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FACTDROP: Goldman's secret loan to Greece shows ‘2 sinners' as client unravels
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3/07/2012

Goldman's secret loan to Greece shows ‘2 sinners' as client unravels

PM Simitis and Papademos (president of the BoG by this time) celebrating the success of Greece's entrance into the eurozone.

Πηγή: The News Tribune
By NICHOLAS DUNBAR AND ELISA MARTINUZZI (Bloomberg)
March 7 2012

LONDON — Greece’s secret loan from Goldman Sachs was a costly mistake from the start.

On the day the 2001 deal was struck, the government owed the bank about 600 million euros ($793 million) more than the 2.8 billion euros it borrowed, said Spyros Papanicolaou, who took over the country’s debt-management agency in 2005. By then, the price of the transaction, a derivative that disguised the loan and that Goldman Sachs persuaded Greece not to test with competitors, had almost doubled to 5.1 billion euros, he said.

Papanicolaou and his predecessor, Christoforos Sardelis, revealing details for the first time of a contract that helped Greece mask its growing sovereign debt to meet European Union requirements, said the country didn’t understand what it was buying and was ill-equipped to judge the risks or costs.

“The Goldman Sachs deal is a very sexy story between two sinners,” Sardelis, who oversaw the swap as head of Greece’s Public Debt Management Agency from 1999 through 2004, said in an interview.

Goldman Sachs’s instant gain on the transaction illustrates the dangers to clients who engage in complex, tailored trades that lack comparable market prices and whose fees aren’t disclosed. Harvard University, Alabama’s Jefferson County and the German city of Pforzheim all have found themselves on the losing end of the one-of-a-kind private deals typically pitched to them by securities firms as means to improve their finances.

“Like the municipalities, Greece is just another example of a poorly governed client that got taken apart,” said Satyajit Das, a risk consultant and author of “Extreme Money: Masters of the Universe and the Cult of Risk.” “These trades are structured not to be unwound.”

A gain of 600 million euros represents about 12 percent of the $6.35 billion in revenue Goldman Sachs reported for trading and principal investments in 2001, a business segment that includes the bank’s fixed-income, currencies and commodities division, which arranged the trade and posted record sales that year. The unit, then run by Lloyd Blankfein, 57, now the New York-based bank’s chairman and chief executive officer, also went on to post record quarterly revenue the following year.

The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using a historical exchange rate, a mechanism that implied a reduction in debt, Sardelis said. It also used an off-market interest-rate swap to repay the loan. Those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.

The trading costs on the swap rose because the deal had a notional value of more than 15 billion euros, more than the amount of the loan itself, said a former Greek official with knowledge of the transaction who asked not to be identified because the pricing was private. The deal’s size and complexity meant that Goldman Sachs charged proportionately higher trading fees than for deals of a more standard size and structure, he said.

“It looks like an extremely profitable transaction for Goldman,” said Saul Haydon Rowe, a partner in Devon Capital, a London-based firm that advises global investors on derivatives disputes.

Goldman Sachs declined to comment about how much it made on the swaps. Fiona Laffan, a spokeswoman for the firm in London, said the agreements were executed in accordance with guidelines provided by Eurostat, the EU’s statistical agency.

“Greece actually executed the swap transactions to reduce its debt-to-gross-domestic-product ratio because all member states were required by the Maastricht Treaty to show an improvement in their public finances,” Laffan said. “The swaps were one of several techniques that many European governments used to meet the terms of the treaty.”


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