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There is a new chapter in the Greek saga today, with news from Bloomberg that Goldman Sachs failed to disclose currency swap deals in Greek bond deals: Goldman Sachs Group

Issues:

There is a new chapter in the Greek saga today, with news from Bloomberg that Goldman Sachs failed to disclose currency swap deals in Greek bond deals:

Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit.

No mention was made of the swap in sales documents for the securities in at least six of the 10 sales the bank arranged for Greece since the transaction, according to a review of the prospectuses by Bloomberg. The New York-based firm helped Greece raise $1 billion of off-balance-sheet funding in 2002 through the swap, which European Union regulators said they knew nothing about until recent days.

With this bit of additional detail in the mix, Goldman’s defenders (is that you, Lloyd?) will now have a harder time making the case that the bank was acting properly in its dealings with Greece and the EU.  These arguments weren’t particularly strong, to begin with; as is usually the case, those that have risen to Goldman’s defense (John Carney chief among them) have been making broad-brush arguments about standard Wall Street practices (revelation: banks hedge their bets) rather than engaging the details of this particular story or taking into account everything we know about Goldman’s past behavior.

Contrast this kind of approach with that of Yves Smith, who has posted a very interesting and detailed analysis of the situation, observing that Bloomberg seems to have tiptoed around the heart of the issue, substituting a less controversial f-word (“fooled”) for the more accurate one (“fraud”).  She is a former Goldman employee, and shares some valuable knowledge of how relationships are managed at Goldman, concluding that the bank had, in fact deceived investors:

So I’m not certain you need a particular memo [to prove fraud], even though such documents probably exist. All you need to do is walk through the structure of Goldman relationship management and their usual client communication protocols to establish that it is just not credible that the team working on the bond issues could not have known about the swaps.

Goldman has centralized account management. One person, a relationship manager, is ultimately responsible for selling all products to particular corporate clients and government entities. His full time job is client coverage; he then works with product specialists as needed to get deals done (specialists are also assigned to particular accounts, but the relationship manager is always in the mix. Hank Paulson was one of these relationship managers, called investment banking services). So Goldman cannot pretend that somehow the team that handled the bond offering didn’t know about the swaps deal.

Naturally, it all comes back to making sense of relationships and organizational structures.  How does Goldman manage the conflicts that arise within these structures?   Why do some clients, like John Paulson, seem to get priority over clients like AIG?  These are questions that might best be answered with subpoenas.