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E.U. Shocked at Greek Greeks Used Financial Technology For Debt Deceit

Economics / Global Debt Crisis Feb 28, 2010 - 09:56 AM GMT

By: Janet_Tavakoli


Best Financial Markets Analysis ArticleThe European Union (EU) is shocked--shocked I tell you!--that Greece used financial engineering to qualify for admission. Exactly how did they think that weaker countries managed to meet the requirements? Now the EU is concerned that geeks used their knowledge of Greece's hidden debt (and bailout negotiations) to manipulate financial markets for their own profit.

A few years ago, Greece engaged in derivatives transactions which essentially gave it a disguised loan, a gift from geeks. Greece may or may not have had plans to invest the money to create national wealth instead of say, blowing it all on national bling. Either way, Greece used its national credit card in a futile attempt to keep up with the EU Joneses.

The National Bank of Greece seems embarrassed. Last week, it removed the prospectus for Titlos PLC, the financial engineering vehicle arranged for it by Goldman Sachs International, from its web site.

Now Federal Reserve Chairman Ben Bernanke is concerned with the way credit derivatives and other financial instruments are being used during Greece's current debt crisis. In his semi-annual economic report to Congress, Benanke said the Fed and the Securities and Exchange Commission (SEC) would look into the involvement of the banks they oversee:

"Obviously, using these instruments in a way that intentionally destabilizes a company or a country is--is counterproductive."

He should question all related Greek and Euro transactions (not just derivatives). Banks claim their trades aren't risky because they are doing customer business. One should remember that Goldman Sachs claimed its destabilizing transactions with AIG were "customer business." How did that work out?

EU Needs its Own Investigation

To paraphrase Winston Churchill, U.S. financial regulators occasionally stumble over the truth, but they pick themselves up and hurry off as if nothing ever happened. In February 2007, I wrote the SEC about U.S. corporate credit derivatives indexes--similar to the sovereign indexes that reference Greece's debt. Banks persuaded U.S. state pension funds to use them as "hedges" to protect their large fixed income portfolios.*

Next banks served other customers by creating phoney "AAA" rated products. These fake investments used lots of leverage (borrowing), and they pushed hard in the opposite direction of the pension funds' trades. As a result, the pension funds' "hedges" collapsed, and they lost money. The customers that bought the new "investments" lost money, too. Within a year, the phoney AAA investments were downgraded to junk, and customers lost around 90% of their money. (These financial instruments were unrelated to phoney mortgage securitizations.) Banks made hefty fees, but the pension funds and customers they suckered into taking these "gifts" were harmed.

I gave the SEC a map and a flashlight, yet it went nowhere. (My letter still sits on the SEC's web site.) I'm called the "Cassandra of credit derivatives," but it's a misnomer. I'm not prescient, I have no psychic ability, and the geeks at U.S. banks--that claim they are great risk managers--are capable of the same analysis. Moreover, only pension funds and banks' customers were the victims of an unholy rape.

Today, rumors are that crony capitalists are using derivatives to profit from Greece's misery. There are allegations that investment banks and hedge funds used their knowledge of Greece's hidden debt to drive up its borrowing cost and drive down the Euro. Then these speculators reversed their positions, when they had advance information of a potential bailout for Greece.

Other rumors suggest customized trades on the sovereign credit derivatives index also exploited Greece's problems. Still other rumors point to a campaign to manipulate Greek debt prices and knock down the Euro.

The European Union and Greece should launch their own investigations. When U.S. regulators say they'll "investigate," it seems to mean "get lost."

The U.S. Should Investigate Transactions that Destabilized America

If the U.S.'s "photo-op regulators" are investigating transactions that destabilize countries, they should start at home. Is it "God's work" to enrich crony capitalists--Washington and Wall Street's new chosen people--while siphoning money from hard-working taxpayers?

Geeks used financial technology in a way that destabilized the U.S. economy while the U.S. is at war. I believe there is a much stronger word for it than "counterproductive."

*Pension funds shorted corporate credit default swap indexes (bought credit protection) and took a long position in swap spreads to hedge their bond portfolio credit risk.

By Janet Tavakoli

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Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2010 Copyright Janet Tavakoli- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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