Protesters demonstrate in Athens against the government’s planned budget cuts. Goldman Sachs has become embroiled in Greece’s deficit crisis over a 2001 debt deal. Photograph: Simela Pantzartzi/EPA

It is the most profitable investment bank on the planet, and is viewed as an awesome money-making machine that runs rings around its rivals and rewards its high fliers with jaw-dropping multibillion-pound bonuses. Welcome to the world of Goldman Sachs, which has a reputation for managing risk second to none and where savvy traders took huge bets against the overvalued American mortgage market months before the onset of the credit crunch three years ago.
But Goldman’s knack for making huge dollops of cash from the markets is matched by its tendency to attract controversy to a degree that separates it from competitors. The latest furore is over the role Goldman played in helping Greece conceal its debts, which enabled the country to join the European single currency in 2001. Although it acted entirely legally, critics have heaped opprobrium on the bank, claiming that Goldman sails close to the wind in its endless quest for power and money.
The most stinging criticism last week came from Phil Angelides, chairman of the US financial crisis inquiry commission, who said he had been most struck so far in his probe by the way in which Goldman had been “creating and selling securities and then betting against them”. In reference to Greece, he said the practice extended to the creation and selling of foreign debt instruments. “I find it troubling,” he said.
Perhaps the wave of anti-Goldman sentiment can be explained by envy. After all, it is extremely good at what it does and seems more brazen and aggressive than other investment banks, although flamboyant displays of wealth and ego by people who work there are frowned upon.
Though Goldman sometimes goes where others fear to tread, rival banks are never far behind. Take the row over Greece, which has drawn up a deficit-cutting plan to avoid fiscal collapse amid fears that it could default on its loans. JP Morgan and Merrill Lynch were also involved in European currency swaps that helped countries such as Greece and Italy meet EU debt rules enforced by Brussels. But it was the Goldman deal, probably the largest, that attracted attention in Risk magazine in 2003 and which was followed up elsewhere in the media.
Goldman is under fire for reaping as much as £192m in fees through a complex currency transaction in 2001 that helped Athens borrow cash without putting it on its books as a loan. The so-called swap deal, permitted under EU law at the time, helped Greece meet eurozone limits on government borrowing. Under the arrangement between Goldman and Greece, the government in effect obtained a $1bn loan without adding to its public debt burden. The allegations sparked uproar in Europe last week, where ministers are discussing a possible Greek bailout, but only if it dramatically cuts public spending.
Stung by the criticism, a senior Goldman banker, Gerald Corrigan, was forced to admit that the deal could have been more transparent when he appeared before a UK parliamentary committee. “With the benefit of hindsight, the standards of transparency could have been and probably should have been higher,” he said. In his testimony, Corrigan said that countries had sought to control their budget deficits for centuries and that Goldman was only one of several banks that had helped countries to manage their debt burdens.
Goldman commented on the Greek deal on its website: “The Greek government has stated (and we agree) that these transactions were consistent with the European principles governing their use and application at the time.”
But analyst Nicholas Dunbar said: “What gets lost amid the furore is that here is another example of the relationship between financial innovators at investment banks and institutional clients, including governments, which were anxious to skirt various restrictions. It was hard for Goldman’s publicity-shy derivatives innovators to resist applying their skills. Better oversight of derivatives dealers is long overdue.”
In the US, Ben Bernanke, US Federal Reserve chairman, said he was looking into Goldman’s role in arranging swaps for Greece. Bernanke called any financial instruments that destabilise a firm or country “counterproductive”. “We are looking into a number of questions relating to Goldman Sachs and other companies and their arrangements with Greece,” Bernanke said.
Across the Atlantic, the EU’s statistics office, Eurostat, reinforced the view that Greece had indulged in some questionable financial practices over the years. Commenting on the Goldman transaction, it pointed out that this kind of deal was “not usual practice for the governments of member states and, therefore, specific rules for such government transactions did not exist [until 2008]”.
It added: “Concerning the specific off-market swap operation, Greek authorities had not informed Eurostat about this kind of government transaction. On the contrary, during a Eurostat visit to Greece on 15-19 September 2008, the Greek authorities declared that, in Greece, government units are not allowed by law to engage in off-market financial derivatives.”
To outsiders, Goldman always appears to be ahead of the game. While other banks largely confine themselves to advising and acting for clients, Goldman has shown greater willingness to risk its own capital, prompting critics to liken it to a huge hedge fund that is prepared to use its balance sheet to take positions in almost anything you care to mention: commodities, mortgages, currencies, equities and commercial property.
The bank has used its cash to establish an influential private equity arm, bidding for British firms such as Associated British Ports (ABP) and BAA, while also supporting bids for ITV and Marks & Spencer, stoking controversy in the Square Mile. By 2007, the trading side had contributed a greater share of revenue than ever before: net income reached $46bn, of which $31bn came from trading and investing its own capital.
Last year, however, Wall Street faced a wave of public anger at how banks had survived and prospered even though they had received government money to prop up their finances at the height of the financial crisis. Goldman, which received $10bn of Treasury support, was the lightning rod for criticism amid suspicion that it had deep links with governments around the world, with former senior executives disproportionately represented in positions of power in the US and elsewhere. Hank Paulson, for instance, a former Goldman boss, was treasury secretary at the time that Goldman and other investment banks received American government cash – infuriating Main Street, where millions were being made redundant as the worst recession in living memory took hold.
Rolling Stone magazine’s damning description of the gilded investment bank as a “great vampire squid” – because its tentacles seem to appear in so many parts of public life – resonated with the bank’s detractors. “They get up people’s noses because their contacts book is second to none, although that is hardly a crime,” says a rival banker.
In the years before the credit crunch, Goldman’s European private equity arm chased down deals in the soaring mergers and acquisitions market.
First there was the decision, credited to Michael Sherwood, co-chief executive of Goldman Sachs International, to back Philip Green’s attempt to buy Marks & Spencer in 2004. Later, the private equity division was involved in “bear hug” bids – not technically hostile, but not wholly friendly either – for bar owner Mitchells & Butlers and Associated British Ports.
Goldman’s actions have prompted worries about conflicts of interest. There are numerous examples: in the US it advised General Motors on the sale of its property arm and joined a buyout group making a bid. It was on both sides of the merger of the New York Stock Exchange and Archipelago. In the UK, J Sainsbury dropped Goldman as its broker amid reports it intended to back a bid for the rival retailer M&S; while broadcaster BSkyB severed its connection after the bank backed plans for a buyout of ITV, Sky’s competitor.
One of its most controversial moves was a bid in 2006 for BAA, the former British Airports Authority, after it was invited to help with its defence against a takeover launched by Spain’s Ferrovial. Although Goldman said its approach to BAA was friendly and portrayed it as a white knight bid to fend off Ferrovial, the move was viewed as unorthodox to say the least by Marcus Agius, then BAA chairman. Shortly afterwards, Goldman bosses stopped the bank using its own money to finance hostile takeover bids, as they threatened to damage the bank’s standing with its corporate clients. An investment banker says: “Goldman is very good at risk management, but when it comes to managing conflict, it has been less smart.”
Those with long memories recall that the bank, which acted for Robert Maxwell in numerous share trades, was criticised in a UK government report into the collapse of the swindler’s business empire in the 1990s. Goldman denied any impropriety.
In his latest film, Capitalism: A Love Story, Michael Moore drives up to its New York city HQ, 85 Broad Street, in an armoured Brink’s security van, leaps out with a sack with a giant dollar sign on it, looks up at the building and yells: “We’re here to get the money back for the American people!”
In recent months, the Service Employees International Union has protested outside Goldman’s Washington office, calling for it to donate its bonus pool to homeowners facing foreclosure.
As the most successful bank on Wall Street, and because of its reputation for paying some of the highest bonuses, Goldman has faced unprecedented public criticism. There is outrage that, having taken government money to survive the crash, Goldman is in such rude financial health and is handing out billions to its bankers. And there is anger that Goldman received the second-largest payout of taxpayer cash via the US government’s bailout of the insurer AIG.
Under pressure, the bank’s chief executive, Lloyd Blankfein, recently apologised for its role in the financial crisis and announced a $500m pledge to small businesses. He said: “We participated in things that were clearly wrong and have reason to regret. We apologise.”
This month, Goldman unveiled bonuses for senior staff that were far lower than expected in a bid to mollify public opinion. In London, staff payments were capped at £1m, while executives were awarded shares, rather than cash, which cannot be sold until 2015.
Looking to the future, Goldman, like all investment banks, is threatened by plans announced by Barack Obama that would prevent banks trading purely for their own account and ban them from owning hedge funds and private equity firms. That means banks would have to choose between owning an insured depository or owning proprietary trading operations and holding stakes in hedge funds and private equity firms. They would, however, be able to continue proprietary trading related to their customers’ businesses, as well as undertake conventional investment banking for clients.
If Obama can get his plans through Congress, banks could be broken up with riskier operations spun off. Whether the so-called masters of the universe can get around that one remains to be seen.

