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The blind spot surrounding the 2005 'major restructuring' of the Goldman / Greek secret loan

Politics / Eurozone Debt Crisis Apr 02, 2012 - 12:54 PM GMT

By: ECB_Watch


Best Financial Markets Analysis ArticleThe EU Commission was at the forefront of the response to the revelation in 2010 of irregularities in Greece's government statistics and in particular the 2.8bn Euros secret loan it received from Goldman Sachs in 2001 (Bloomberg). Has it delivered, and has parliamentary oversight been adequate? 
We tried to answer in a December 2011 article by comparing the results of a thorough audit from Eurostat with initiatives from legislative bodies in the EU and the UK and the bank's communication (MarketOracle). In short, there were serious lapses that point to a deception. 

We revisit the issue based on additional material, an April 2010 hearing in the EU parliament (video footage included in this article) and the work of the special committee in charge of studying the causes of the financial crisis, CRIS. The time is opportune following Nick Dundbar's recent report which reveals important details about the imbalanced relationship between Greece's debt agency and the bank (Bloombeg). That reinforces our case that EU officials have limited their reach to regularizing the accounts, not investigating the actions of the parties involved.
In this article we draw up an inventory of the cases in which a 2005 'significant restructuring' of the transactions has evaded scrutiny. Both from EU officials supposedly in search for the truth (in one case literally) and the media. We take a critical look at the coverage of Nick Dunbar and March Roche because are supposed to know better than any other observer.
Main characters Alphabetically (surname): Edward Gerald Corrigan
  • Affiliation: Goldman Sachs
  • Title: Managing Director
  • Notable: Said at April 2010 EU parliamentary hearing he knows nothing in reference to 2005.
Mario Draghi
  • Affiliation: Goldman Sachs International (2002 to 2005), ECB (present)
  • Title: Vice-Chairman (2002-2005), President (present)
  • Notable: Said during June 2001 hearing he could not have been implicated because the deal dates back to 2001
Nicholas (Nick) Dunbar
  • Affiliation: Bloomberg
  • Title: Editor
  • Notable: Wrote a news breaking article in 2003 on the issue (
Olli Rehn
  • Affiliation: EU Commission
  • Title: Director General for Economic and Financial Affairs (DG ECFIN) 
  • Notable: In April 2010 declared in the EU parliament that there was no case for judicial action.
Marc Roche
  • Affiliation: Le Monde
  • Title : City correspondent
  • Notable: Author of the book How Goldman Sachs controls the world (Amazon)
This is the timeline of cases when the 2005 'significant restructuring' may have some relevance. Other events that are necessary to provide context are also included.
February 2010
A hearing involving Goldman Sachs is held at the Treasury Select Committee of the UK parliament. It is chaired by MP Michael Fallon. Spokesman for the bank Gerald Corrigan says, among several arguments, that the EU was "too liberal" in allowing a loophole at the time the deal was made in 2001, and that Eurostat was consulted on the accounting treatment. Around that period the bank issues a press release acknowledging the apparent debt reduction resulting from the transaction in 2001. Neither the spokesman nor the press release mentions the 2005 restructuring.
April 2010
A hearing called Lessons from Greece is organized by the ECON Committee of the EU Parliament, chaired by Sharon Bowles.
In the first session, Commissioner Olli Rehn responds to the mention of taking legal action against the parties involved in the transactions. He says it is not warranted because, while illegitimate, they were legal when initiated in 2001 according to the member state's law (Greece).
In the second session, whereas Olli Rehn has already left, spokesman Gerald Corrigan is asked by the head of Eurostat about the 2005 restructuring. He says he knows nothing in reference to that.
May 2010
CRIS delivers its mid term report. It contains an amendment to boycott Goldman Sachs, but no legal opinion to support it. It is revoked under the impulsion of the Chairman, Wolf Klinz.
September 2010
Eurostat examines most of the evidence on the Greek debt swaps.
November 2010
Eurostat delivers its audit to the EU Commission. The 2005 restructuring maintains unreported a re-evaluation of the loan from 2.8bn Euros in 2001 to 5.1bn Euros throughout 2006-2009. Soon after, the bank's position was sold to the National Bank of Greece for that amount.
The audit shows a pattern of irregularities throughout the decade, including in reference to a 2004 audit. Even after the loophole was closed in 2008, Greece continued to deny the existence of the contentious transactions.
May 2011
