Goldman, Greece — It’s All One Big Conspiracy, Man

It hardly seems like it should be necessary to point out that there is absolutely no socialist sensibility in American politics. In the great American public debate, socialism’s not even allowed on the stage. Even in the aftermath of the greatest financial fiasco of our time, there is no sign that Americans’ faith in the free market has wavered a whit. And in spite of public rage at the arrogance of U.S. banks oblivious to the moral hazard of keeping the gains and spreading the losses around (which, if anything, is reverse socialism), most of the anger has focused on Washington, and not Wall Street.

On the other side of the pond, however, where there are actual socialists, public discussion of the crisis has been a little different. Politicians on the left and on the right have been quick to blame the financial crisis on laissez-faire economic policies, and leaders on both sides of the aisle have spoken out in favor of greater regulation of financial markets. No doubt, this is partly instinctive. The European approach always tends to be more technocratic and dirigiste. Here, the public ritual, in times of economic uncertainty, is to emphasize the more protective spirit of the European social model. This is particularly true of right wing French presidents. After the French famously rejected the European constitution in 2005, then-president Jacques Chirac started cheerleading the French and European social models like a roadside convert. And President Nicolas Sarkozy, who’s right at home on the deck of many a billionaire’s yacht, recently felt the need to disrespect the Davos.

European leaders have not shied away from directly criticizing the market’s behavior, when they don’t like it. This has been especially true while the Greek fiscal crisis has wound on. There’s been a lot of talk, for instance, of a “speculative attack” on Greece, and thinly veiled warnings directed at market participants. After the Eurozone Finance Ministers’ meeting last Friday, French Finance Minister Christine Lagarde  went so far as to warn off speculators. They “had better be careful,” she said, “There is clearly a statement of solidarity—we are closing ranks. Whether we are big member states or small member states we are all in this together and we are not going to let any of us down.” She even followed this with an implicit regulatory threat.  “What we are going to take away from this crisis,” she added, “is certainly a second look at the validity, the solidity of [Credit default swaps] on sovereign debt.”

Christine Lagarde. Photo by MEDEF

It’s a little hard to imagine Tim Geithner, or any American politician of sound mind, threatening hedge funds with regulation if they didn’t stop shorting the stock market. (Actually, he’d probably just ban the practice.)  But the swift drop in the Euro last week struck a nerve. It’s just too reminiscent of the speculative attacks (by George Soros, et.al.) that surrounded the establishment of the European Exchange Rate Mechanism, the system that preceded the Euro, in the early nineties. Last week, the short position against the European common currency hit a record high. Still, to call it a “speculative attack” is to take a point of view on the appropriate level of the Euro. Also, it assumes a concerted effort.

Unlike in the Anglophone world, where markets are spoken of like acts of nature, in Europe, it raises few eyebrows when politicians or commentators ascribe motives to the financial market.  Here’s how Jean-Marc Sylvestre, chef economics editor for French TV channel TF1, recently described the speculative attacks on Greece:

The architects are investment funds, in particular hedge funds, with considerable liquidity, whose job it is to put that money to work for maximum profit… these investment funds choose an investment target they feel is fragile and swoop down on it very quickly… on the recommendation of their financial analysts, who returned from Davos brimming with confidence, many hedge funds began to sell Greek debt heavily, and then the Euro, hoping to redeem the paper in two or three weeks when it was worthless.

Note the predatory metaphor, the emphasis on their greed, and their analysts’ pride— “swooping down quickly for maximum profit”, as opposed to, one imagines, less rapacious investors, who invest at a leisurely pace and for middling profits. The point is, there’s a strong mainstream European tradition of belief that markets are controlled by cabals, at least some of the time. It’s a point of view that could get you banned from CNBC.

