Goldman Stars in This Greek Tragedy

Goldman Sachs (GS), Wall Street's most profitable securities firm and a boon to conspiracy theorists the world over, has angered EU regulators over its role as Greece's enabler—helping the Greek government mask the severity of its debt problems early last decade. Goldman designed an off-balance-sheet currency swap deal that delivered a windfall to the Greeks shortly after they entered the euro zone.

Now there's evidence Goldman may have also misled investors when it managed the sale of $15 billion worth of Greek bonds in subsequent years, according to a review of bond prospectuses by Bloomberg News. No mention was made of the Greek currency swap in sales documents for the bond offerings in at least 6 of the 10 sales the bank arranged for since the 2002 currency transaction.

Failing to disclose the swap may have allowed Greece, Goldman (a co-lead manager on many of the sales), and other underwriters to get a better price for the securities, says Bill Blain, co-head of fixed income at Matrix Corporate Capital, a London-based broker and fund manager. Goldman has earned about $24 million underwriting the bonds since 2002.

That year, Goldman helped Greece pull off a lucrative cross-currency swap in which some $10 billion in Greek debt, issued in dollars and yen to international investors, was swapped for euro debt using a "historical" (and very favorable) exchange rate, says Christoforos Sardelis, then head of Greece's Public Debt Management Agency. (Greece entered the euro zone at the start of 2001.) The swaps used by Greece to manage debt were "at the time legal," Greek Finance Minister George Papaconstantinou said on Feb. 15, adding the government doesn't use such swaps now.

Athens got far more money than it would have at the prevailing exchange rates for the euro back in 2002. Further, the currency deal didn't show up in official debt statistics—and did not affect the debt-to-GDP limits for countries in the euro zone. Goldman also extended a $1 billion up-front payment to Athens as part of the deal.

This complex transaction was until recently news to EU regulators, who last week launched an investigation into the Greek currency swap. Goldman could face legal liability "if it could be established that they were knowingly hiding risk, and therefore knew or had reason to know that the bond disclosure documents were misleading," says Thomas Hazen, a law professor at the University of North Carolina at Chapel Hill. "But that would be a tough hill to climb, in terms of burden of proof. There would have to be some sort of smoking-gun memo." Michael DuVally, a spokesman at Goldman Sachs in New York, declined to comment.

Legal niceties aside, Goldman's image in Europe may take yet another hit. "The price of bonds should reflect the reality of Greece's finances," Blain says. "If a bank was selling them to investors on the basis of publicly available information, and they were aware that information was incorrect, then investors have been fooled."

With Maria Petrakis in Athens, Aaron Kirchfeld in Frankfurt, Ilias Antoniou in London, and David Scheer in New York

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