Jean Claude Trichet derails a legal proceeding by Bloomberg to release secret files about the transactions that are in custody of the ECB, pretexting that it could cause market risk (Bloomberg).
June 2011
At the nomination hearing,  Mario Draghi was asked to dispel allegations by Simon Johnson (BaselineScenario), relayed by the ex-Chair of ECON, that he might have a connection to the management of the transactions (recall job titles).  One of the two arguments he put forth, each contradicted by evidence, was that this was not possible since the transactions came into effect in 2001.
July 2011
CRIS delivers its final report. It mentions a delegation meeting with senior members of the firm. That is all.
August 2011
Olli Rehn not only makes the same blunder as that of Draghi, in response to a written parliamentary question, but he uses as evidence the very audit that officially attests of the 2005 restructuring.
October 2011
El Tiempo says that Mario Draghi had said in 2010 that there was more than one deal between Greece and Goldman Sachs. This may clash with his defense based on the fact the deal preceded his hiring. More significantly, it reveals documents coming from the Bank of Italy that refutes the other argument he put forth at the hearing.
November 2011
Marc Roche writes an article about Draghi taking the helms of the ECB. The article has the 'Goldman Sachs controls the world' overtone of his book, but he repeats Draghi's defense at the June hearing without questioning it (Le Monde). Either he knew nothing of the 2005 restructuring described in the 2010 audit or he chose to keep it from public knowledge. January 2012
Nick Dunbar catches up on the 2005 restructuring (NickDunbar). March 2012
Nick Dunbar reports on Greek officials loosening their tongue (Bloomberg), highlighting the existence and scope of the 2005 restructuring. But he doesn't report that it evaded scrutiny at the EU and UK hearings and at the nomination of the ECB-President hearing. Marc Roche wrote a short summary of Dunbar's finding (Le Monde).
The added material we have looked at has confirmed our perception that EU officials have skewed the issue in a way that is favorable to those that might have been implicated.
Contrived investigation
In April 2010 Olli Rehn prejudged of the outcome of the ongoing Eurostat audit because most of the evidence on the transactions was not examined until September 2010. He was careful to add that he would take "appropriate measures" if anything new came to his attention. But that should have happened the same day after Corrigan said he knew nothing of the 2005 restructuring. By leaving that unchallenged, we know that Olli Rehn's claim was not credible.
Olli Rehn's argument that no judicial action was warranted echoes that of the bank insofar as it hinges on a technicality: it's the accounting standard's fault for not having anticipated the loophole. That's contrived, even if we consider only the accounting treatment (see below). Furthermore there are allegations of breaches of primary dealer obligations and market abuse that haven't been considered.
Breaches of key principle and compliance
The secret loan was achieved through the joint use of a set of currency swaps on top of existing foreign denominated liabilities and a set of interest rate swaps, both of which used off-market parameters. We argue in another piece that the goal was to obtain a legal appearance that deviated from the economic reality, a loan. Yet,  a core principle of the standard in 2001 is that when the "legal appearance" conflicts with the economic reality, the second should take effect in the accounting treatment.
It is clear from  the audit report that Greece's statistical agency engaged in misleading behavior until if was reformed in 2010. This casts a doubt on the bank's other line of defense that Eurostat had validated the deal.
The ECB connection
The May 2010 event implies that the ECB files contained data that was not in the public domain, notably the November 2010 Eurostat audit. A convenient hypothesis is that this confidential data was compromising for the successor of Trichet, who came under scrutiny the following month, June 2011. Regardless of the ECB files, the nomination process falls under a veil of suspicion due to the nominee's inconsistent explanations. Obviously, the 2005 'significant restructuring' was disregarded.
EU Parliament and media passive
The special committee CRIS contains nothing of substance about the Greek debt scheme. In comparison the senate panel led by Levin and Coburn produced preliminary investigations of a number of cases in the mortgage crisis that were taken up by the SEC and the DOJ (McClatchy)
The financial media and, for that matter, Brussels correspondents, have not called into question the banks' defense and the EU's official respo

Source and Sources

By Jareth

ECB Watch

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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