Blankfein’s rise

Like many who make it to the top of Wall Street, Goldman chief executive Lloyd Blankfein, pictured, comes from a humble background. He grew up in a public housing project in Brooklyn and attended Harvard on financial aid. His family had emigrated from eastern Europe in the 1880s and had at first prospered in the New York garment industry, but suffered during the Great Depression. Blankfein’s father worked for the US postal service as a clerk. His son was bright and, after graduating, attended Harvard Law School and then spent several years as a corporate tax lawyer. Later, he grew interested in finance, but was rejected by Goldman and Morgan Stanley. He took a position selling gold coins for J Aron, a small commodities trading house, determined to make it big on Wall Street.
As luck would have it, Aron was taken over by Goldman, so Blankfein joined via the back door. In 1988, he was named as a partner and less than a decade later was running the fixed-income, currency and commodities division. He was the first trader to be appointed CEO in 2006, illustrating the decline in importance of the investment banking division.
He is married to Laura Jacobs Blankfein; they have three children. In 2007, Blankfein paid $27m for an apartment at 15 Central Park West. He was paid $9m in 2009 – a far cry from the $69m he collected in 2007
http://news.google.com.au/news?sourceid=navclient&rlz=1T4RNTN_enAU340AU341&q=greek+swaps&um=1&ie=UTF-8&hl=en&ei=xf6JS9SjJZC2swO6xYyFAw&sa=X&oi=news_group&ct=title&resnum=1&ved=0CBEQsQQwAA