The rumors of a possible partnership by John Paulson and Goldman Sachs in the speculative attacks on Greece, which I first reported on last week, are now heating up in Europe to the point where one French journalist has multiple sources corroborating them. No one can point to hard evidence, just yet, because these are opaque, unregulated markets. But the news is quickly rising above the status of rumor.
The French financial newspaper Les Echos picked up on my post on John Paulson and Greece yesterday. Here is my (rough) translation:
There aren’t just suspicions that Goldman Sachs is speculating against the Greek debt through the market for credit default swaps (CDS). After having made $3.7 billion dollars by betting on the subprime market, the hedge fund manager John Paulson has been cited as a partner of Goldman Sachs in the Greek market. According to the activist Kevin Connor, co-director of the think tank the Public Accountability Initiative, based on article in the British and Greek press, Paulson’s funds have taken large/important positions in the Greek debt market through a team of 20-30 traders.
My original post pieced together information from several Greek and British articles which were reporting on Paulson and Greece; these were largely still rumors, though an article in the Greek newspaper To Vima seemed to report the news with more certainty.
But there is now even more evidence that this is, in fact the case, as pieces like the Les Echos article appear to have given a French financial journalist cover to out Goldman and Paulson as the large American bank and hedge fund that are waging the attacks on Greece (h/t Naked Capitalism). A source had told the journalist, Jean Quatremer, that Paulson and Goldman were behind the attacks, but told him not to name names. Now that the rumors are more specific, actually pointing to Paulson and Goldman, he reports that he has multiple corroborating sources.
Here is the translation, from commenter Francois T at Naked Capitalism:
On February 6, on this blog, I wrote that Greece was victim of speculative attacks on the part of a large Bank of American business and hedge funds betting on a default in payment of Athens. Until then, we certainly knew that there was speculation, but no one had yet managed to put a name to those who sought to destabilize Greece and the euro area. At that time, my informant had discouraged me to mention names, which was quite frustrating, for you and me. However, since then, market rumors have become more precise and their names, openly cited in the media, even if it is with good reason, very carefully. The Greek Government itself accuses them openly. I can therefore confirm that, according to concurrent sources, Goldman Sachs and speculative Fund managed by John Paulson would be the two main actors of these attacks against Greece and the euro. I have already detailed you in my post from February 6 the speculation mechanism.
More shocking, in this case, is without doubt the role played by Goldman Sachs, whom, at the same time it was advising the Greek Government, secretly took contrary positions against Greece and the euro. This murky behavior is illustrated by the recent case recalled by February 8 Spiegel and the New York Times February 14(1): in 2002, the Bank of American case helped Greece, against remuneration of 300 million dollars in “creative accounting” operation designed to cover up some of its debt (I will come back to this topic in a future column).
If this is true, it is, indeed, shocking that Goldman Sachs is both advising Greece and taking massive short positions against the country, but as I’ve noted before, it is no more shocking than what happened with AIG and the subprime game, which also brought the bank together with John Paulson in a fateful, lucrative, and immensely destructive partnership.
Quatremer also makes the allegation that the speculators may have orchestrated a series of leaks, published in the Financial Times, that suggested Greece had hired Goldman for a private placement of debt — a fairly desperate measure — and China refused to buy. This agitated markets and left the speculators in a much stronger position:
Remember also that on 25 January, Greece had managed to sell 5 years notes for an amount of 8 billion euros whereas they were only aiming for 3 billion: demand, however, reached EUR 25 billion! Goldman Sachs was part of the consortium that placed the Greek paper. So far, nothing unusual here. It is then that a curious fact occurs.
After this spectacular success, everyone thinks that the markets are reassured, since they implicitly express that they believed a Greek default is not in the cards. And indeed, there is a lull. However, as soon as Wednesday, another storm hit the markets. An article in the Financial Times, the only paper read by market, operators has indeed just assert that China refused to buy EUR 25 billion of Greek debt, a ‘private placement’ by… Goldman Sachs. What is it? When a Government is concerned that it won’t be able to sell its debt directly to investors, it asks a bank (or consortium of banks) to do so on its behalf. It is a sign of panic. And the fact that Beijing would have declined the offer would be downright alarming. In short, two reasons to flee from Greece markets. The Chinese denied the news, but markets still required Athens a higher risk premium. Those who orchestrated the leaks gained on all fronts: their loan suddenly became more profitable, as well as their CDS, these “insurance” instruments supposed to guard against a default of the borrower (see my post on February 6)
This sort of media manipulation may seem somewhat conspiratorial, but it is perfectly believable in the world of finance (also believable, I suppose, that someone is spreading false rumors about Goldman and Paulson). Information drives market conditions, and by releasing information strategically, “credible” sources (such as powerful investors) can move markets in their preferred direction.
During the subprime days, Goldman played journalists like a fiddle, suggesting that the subprime sector would recover and making moves to buy lenders at the same time that they were privately making extremely bearish bets on the mortgage sector. These (apparently highly deceptive) professions of faith in the mortgage industry may have helped lower the cost of any protection they bought, essentially helping them find suckers to take the other ends of their bets. I’ll have more on this soon.