Goldman Sachs, Greek Debt and Greed

August 17, 2015

goldman-sachs-graphic

I’m currently reading Flash Boys by Michael Lewis, a detailed and at times, inconceivable, account of the way High Frequency Traders manipulate stock markets to make substantial gains, when I came across a throwaway line about the bank, Goldman Sachs, and the Greek Debt crisis.

Now, forgive me if you have already read about this, but I hadn’t come across the story until now and I’m sure I’m not the only one who was unaware of it.

The story begins in 2001 with Greece desperately trying to live up to its Maastricht Treaty euro-zone commitments to demonstrate an improvement in its public finances when in fact they were getting worse, not better.

They turned to US bank Goldman Sachs for help and found it in the shape of one Lloyd Blankfein, who has now risen to the lofty heights of CEO, who proposed a secret loan of €2.8 billion for Greece, disguised as an off-the-books “cross-currency swap”—a complicated transaction in which Greece’s foreign-currency debt was converted into a domestic-currency obligation using a fictitious market exchange rate.

This arrangement magically shaved 2% off Greece’s debt and Blankfein and his team collected a fee of €600 million which accounted for 12% of Goldman’s total earnings from trading and investments in 2001 in just one deal – no wonder he’s now the CEO.

Unfortunately the magic soon wore off and the deal turned sour – what had started out as a €2.8 billion ‘hidden loan’ had become, by 2005, a very visible, almost double the amount, debt of €5.1 billion when it was restructured by Goldman’s then international division managing director, Mario Draghi.

Does the name sound familiar? Yes, the very same Mario Draghi who is now head of the European Central Bank and a key figure in the current Greek bail-out.

Of course, Goldman’s aren’t the only ones to have benefited from Greece’s misfortune, a recent report from the private, non-profit Leibniz Institute of Economic Research says that over the last 5 years Germany has profited by €100 billion, equivalent to 3% of its GDP, as investors have fled from Greece into the welcoming arms of Germany.

“These savings exceed the costs of the crisis – even if Greece were to default on its entire debt,” the study said.

So, if Greece had refused Goldman’s helpful but over-complicated and ultimately very costly, interest rate swap deal in the first place and ‘fessed up to their public sector failings way back in 2001 perhaps they wouldn’t have been in the mess that they are in today with, what is by all accounts, an unsustainable bail out deal adding another €85 billion to their already crippling debts.

And the greed?

Well the dictionary definition of greed is: the inordinate desire to possess wealth, goods, or objects of abstract value with the intention to keep it for one’s self, far beyond the dictates of basic survival and comfort.

With Goldman Sachs and the German nation getting ever richer at the expense of the Greek people it is clear who, amongst others, are the perpetrators of greed and who is the victim


Kids Company, Corporate Governance and Conflicts of Interest

August 13, 2015

KidsCompany

Alan Yentob, Chairman of failed charity Kids Company, cut a pathetic figure on prime-time television last week, scuttling into a coffee shop to avoid having to answer questions from the press – exactly what not to do as the Chairman of a board of trustees.

The role of Chairman is often misunderstood, particularly by those occupying the position but it is during a crisis that they should really come to the fore, becoming the public face of the organisation and taking the heat off the Chief Executive, to allow them to focus on running the business.

It is not as if the charity’s problems have come as a surprise to the trustees – an audit commissioned by the Cabinet Office last year said that cashflow problems were a “key financial risk” which meant that “it is not possible to build reserves and invest in new activities and locations”.

Other clear warnings of looming insolvency included an inability to make PAYE payments to HMRC on a number of occasions and most recently non-payment of staff wages.

So what should the trustees have done?

As soon as problems arose in terms of not being able to pay staff, suppliers or to meet tax liabilities, the board should have called in an insolvency practitioner to check that they were being reasonable in continuing to operate the charity. They should have instigated a full investigation into the charity’s finances and should have reviewed and modified, where necessary, the financial controls, policies and procedures.

Only if they were then satisfied that the charity was a ‘going concern’ should the trustees have allowed the charity to continue to operate.

Instead, they have relied upon the continuing support of leading politicians to provide government funding for an organisation that has clearly been unsustainable for a number of years.

Which brings us back to the Chairman, Alan Yentob, who is also Creative Director of the BBC. Rather than spending time working with the board and the Chief Executive to prepare a clear statement for the media as to what was going on, he apparently tried to suppress the BBC’s news-coverage and influence its treatment of  Kids Company Chief Executive Camila Batmanghelidjh in a Radio 4 interview – a clear conflict of interest.


Why did George Osborne sack FCA CEO Martin Wheatley?

August 5, 2015

Martin Wheatley

Financial Conduct Authority (FCA) CEO Martin Wheatley was sacked by George Osborne despite, in Osborne’s own words, having “done a brilliant job of launching the FCA in tough circumstances”.

So the question is – was he sacked because he wasn’t being tough enough with Bankers and others in the City or because he was being too tough?

The FCA, now run by interim CEO Tracey McDermott, who was known as a ‘Rottweiler’ in her previous role as director of Supervision, warned that some firms have still not done enough to prevent financial benchmarks, such as Libor, being manipulated.

The City regulator said that the consistency of implementation and speed at which improvements had taken place was “disappointing”.

“The application of the lessons learned from the Libor, Forex and Gold cases to other benchmarks had been uneven across the industry and often lacked the urgency required given the severity of recent failings,” it added.

So there is still a job to do in bringing Banks and traders to heel.

Martin Wheatley is clearly unhappy with George Osborne’s decision to not renew his contract as FCA CEO despite levying billions of pounds in fines and making top-level attempts to reform the culture of trading floors.

“I am disappointed to be moving on and I do so with a sense of unfinished business,” Mr Wheatley said in his first public comments since his sacking.

He made clear that the culture of investment banking remained largely unreformed despite several years of scandals. “The top of organisations have understood the environment . . . but I still think it is quite hard to deliver. It’s tough and it takes time,” he said.

“As we saw with FX [the foreign exchange-rigging scandal], there are some parts, the wholesale parts of financial services, where it is actually not yet seen as relevant. There’s still a view that: ‘Well, that’s a caveat emptor market’ and big financial players trading with one another. That’s the area that has much further to go.”

Mr Wheatley left little doubt that if he had remained in charge of the FCA the banking industry would have faced no respite in his tough approach to regulation. He had considered banning some firms from trading as an alternative to fines, he said. “The use of trading bans, or, in our terms, ‘variations of permission’, is something we actively look at each time we feel that we’ve got to take an action. Those variations of permission can be removing somebody from part of the market, or a significant part of the market, for a period of time,” he said.

A study by the regulator said that six unnamed banks remained ignorant of the fact that their trading data could be used to influence key financial benchmarks, while one had still not put in place any kind of oversight of its submissions process.

The findings come even though global regulators have made the reform of benchmarks a priority over the past three years, highlighting what the FCA said was a cultural resistance in the industry to making painful changes.

It will be interesting to see who is appointed to take Wheatley’s place as it will answer the question of whether Osborne is going to get tougher with the Banks or if he is going to appoint someone who will ease off the pressure and cut them some slack.

Last year Bank of England governor Mark Carney said that top (Bank) executives had “got away without sanction”.

“Maybe they were not at the best tables in society after that, but they’re still at the best golf courses. That has to change,” he said.

To many, especially those who have suffered financially since the recession, which is most of us, Bankers are still getting away with it and the FCA should carry on the work that Martin Wheatley started – to others, and that might include Osborne, our current financial recovery is almost entirely reliant on the financial sector and we should not be killing the Golden Goose by continuing to bash them with billion pound fines.


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