Greek swap mess

http://www.nytimes.com/2010/02/25/business/global/25swaps.html?ref=business

It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

As Greece’s financial condition has worsened, undermining the euro, the role of Goldman Sachs and other major banks in masking the true extent of the country’s problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust

Goldman's derivatives lowered Greece's debt by about 1 percent. Ergo, 99% of the problem is simply that Greece borrowed too much. But yes, blame the banks.

And Markit is hardly 'little known'.

The point was the swaps did not lower debt but disguised the debt, and the banks then used this information to bet against their client. Just because something is legal, does not make it ethical.

No one did this to the Greeks except the Greeks. It's like the overdosing addict blaming his problems on the dealer. Sure, the dealer is unsavory, but the addict has a choice about whether to take the drug. The Greek government acted irresponsibly and it was driven by the short-sighted demands of the electorate. Not altogether unlike much of what goes on in this country: people want tax cuts, but mention reducing the areas of major costs: social security and medicare among others, and people go beserk and say "how dare you." And so, we either raise taxes, or borrow. And the answer, as in Greece, for the last decade has been: we borrow. But hey, let's all just blame Goldman Sachs--it is so much easier than to say the problem lies with us all.

Disagree. This assumes that investment bankers should have no ethics requiremetn or be expected to act in a fiduciary capacity. A patient who asks his Doctor for smack, A businesman who asks his accountant to hide income. Why are bankers different?

kylewest, you just compared Goldman to a crack dealer.

I never said Goldman would be without responsibility for unethical or other poor (or worse) behavior. What I'm saying is let's not just focus on the bank. It's like saying if we get rid of the dealers there will be no drug problem. You can't point fingers at the bank without in the same breath asking what in the world the government was thinking would happen in the not-so-long run as days of recogning came, or what the populus was thinking about how all the government spending was going to get paid for if not by them? I hate victim mentalities, and painting Goldman as the culprit here grossly distorts a layered and complex interaction among many irresponsible, short-sighted parties. Reform banking laws all you want but it won't matter if governments and citizenry don't change too--they'll just find other ways to "get high."

Hey, how many Greeks own NYC real estate? Gotta wonder if the Euro buyers of NYC real estate will be effected.

Euro buying power has declined, but the current crisis highlights the continued attraction of American market to foreigners. Owning a Condo in NY is like a money market account to a european or asian investor. It may not offer the best return, but it wont' go to zero.

What's sad about this is that on an individual consumer level, both Greeks and Germans [apparently the biggest holder of Greek debt; their banks, anyway] have traditionally had a huge aversion to debt, mortgages, credit cards, etc.

What Greece has done is not a one off item, these type of swap transactions go back to the 1990's. Kylewest describes this correctly, just blaming Goldman for this is missing most of the story. If Goldman didn't execute this transaction, believe me one of their competitors would have. Does that mean the whole thing is not unethical or poor behavior? No, not at all, it just is more complicated than that.
Where there is a will there is way when it comes to this type of behavior by the principles and their enablers. Especially when the enablers are so handsomely rewarded.

I have to agree with Soros. The Euro is doomed. You can't have a common currency without both a central bank and a central treasury.

Alan, you are exactly right. Traditionally, Greeks "had a huge aversion to debt, mortgages, credit cards".

I remember the reaction of my parents when I explained to them that I will get a mortgage to buy an apartment in New York: "You want a loan??? From a bank? Are you crazy? Just get enough money first, and buy afterwards". They had similar reactions when I arrived here in the mid-1990's and I told them that I got a credit card. ("You do not have enough money? Maybe we should start sending money to you? Why having a credit card").

The risk aversion of an ordinary Greek citizen is amazing. Put long term savings in Treasuries instead of savings accounts? No way. Start a business that may need some time to become profitable? No way.

And it is kind of ironic that once Greeks deal with other people's money, they have no problems accumulating debt, and engaging into risky behavior. Risk averse with our own money but no problems with screwing around with the government's funds...

While there may be a Greek ethos embodying an aversion to debt, it is apparently not reconciled with the demand for expensive entitlement programs, guaranteed wages or whatever else it is that people are taking to the streets about in Greece now that the government says it has to cut spending. It is schizoid. If cuts aren't made, then money must be generated through taxes or borrowing, but the people say no to taxes leaving only borrowing. But then the people say how our leaders seek to take on more debt. It is a societal problem that sows seeds for its own destruction. Are American listening to all this? Surely not. It's Greece--what's any of this matter to us, huh?

Sigh. The people who created the markitt indices, and the people who use it to hedge or speculate have probably NEVER IN THEIR LIFE spoken to the bankers who arranged the Greek debt offerings, and knew no more about it that anyone else. You guys have a twisted view of the way 'banks', with thousands of employees, work.

Euro was doomed from the beginning, too many competing interests. Too much freeloading off of others

kyle: It is actually very easy to reconcile: Everyone wants the maximum for himself without willing to give up anything. And everything should be paid by others.

The Greece problem has affected the euro and the buying power of the Europeans. I am a euro investor and it is hitting me in the pocket and thus has me rethinking my NYC R/E purchase.