Helping Governments Deceive

In the aftermath of the Enron crisis, we learned that Wall Street firms had been helping Enron deceive investors by lending money to it through convoluted structures that were intended to let Enron claim they were not really loans, and that the company was therefore less indebted than it was. In return, Enron paid interest rates that were higher than it would have faced on a normal loan.

The banks, in effect, were charging Enron for helping it to lie.

When Enron collapsed, the same banks were among the losers. They said they had been deceived by Enron about its true fiscal position.

They deserved little sympathy. If you pay me to help you lie, it should not surprise me if you turn out to have lied to me as well.

Now we see something very similar emerging in Europe. My colleagues Louise Story, Landon Thomas Jr. and Nelson D. Schwartz report in Sunday’s Times that Goldman Sachs and J.P. Morgan, and perhaps others, sold financial instruments to Greece that were designed to artificially depress its borrowing and budget deficits.

Goldman and Morgan declined to comment. Greece says what it did was legal at the time.

Now Greece is under attack in the markets, and the major countries in the euro zone are trying to force it to clean up its act and to keep it from defaulting. There is little agreement on how to do that.

Traders who bet against Greece — by shorting Greek bonds while buying German ones, for example — have made a lot of money as the market realized just how much trouble Greece was in.

The European Union is now asking Greece for details of what it did. But it should go further. It should seek to find out if the banks that helped Greece lie — and thus knew its numbers were false — made money betting against it. If so, do those banks deserve to keep those profits?

Source: NYT Blogs, 15 Feb 2010
By: Floyd Norris



Floyd Norris, the chief financial correspondent of The New York Times and The International Herald Tribune, covers the world of finance and economics.