Fed investigating Wall Street banks’ dealings with Greece, Bernanke says
Federal Reserve Chairman Ben S. Bernanke revealed Thursday that the central bank was examining financial deals that Goldman Sachs and other banking companies made with Greece before its debt crisis erupted, creating potentially more public relations troubles for Wall Street firms.
“We are looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece,” Bernanke told the Senate Banking Committee on the second day of the Fed’s semiannual report to Congress on the nation’s economy and monetary policy.
Bernanke said the Securities and Exchange Commission was also interested in this issue. The SEC, as customary, declined to confirm or deny it was investigating the matter, but spokesman John Nester said: “As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices.”
Goldman is facing scrutiny for arranging so-called currency swaps that allowed Greece to cut its debt figures in 2001 and meet the European monetary union’s deficit limits. These transactions at the time were not required to be reported, and as such, essentially enabled Greece to borrow funds and conceal the real size of its debt.
Goldman reportedly made millions of dollars in fees, and there are allegations Goldman entered into subsequent deals with other parties that allowed it to profit from a deterioration in Greece’s credit quality.
While Goldman’s actions may have been completely legal, experts say, they raise ethical questions.
“The problem is [it] could suggest that Goldman took advantage of its knowledge of the true fiscal condition of Greece relative to the rest of the market,” said Darrell Duffie, a Stanford finance professor. “Americans are looking with a critical eye at large banks and whether their behavior is ethical and safe. And depending on how this comes out, it may not help the big banks.”
Duffie said he wouldn’t be surprised if Goldman and other banking companies had struck similar deals with other countries. Analysts have raised concerns about the fiscal condition of Portugal and Spain, among others.
Calls to Goldman officials weren’t returned Thursday, but in comments posted earlier this week on its website, the company said the transactions in question reduced Greece’s debt by a total of 2.4 billion euros and had a “minimal effect on the country’s overall fiscal situation.”
