In the famous Athenian morality play Oedipus Rex, the leading character by the same name, unknowingly slays his father and beds his mother.
When Sophocles' character discovers the depth of his depravity, he blinds himself by grotesquely poking out his own eyes. Then he wanders the kingdom he once ruled as sightless beggar unable to atone for his unfathomable sins.
Like other ancient dramas of a similar ilk, fatalism is the predominant theme of the Oedipus trilogy. In modern terms, Oedipus learns that karma is a bitch.
New York-based investment bank Goldman Sachs may be facing a similar reality, relative to its role in underwriting billions of dollars in now suspect bonds for Oedipus's Greek progeny.
Recent reports out of Europe have disclosed that the Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its federal deficit.
Goldman Sachs' role in developing, promoting and underwriting credit default swaps such as those that brought AIG and the entire financial system to its knees is well known. Now it appears that Goldman was at the center of the financial storm that has enveloped the Greek economy and set off a currency wildfire in Europe.
Records show that the sales documents filed in concert with the bond sales Goldman underwrote for Greece made no mention of the currency swaps. As early as 2002, Goldman helped Greece raise $1 billion of off-balance sheet funding through these swaps, which European Union regulators said they knew nothing about until recent days.
Failing to disclose the swaps may have allowed Goldman and Greece to get a better price for the securities. The failure to disclose these currency swaps not only misled investors, but also may have aided Greece to conceal the depth of its financial problems from it European trading partners.
Beyond the Rules
Officials from Bonn to Brussels are now saying that if the truth about the Greek fiscal crisis had been known, Athens' continued membership in the European Union may have been jeopardized. To remain in the alliance, the E.U. has stringent guidelines pertaining to the percentage of debt each of its member states may carry relative to their individual Gross National Products. At a deficit ratio that was nearly 120 percent of its GDP, the Greek debt far exceeded the maximum thresholds set by the E.U.
Goldman was generously compensated for its role in helping the Greeks keep the true nature of its budget problems secret. Goldman earned about 735 million euros ($1 billion) since 2002 on fees generated by its underwriting of Greek bond sales.
The surprise disclosure about the fiscal woes in Greece has triggered the worst crisis of confidence in the euro since its introduction in 1992. In the past three weeks, since news of the Greek crisis hit the airwaves, the euro has plummeted nearly 10 percent in value, from highs around $1.50 in mid-January to its current lows hovering at $1.35. Most analysts believe that the euro will continue selling off, causing it to fall below $1.30 in the next several weeks.
Following a two-day meeting in Brussels, European finance ministers spelled out a series of austerity measures Greece must take to bring its deficit under control. European officials, including a visibly angry Angela Merkel, the German Prime Minister, uncharacteristically broke ranks by expressing their unrestrained outrage over revelations that the Greeks had cooked their own books.
Athens' trading partners were not mollified by Finance Minister George Papaconstantinou's contention that the transactions were legal under the current E.U. rules. For its part, Goldman has been conspicuously silent.
The Importance of Vigilance
Although Goldman may be facing sanctions from the E.U., including a total ban on its license to conduct business within the member states, the bank did what it does best. It made money by creating derivative risk that others were forced to swallow when the piper came to call.
It's tough to fault Goldman. Goldman was only filling a need that other banks would have jumped on if they had been as astute.
The larger issue is the role and the influence of private banks like Goldman Sachs in economies throughout the globe. While Goldman's conduct relative to the Greek bond sales may have been within the letter of the law, their complicity in helping leaders in Athens conceal their debt from the European Union as well as their own people was morally reprehensible.
As we begin to emerge from the worst financial crisis since the Great Depression, we may celebrate the fact that Europe's loss is our gain. After all, the swift drop in the value of the euro has dramatically increased the buying power of the U.S. dollar.
In the long run, however, a stable Europe is essential to our own economic solvency and security. For these reasons, we cannot allow investment banks like Goldman to operate outside the scrutiny of governmental oversight, even if it means sacrificing a fat payday for U.S. banking interests and our economy.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
