Goldman Sachs and Greek Debt Crisis: Investigations by US, EU and Greece

Goldman Sachs worries are now global and greater in scope.  Investigations have been initiated in the US, the EU and in Greece to find grounds for legal action against the firm and other US investment banks for their alleged role in creating the fiscal crisis that has impacted world markets.

The Greek People and their Prime Minister are in agreement in the rush to pin blame on the US.

Greek Prime Minister George Papandreou declared he is not ruling out taking legal action against U.S. investment banks for their role in creating the spiraling Greek debt crisis.

Both the Greek government and its citizens have blamed international banks for fanning the flames of the debt crisis with comments about Greece’s likely default, actions that are causing the country’s borrowing costs to soar.

“I wouldn’t rule out that (legal action) might be a recourse. But we need to let due process (take its course) and then make our judgments once we get the results from the investigations,” Papandreou said in a CNN interview broadcast Sunday.

Papandreou also said a parliamentary investigation will examine the rapid swelling of Greece’s debt and international banking practices to examine whether the financial sector engaged in “fraud and lack of transparency.”

The European Union and the International Monetary fund have approved a euro110 billion ($136 billion) bailout package for Greece, part of an overall euro750 billion ($1 trillion) rescue loan package to protect the euro, the common currency of 16 European nations.

The Greek leader also urged more regulation of the markets which, in his view, are now betting against the European governments that have poured billions into them since the global financial crisis began in 2008.

Some European governments plan to push for tighter regulation of hedge funds this week _ a move opposed by Britain, home to the financial hub of London. [onenewsnow.com]

With other major financial hubs  in Asia, Europe and South America gaining in popularity, the end game may be that New York and London cease to be the major financial capitols.

Testifying before the Senate Finance Committee, Fed Chairman Bernake said:

The Federal Reserve and Securities and Exchange Commission are seeking information about whether Goldman Sachs and other U.S. firms helped set up financial transactions over the past decade that effectively hid the amount of debt Greece was taking on. Another potential issue is whether banks and hedge funds, by taking big bets that Greece would default, are creating a self-fulfilling downward spiral for the Mediterranean nation.

Addressing concerns that financial firms have been engaging in trades to bet on a Greek default, Bernanke said that “using these instruments in a way that intentionally destabilizes a company or a country is counterproductive, and I’m sure the SEC will be looking into that.”

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Goldman served as investment banker for Greece as the country borrowed billions by entering complex financial contracts known as cross-currency swaps. The contracts allowed Greece to limit the amount of debt it seemed to be taking on to fund its national budget.

Now, with a widening budget deficit, Greece has been struggling to raise money to pay off old debts and continue to fund government operations. In turn, those troubles have prompted fears that some of Europe’s other weaker economies might also face difficulties in covering their debts, which could provoke a wider financial crisis and hamstring the global economic recovery. [WashingtonPost.com

Perhaps the only bright spot is the fact that the US having been put over a barrel by members of the international community is not on the defensive tack but is acting in concert with its detractors in investigating its own financial industry.  This tactic should put it in a more favorable light – hopefully with the people rioting in the streets in Greece.

Tagged: George Papandreau, Global Fiscal Crisis, Goldman Sachs

Posted in: BANKING INDUSTRY, EUROPEAN UNION, FINANCIAL INDUSTRY, GREECE, REFORM, REGULATION, UNITED STATES