Goldman Sach’s Greek Currency Swap
Where there’s controversy and problems in the market you’re sure to find Goldman Sachs. This investment bank just can’t stay out of the spotlight—a problem that’s not going away any time soon. This time at least Goldman wasn’t in the wrong.
How Swaps Work
Currency swaps between Greece and Goldman Sachs have hit the presses and quickly. These agreements, typically to swap debt or other secured assets (secured against the taxpayers) for cash are quite common, allowing for an expansion of the balance sheet on Greece’s end for delivery of quick liquidity from Goldman Sachs.
Why its Done
These agreements are mutually beneficial. First, Goldman Sachs receives a huge payoff for both brokering the swap as well as taking their own payments in interest on the debt swap. For Greece, it got to borrow $1 billion at the cost of $192 million, however the arrangement allowed Greece to keep the transaction off the balance sheet, thus allowing Greece’s annual deficit to appear much smaller than it actually was. Of course, Goldman Sachs could see the problems in the Greek economy (as it was the one financing it) but other investors had no way of getting to such vital information. And in proper Goldman Sachs fashion, the firm used the information to bet against Greece, just like it had bet against real estate values before the credit crunch.
Unfortunately, it doesn’t seem like these games are going to end any time soon. Although what Goldman Sachs did was legal, I can’t help but disagree with the ethics behind it. Completing a deal off the books and away from the public eye is disgusting at best, and I would hope that these kind of backroom deals aren’t only made illegal, but the new laws are actually enforced.