JUDY WOODRUFF: Finally tonight: the connections between Wall Street and Greece, as the fallout of its economic crisis continues.
Jeffrey Brown has the story.
JEFFREY BROWN: The Greek debt crisis extended to both Wall Street and Washington today. Greece is facing the possibility of a default and the certainty of austerity measures that have already sparked protests over job, wage, and service cuts.
There are also now increasing questions about the role that Wall Street banks might have played in, first, helping Greece mask its real problems, and, more recently, harming its chances for recovery.
All that came up at a Senate hearing today with Fed Chairman Ben Bernanke.
SEN. CHRISTOPHER DODD, D-Conn.: We have a situation in which major financial institutions are amplifying a public crisis for what would appear to be for private gain.
I want to ask you here whether or not you think there ought to be limits on the use of credit default swaps to prevent the intentional creation of runs against governments. Do you have any quick comments on that?
BEN BERNANKE, federal reserve chairman: Using these instruments in a way that intentionally destabilizes a company or a country is is counterproductive. And I’m sure the SEC will be looking into that. We’ll certainly be evaluating what we can learn from the activities of the holding companies that we supervise here in the U.S.
JEFFREY BROWN: And joining me with the latest on all this is Roben Farzad, senior writer for “Bloomberg BusinessWeek” magazine.
Roben, in general terms first, what exactly is Chairman Bernanke promising to look into?
ROBEN FARZAD, senior writer, Bloomberg BusinessWeek: This has, for the better part of a decade, been a great big unknown for financial regulators the world over, this world of derivatives, which are largely unregulated secondary investment vehicles.
They’re almost train of thought. It’s it’s whatever an investment bank can come up with. We saw the derivative situation blow up with respect to AIG, where there was an oversight. And now the concern, not only here in the United States and in Greece, but in the rest of the world and in the capital markets, is that the banks in parallel practice this with governments to help them juke the stats.
JEFFREY BROWN: Well, go back a few years to 2000, 2001. First issue is whether and how these banks and financial institutions might have helped Greece mask its true problems. Now, how how would how did they do that?
ROBEN FARZAD: Greece, in 2000, 2001, very much wants to become a euro member. And to do that, it has to be able to show its financial stability and a certain measure of austerity. It has to have, for example, a budget gap that is no more than whatever percentage the limit was back then, if it was 6 percent or 7 percent or 8 percent.
So, to do that, it was very much in the market for covering its warts, hiding its sin, if you would. There is the tough measure of going back to your electorate, going back to the unions, the public service workers, and saying, we need to tighten our belts and behave ourselves and get ready to become members of the euro, the European Monetary Union, where it will accrue great benefits to us, trade-wise, in terms of our borrowing costs.
That’s the hard way of doing it, especially with a left-of-center government. A more seductive way of doing it is bringing in the investment banks and asking them, is there any way that you could push out the loans, make it look like my loans aren’t due within the next five years?
Or, in the case with Goldman Sachs, what’s being argued here and alleged is that a lot of the debt was was concealed within esoteric currency trades to make it look as though it wasn’t debt at all. So, the argument is that Greece looked a lot more hale and hearty and creditworthy than it actually was.
JEFFREY BROWN: It’s not so different from, of course, what we have been finding out about what happened with many companies, with the housing market. But, in this case, it’s a it’s an entire country.
ROBEN FARZAD: Yes, it’s an entire country. And it shows you the universality and, I think, similitude here is that Wall Street is paid writ large and paid a lot to be opportunistic, to game the system, to find the tiniest, most, you know, esoteric loopholes, and to exploit them to the max, until the situation doesn’t become untenable.
If this sounds familiar to a lot of people out there, Enron was a great strong company that pursued this type of alchemy through off-balance-sheet accounting. We saw a lot of this very recently with subprime in the housing bubble make certain homeowners and borrowers look a lot more creditworthy than they were with the securitization process.
And the great fear here is that it was done with a lot of countries and with governments who were complicit as well.
JEFFREY BROWN: And to bring this up to date to even recent times, now the discussion is to what degree financial institutions, including Goldman Sachs, would have contributed to Greece’s problems, or at least to to make it harder for them to get out of it, right, through the use of credit default swaps and derivatives, those things we heard about a lot over the last couple of years.
ROBEN FARZAD: Yes.
An investment bank like Goldman Sachs, which often bets on its house account, enjoys both sides of the trade, both selling the securities and the vehicles to the investor or the government or the company on the front end, and then being able to bet on the down end.
You know, for example, this happened with real estate. It bet it helped swell subprime, and then it bet that housing would collapse, very successfully. In this case, you have collateralized CDS, collateralized debt swaps, where they’re effectively insurance policies that have to be taken out on Greek’s creditworthiness.
And it makes us especially prohibitive for Greece to go out there and refinance its debt. It needs to refinance it needs to raise about 25 billion euros over the next three months to refinance its debt. But if borrowers out there are being charged almost usurious amounts to be able to go out there and be an active participant in Greek debt, they are not going to do it.
And they are going to take it out of Greece’s hide and say, you need to sweeten the pot and pay us a much higher interest rate for us to give you the time of day.
And the argument here is that Goldman Sachs is participating in that market, and exacerbating the cost of insuring Greek debt at the same time.
JEFFREY BROWN: But…
ROBEN FARZAD: So, it’s really both ways of the trade.
JEFFREY BROWN: But, Roben, when when if Ben Bernanke says, we’re going to look at this, he’s the SEC is going to look at this, is it illegal? Is it what is he saying? Illegal, immoral, or just this is the way Wall Street does business, but we need to look at it?
What exactly are they looking at?
ROBEN FARZAD: This is the Rorschach here. Derivatives, broadly, were just unregulated. This was a wild, wild, wild West.
And for the Fed to look after this almost 10 years after the fact is very cold comfort, when this is unfolding real-time. And Germany’s on the hook. German banks, French banks, Swiss banks, the entire global capital market system is waiting for bated breath to see if Greece is going to get bailed out. So, it’s not very comforting to hear Angela Merkel or Brussels or Ben Bernanke saying, we’re going to look into it.
Obviously, regulators again must try to be ahead of the curve when it comes to these esoteric derivatives, because, once again, Wall Street, no matter the firm, is paid to game the system. So, it pays just an ounce of prevention, an ounce of forethought pays back in spades.
JEFFREY BROWN: But, briefly, at the same time, Wall Street’s stock exchange has continued to watch this all warily. We even saw that today. The market went down quite a bit for a while today, and people were talking about that as linked to worries about Greece and Europe.
ROBEN FARZAD: This is systemic.
What happens, again, to German banks, French banks, Swiss banks have something, I think, of $150 billion or $175 billion of exposure to Greek debt that was just passed along the system. It was very fungible after these initial deals were signed.
And what happens if Greece defaults? Would there be a chain reaction? Would we see this type of contagion spread to other weak players in a very weak economy right now, such as Spain, Portugal, Italy? What happens when Angela Merkel or some of the rulers of these other countries have to come in and bail out their banks once again?
So, you have to imagine how difficult it is for the ruler of a Germany to go to their people and say, we need to help bail out a European cousin here, because this is bound to recourse to us. And, at the same time, the Germans are saying, well, the Greek have to tighten their own belts.
So, it’s exceedingly difficult and fraught with tension.
JEFFREY BROWN: All right, Roben Farzad, thanks again. Nice to talk to you.
ROBEN FARZAD: Thank you, Jeffrey. Appreciate it.