis lurches from bad to worse, some European officials have complained that part of the blame lies on this side of the Atlantic. Evidence emerged at a Senate Banking Committee hearing on Thursday that the allegations are being taken seriously.
Federal Reserve Chairman Ben Bernanke revealed that the central bank is beginning to investigate some of the claims.
"We are looking into a number of questions related to Goldman Sachs and other countries, and their derivative arrangements with Greece," Bernanke told lawmakers.
The allegations involve what are called cross-currency derivatives sold to the Greek government nearly a decade ago. At the time, Greece was lobbying to get into the European Union. The derivatives sold by Goldman helped Greece conceal the extent of its debt from EU regulators and investors by taking it off the government's books.
Tim Backshall, chief strategist at Credit Derivatives Research, says these transactions aren't illegal, but they are not usually used by sovereign governments, and the fact that they were has helped undermine the market's confidence in Greece.
"What I think worries a lot of market participants is the uncertainty, the not knowing, and certainly the fact that these deals were going on makes you wonder what you don't know," Backshall said.
Credit Default Swaps
More recently, Goldman has been hit with another set of allegations involving credit default swaps. These are a kind of complex financial instrument that enables investors to place bets on the financial condition of a company or a government even if they don't have any financial ties to it. The market for credit default swaps is huge, and Goldman plays a major role in it.
In this case, Goldman joined with other big banks to set up a kind of index that helps investors measure the value of the swaps held against Greece and other countries. Critics say this has turned into a kind of vicious cycle: Investors look at the index, see that a country's debt situation is becoming worse, and then they sell its bonds, which makes the index go up even more.
At Thursday's Senate hearing, committee Chairman Christopher Dodd (D-CT) said this contributes to an atmosphere of crisis and makes it harder for the Greek government to borrow.
"Since there's no requirement that purchasers of credit default swaps actually own any of the underlying debt, we have a situation in which major financial institutions are amplifying a public crisis — or appear to be — for private gain," Dodd said.
Are Allegations Exaggerated?
Others say Goldman's role in the crisis is being greatly exaggerated and that it's being made a scapegoat for problems caused by the Greek government's poor fiscal management.
Bernanke defended the use of credit default swaps, saying they were useful in helping companies and governments hedge against risk. But, he said, "Obviously using these instruments in a way that intentionally destabilizes a country or company is counterproductive."
The question for the Fed is whether Goldman actually did that and what impact its actions had. A Goldman spokesman declined to discuss the allegations, saying the company doesn't comment on legal and regulatory matters.
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