He who has the gold makes the rules. I suspect this is the operating mantra at Goldman Sachs even after the bank’s near-death experience (when Solomon Bros stock was taking a hit, Blankfein knew his bank could be next). As it turns out, the bank was involved in enabling Greece to stealthily spend beyond its means. According to The New York Times, in 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means. Additionally, in late November, 2009— three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting. The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.
Lest it be forgotten, half of Goldman Sachs’ 2009 revenues came from trades on its own books—even as the bank had become a bank holding company and thus supposedly more not less risk averse. In general terms, my concern is that the bankers at Goldman might be overly in love with leverage and thus be blind to the risks. Were this contagion limited to Goldman Sachs, it would be a question of whether the bank is too big to fail; that the bank has actively enabled one of the EU’s states to secretly take on more debt suggests that the systemic risk that is involved is political as well as economic.
According to The New York Times, “bankers enabled Greece and other governments to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.” This is a condition that American and European citizens have allowed to happen; the market for sovereign debt (and the enabling banks) could be better regulated. Indeed, the government of Iceland floundered economically and politically due to its holdings in valueless subprime mortgage derivative securities; its perilous fiscal condition prompted it to apply to the EU to become a state. Enlargement itself was flagged in the EU as entailing risks for the union. So Wall Street banks whose managers believe in debt and minimizing or avoiding market regulation present the world with not just economic systemic risk, but added political risk as well. That is to say, Wall Street can reach across the Atlantic, with European governments hanging in the balance. To push for banking deregulation in the U.S. can entail political risks abroad. In other words, banking regulation can be viewed as a social responsibility and a matter of good foreign policy.
Even though they had contributed to political instability in Europe, Goldman Sachs managers received near record bonuses in 2010. The payouts were more than a sufficient incentive for the economic alcoholism to carry on in abject denial. "We're not at fault! We're just market makers." The problem here is that the alcoholic has the gold, and thus can make (or at the very least dance around) the rules. As Richard Durbin of the U.S. Senate said in 2010 after he tried to allow bankruptcy judges to be able to modify home mortgages, the banking lobby owns Congress. The amazing point here is: the lobby could still call the shots in Congress even in the wake of the industry's sordid role in the financial crisis of 2008. This ought to be a red flag for anyone who values the republic as a form of government in the U.S.
Ultimately, it is the American people who are to blame—that's right, you and me—because too many of us are sufficiently credulous to elect and re-elect representatives who cave in to the banking lobby’s pressure. There are too many “professional” pols seeking to perpetuate themselves; there is hardly a citizen statesman left serving as a matter of duty rather than power and vocation. We have stood by and let the banks too big to fail get even bigger (and thus more powerful over our governments). We have not put sufficient pressure on our representatives in Congress to remove the too big to fail problem. It is all too easy to point our fingers at the managers of Goldman Sachs, especially on the bank’s role in the Greek debt problem, but it is ultimately ourselves who are responsible for enabling the elephant in our living room. Now that that elephant is breaking furnature in other houses, perhaps we might find the time to get our own house in order. We continue to think and act otherwise. Crucially, this is to our own peril. In other words, denial is not a viable survival mechanism, even if it is more comfortable.
Click to add a question or comment on the role of Goldman Sachs on the Greek indebtedness.
Louise Story, Landon Thomas, Jr., and Nelson D. Schartz, “Wall St. Helped to Mask Debt Fueling Europe’s Crisis,” The New York Times, February 13, 2010.