Goldman Bet Against Entire European Nations - Who Were Clients - the Same Way It Bet Against Its Subprime Mortgage Clients

It is well-documented that big banks like Goldman Sachs made money by betting against investments which they themselves bundled and sold to their own clients, such as packages of subprime mortgage-related products such as collateralized debt obligations.

This practice not only was illegal and unethical, but actually worsened the subprime crisis. See this, this, this, this and this.

But did you know that the big banks did the same thing with entire European nations?

As Andrew Gavin Marshall notes:

Greece has a total debt of roughly 330 billion euros (or U.S. $473 billion).[New York Times] So how did this debt get out of control? As it turned out, major U.S. banks, specifically J.P. Morgan Chase and Goldman Sachs, “helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules.” The deficit rules in place would slap major fines on euro member states that exceeded the limit for the budget deficit of 3% of GDP (gross domestic product), and that the total government debt must not exceed 60% of GDP. Greece hid its debt through “creative accounting,” and in some cases, even left out huge military expenditures. While the Greek government pursued its “creative accounting” methods, it got more help from Wall Street starting in 2002, in which “various investment banks offered complex financial products with which governments could push part of their liabilities into the future.” Put simply, with the help of Goldman Sachs and JP Morgan Chase, Greece was able to hide its debt in the future by transferring it into derivatives. A large deal was signed with Goldman Sachs in 2002 involving derivatives, specifically, cross-currency swaps, “in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.” The banks helped Greece devise a cross-currency swap scheme in which they used fictional exchange rates, allowing Greece to swap currencies and debt for an additional credit of $1 billion. Disguised as a ‘swap,’ this credit did not show up in the government’s debt statistics. As one German derivatives dealer has stated, “The Maastricht rules can be circumvented quite legally through swaps.”[Spiegel]

In the same way that homeowners take out a second mortgage to pay off their credit card debt, Goldman Sachs and JP Morgan Chase and other U.S. banks helped push government debt far into the future through the derivatives market. This was done in Greece, Italy, and likely several other euro-zone countries as well. In several dozen deals in Europe, “banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books.” Because the deals are not listed as loans, they are not listed as debt (liabilities), and so the true debt of Greece and other euro-zone countries was and likely to a large degree remains hidden. Greece effectively mortgaged its airports and highways to the major banks in order to get cash up-front and keep the loans off the books, classifying them as transactions.[New York Times]

Further, while Goldman Sachs was helping Greece hide its debt from the official statistics, it was also hedging its bets through buying insurance on Greek debt as well as using other derivatives trades to protect itself against a potential Greek default on its debt. So while Goldman Sachs engaged in long-term trades with Greek debt (meaning Greece would owe Goldman Sachs a great deal down the line), the firm simultaneously was betting against Greek debt in the short-term, profiting from the Greek debt crisis that it helped create.[Business Insider]