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Goldman Sachs probed in Greek debt crisis

Peter Ryan reported this story on Friday, February 26, 2010 12:29:00

SHANE MCLEOD: American regulators have started an investigation into the banking giant Goldman
Sachs and whether its activities might have fuelled the Greek financial crisis.

The chairman of the US Federal Reserve Ben Bernanke says that while the bank's deals with Greece
were legal they might have played a destabilising role by masking the true level of government
debt.

Greece is facing a possible credit rating downgrade and there are fears it might default on its
sovereign debt obligations.

And one leading economist is warning that wider concerns about sovereign debt could result in a
major share market correction later this year.

Here's our business editor Peter Ryan.

PETER RYAN: Greece's relationship with Goldman Sachs goes back to the late 1990s when the bank
bought credit default swaps; in other words insurance against Greece defaulting on its sovereign
debt commitments.

At the same time Goldman Sachs engineered complex currency deals which helped Greece reduce its
overwhelming national debt.

But now as Greece seeks to renew sovereign loans amid speculation that it might default investors
are understandably suspicious.

And now the chairman of the US Federal Reserve Ben Bernanke is demanding answers.

BEN BERNANKE: We are looking into a number of questions relating to Goldman Sachs and other
companies and their derivatives arrangements with Greece.

PETER RYAN: Ben Bernanke says there's no suggestion of illegal activity by Goldman Sachs or other
US banks.

But he's using new supervisory powers to determine whether complex financial instruments fuelled
the debt crisis gripping Greece and other parts of the European Union.

BEN BERNANKE: Obviously using these instruments in a way that intentionally destabilises a company
or a country is counterproductive. And I am sure the SEC (Securities and Exchange Commission) will
be looking into that. We'll certainly be evaluating what we can learn from the activities of the
holding companies that we supervise here in the US.

PETER RYAN: Earlier this week Goldman Sachs' managing director Gerald Corrigan faced a British
parliamentary hearing where he confirmed the nature of the Greek relationship and how it helped to
manage the perception of government debt.

GERALD CORRIGAN: It is true that a family of currency swaps that were ventured into jointly by
Goldman Sachs and Greece in the late 90s and early part of the 2000s were of a nature that they did
produce a rather small but nevertheless not insignificant reduction in Greece's debt to GDP ratios
at that time.

PETER RYAN: In one deal Goldman Sachs helped Greece reduce its national debt by more than $US3
billion.

But Gerald Corrigan says everything was above board and that Goldman Sachs and other banks did
nothing illegal at the time.

He admitted however that today's standards are much tighter and those before 2007 were perhaps too
liberal.

GERALD CORRIGAN: These transactions which were consistent with existing guidelines and regulations
were not limited to Goldman Sachs and Greece.

MICHAEL FALLON: But you see the point.

GERALD CORRIGAN: Oh I see the point.

MICHAEL FALLON: By enabling politicians to mask additional borrowing banks like yours have in fact
accentuated the risk.

GERALD CORRIGAN: With the benefit of hindsight it seems to me very clear that the standards of
transparency could have been and probably should have been higher.

PETER RYAN: A critical concern is whether a Greek default would spark a debt domino effect across
other weak European nations calling into question the sovereign debt of the United States and
Britain.

Committee member Michael Fallon pressed Gerald Corrigan for an answer.

MICHAEL FALLON: Instruments developed by Goldman Sachs, JP Morgan Chase and other banks enabled
politicians to mask additional borrowing in Greece, Italy and possibly elsewhere. Did that include
the United Kingdom?

GERALD CORRIGAN: I do not know.

MICHAEL FALLON: So it's possible isn't it?

GERALD CORRIGAN: It is possible.

PETER RYAN: Even the mere speculation about a sovereign default in Greece or worse still Britain
has investors uneasy around the world including Morgan Stanley's bearish global equities chief
Gerard Minack.

He told the Australia Network's Business Today that a 25 per cent share market correction is
possible later this year and that sovereign debt worries could be a contributing factor.

GERARD MINACK: It's too early to mark out where the correction may end. I think that in part will
depend on how we see events unfold on sovereign stress which is an inherently unpredictable and
politically driven risk factor.

If the worst emerges on sovereign stress then we could have an even bigger pull back. But I think
it is too early to have a really strong view on how it may pan out this year.

PETER RYAN: But Greece is being read the riot act almost every day. And now the Moody's credit
ratings agency has warned Greece to expect a ratings downgrade if its unpopular austerity program
fails to dent the debt.

SHANE MCLEOD: Business editor Peter Ryan.