Though to be fair to Ms. Lagarde, harboring suspicions about recent action in the sovereign credit default swaps (C.D.S.) market hardly means you’re paranoid. Sovereign C.D.S are derivative contracts that work like an insurance policy against government debt default, though some investors use them simply to speculate on the likelihood of default. (Critics argue this is a bit like wagering on whether your neighbor’s house will burn down, but like everything else, it’s not that simple.)  Sovereign CDS are not traded on any exchange. And this lack of transparency has got critics wondering whether they’re suspectible to manipulation. Recently, Barclays Capital looked into the question of whether sovereign CDS are a good tool for measuring investor sentiment, or merely a way for speculators to sow fear of default, as European policy makers have complained. Their report, “Are Sovereign CDS the Canary in the Coalmine, or the Cat Among the Kittens?” concluded that the small size of the sovereign CDS market made it less predictive than the underlying market for government debt it’s meant to insure.

But then again, small markets are easier to manipulate. Enter the conspiracy theory: on Wednesday, Jean Quatremer, who reports on the Brussels beat for the French daily Liberation, broke the story that Goldman Sachs and the hedge fund run by John Paulson are behind the attacks against Greece and the euro…

The most shocking aspect of this affair is without doubt the role played by Goldman Sachs, which, while at the same time advising the Greek government, has also taken secret positions against Greece and the euro.

And this coming in the same week that it was reported in Der Spiegel and the New York Times that, back in 2002, Goldman helped the Greek government conceal some of its debts from the European Union through a series of complex derivative transactions.  The sole purpose of these transactions would appear to be to sidestep EU reporting requirements and paint a misleading picture of Greek finances. That news drew a lot of ire. Even the normally circumspect German Chancellor Angela Merkel lashed out, saying, “It’s a scandal if it turned out that the same banks that brought us to the brink of the abyss helped fake the [Greek] statistics.”

But potentially more damning is the assertion made by Mr. Quatremer, that Goldman Sachs has been taking advantage of its advisory role, and profiting at the expense of Greece.

… on 25th of January, Greece managed to place 8 billion euros in 5-year paper, even though the original intention had been to issue only 3 billion: demand had reached 25 billion euros! Goldman Sachs was certainly among the syndicate that placed this Greek paper. Up to that point, nothing out of the ordinary… After this spectacular success, everyone thought that the markets had calmed down… But then starting Wednesday [Jan. 27th] another storm hit. An article from the Financial Times… had just confirmed news to the effect that China had refused to buy 23 billion euros of Greek debt, a “private placement” engineered by . . . Goldman Sachs. What was this about? When a government fears that it won’t be able to place its debt, it asks a bank directly to place it on its behalf with one or several investors. It’s a sign of panic. And the fact that Beijing was said to have declined the offer was downright disturbing. In short, two reasons for the markets to flee Greece. [Athens] denied this, but the markets nevertheless increased the risk premium they assigned Greece, boosting [Goldman's] profits.

Of course, Goldman Sachs is a huge bank, with a massive derivatives business that entails managing tremendously complex and often offsetting positions. But if the story’s true, Goldman’s actions have been ethically dubious at best. And in the eyes of the European public, it all must seem downright nefarious.  Politicians respond to the public mood, and regulators in Europe don’t need much more motivation to start clamping down on financial market shenanigans. Already the new EU Internal Market Commissioner, Michel Barnier, has stated his intention to regulate the sovereign CDS market. But that’s just the tip of the iceberg. As he recently told Le Figaro, “No market, no actor, no product and no territory can go without relevant regulation and efficient supervision.” So, look out, markets: here come the regulators.

But for Goldman, at least in Europe, the tarnish on their image may be more worrisome. Goldman Sachs was already a lightning rod for conspiracy theory. Now this Greek episode may burn that image into Europe’s retina. As the French magazine Marianne recently put it, “How do you never lose? If you’re Goldman Sachs, you play from both sides of the table.” I can think of another group of people who profit no matter if their clients win or lose: arms dealers…

Well, it’s enough to start you thinking like a socialist!