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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

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Rake’s Progress

July 30, 2015

As if things weren’t confusing enough for Barclays Bank shareholders we now learn that deputy Chairman and Senior Independent Director (SID) Sir Michael Rake is to leave to take up the Chairmanship of another financial services company (in addition to his role as Chairman of BT).

This news came in the same week as the sacking of Chief Executive Antony Jenkins – whose removal, according to Chairman John McFarlane, was orchestrated by Sir Michael.

As Oscar Wild would have said – “to lose one senior board member may be regarded as a misfortune, to lose two looks like carelessness”

John McFarlane took on the role of acting Chief Executive in addition to his role as Chairman of the Bank as the board struggles to formulate a clear strategy for its investment division – whose head, Tom King, has indicated that he is looking to leave the Bank early next year.

It will be interesting to watch Sir Michael Rake’s progress as he takes up his new role – the UK Corporate Governance Code does not forbid anyone from Chairing two listed companies but it does encourage them to ensure that they are able to devote sufficient time to discharge their responsibilities effectively.


Barclays – comply or explain

July 30, 2015

The UK Corporate Governance Code, best practice advice for the UK’s listed companies, states that “There should be a clear division of responsibilities at the head of the company between the running of the board and the executive responsibility for the running of the company’s business. No one individual should have unfettered powers of decision” – in other words companies should not combine the roles of Chief Executive and Chairman.

In firing  its Chief Executive, Antony Jenkins and appointing Chairman John McFarlane as acting Chief Executive, Barclays Bank are flouting this key principle of the code by having one man in charge of both the board and the business.

Mr McFarlane, who took over the day-to-day running of Barclays on July 17, said there had been some “rumblings and concerns” from non-executive directors over the past few weeks and the decision was taken at a board meeting last night with the announcement made this morning (08/07/2015).

Antony Jenkins leaves the bank with 12 months’ notice and will receive his current annual salary of £1.1 million, £950,000 in role-based pay and a pension of £363,000 a year.

Sir Michael Rake, Barclay’s senior non-executive director (SID), said: “I reflected long and hard on the issue of Group leadership and discussed this with each of the Non-Executive Directors. Notwithstanding Antony’s significant achievements, it became clear to all of us that a new set of skills were required for the period ahead.”

The board does not have a clear timetable for recruiting a new Chief Executive and would seem to be in no hurry to fill the role. It will be interesting to see what pressure is exerted by the Financial Reporting Council, the guardians of UK Corporate Governance, on the Barclays board to encourage them to resolve this unsatisfactory situation in a timely manner.


Fund managers attack bankers’ pay

December 6, 2011

Leading fund managers, including L&G and Jupiter, have stepped up their attack against huge pay rises at the UK’s biggest banks.

In recent weeks, several of the UK’s biggest investment groups have met bank boards to urge them to restrain pay and restructure the way they reward staff, especially within their investment banking arms.

Barclays, HSBC, Royal Bank of Scotland and UBS are among the banks to have been targeted, the Financial Times reports.

According to the paper, there is anger at the rapid rise in fixed salaries against a back-drop of declining investment bank revenues and falling share prices.

Legal & General and Jupiter Asset Management are among a number of influential investors engaged in discussions with the big banks.

Sacha Sadan, corporate governance director at Legal & General Investment Management, told the Financial Times: “We want the banks to make the highest returns. If banks choose to retain their earnings rather than pay them out in dividends, that is fine. But the leakage into bankers’ bonuses while returns are low is not fine. In a tough political and economic environment pay restraint seems to be the only solution.”

Emma Howard Boyd, head of corporate governance at Jupiter Asset Management, added: “We, along with a number of our peers, believe there is substantial value to be unlocked in UK bank shares if they can convince the market that shareholder returns take priority over employee compensation.”

Meanwhile, in its latest attempt to crack down on excessive pay, the Association of British Insurers (ABI) has written to all UK banks demanding they cut individual pay-outs and overhaul their remuneration structures.


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