The Euro, Past, Present and Future

Bernanke wants answers on Goldman role in Greece
Thu Feb 25, 2010 12:09pm EST
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Reuters

* Bernanke says SEC also 'interested' in Goldman role

* Shouldn't use derivatives to destabilize countries

* Bernanke says US economy weak, job losses a worry

* Congress needs to agree to get deficits down, now

By Glenn Somerville and Pedro da Costa

WASHINGTON, Feb 25 (Reuters) - U.S. regulators are looking into how Wall Street firms like Goldman Sachs (GS.N) helped debt-stricken Greece arrange derivatives deals that critics say were used to disguise the size of its budget deficits.

Federal Reserve Chairman Ben Bernanke made the disclosure on Thursday and suggested securities regulators also wanted the information.

"We are looking into a number of questions related to Goldman Sachs and other companies in their derivatives arrangements with Greece," Bernanke said in response to a question from U.S. Senate banking Committee Chairman Sen. Christopher Dodd before testifying to the group for a second day on the state of the U.S. economy.

Bernanke said the Securities and Exchange Commission similarly was "interested" in Wall Street's activities in helping Greece do derivatives deals.

He stopped short of saying an official inquiry of Goldman Sachs' activities was under way by either the Fed or SEC. The SEC had no immediate comment when contacted.

"Obviously, using these instruments in a way that potentially destabilizes a company or a country is counterproductive," Bernanke said. "We'll certainly be evaluating what we learn from the activities of the holding companies that we supervise here in the U.S."

Goldman Sachs spokesman Michael DuVally said, "As a matter of policy, we don't comment on legal or regulatory matters."

FED HAS STRONGER HAND NOW

In the midst of the severe financial crisis that swept the U.S. economy from 2007 to 2009, Goldman and other Wall Street firms converted to bank holding companies, putting supervision of them more firmly in the Fed's hands.

Goldman Sachs has come under scrutiny for deals it did with Greece before it staggered into a debt crisis that has raised fears of a sovereign debt default and forced the European Union to say it will help if necessary to avert one.

The Greek crisis has pressured the euro and EU partners fear it may spread to weaker euro zone economies like Portugal and Spain.

Goldman Sachs entered into currency swaps with Greece, which critics say helped it disguise its debt, and has defended them as neither uncommon at the time nor inappropriate.

Cross-currency derivatives that Goldman Sachs conducted for Greece in 2001 helped reduce the size of its debt at a time when the country was keen to meet criteria for entering the EU and adopting the euro.

Goldman Sachs has a particularly high profile in Washington, having produced numerous alumni including former Treasury Secretary Henry Paulson, many of whom still play active roles in key agencies like Treasury.

It also has attracted a heavy share of public anger over gold-plated banker pay packages, not helped by comments such as chief executive Lloyd Blankfein's assertion last November that the bank was doing "God's work."

The bulk of Bernanke's testimony was a repeat of remarks he made on Wednesday when he told the U.S. House of Representatives that a weak U.S. job market means interest rates must stay low for a long time to try to spur activity.

A key uncertainty is whether the economy can grow fast enough in future to bring unemployment down at an acceptable rate, Bernanke said, a particularly poignant remark in view of a Labor Department report on Thursday that showed unemployment insurance benefit claims rising for a second straight week.

FINANCIAL SERVICES TOO BIG

With the Senate working toward a bill on financial regulatory reform, expected to be unveiled by Dodd early next week, Bernanke said in response to questions that he hoped it would lead to a downsizing in the importance of the financial services sector, which he said has become too big.

He appeared to pour cold water on the idea of a "Volcker rule" that would ban banks from engaging in so-called proprietary trading -- using government-guaranteed capital to make bets for their own account -- as the Obama administration had advocated but Congress seemed to be moving away from.

"We all agree that we don't want excessive risk-taking, particularly not on a 'tails I win, heads you lose basis,' certainly, "Bernanke said, but added there could be "unintended consequences" from such a rule.

He has said that banking regulators should get more powers to monitor and stop some bank trading activities if they deem it necessary to protect financial stability.

One key theme that Bernanke turned to repeatedly during a question-and-answer session was the need for lawmakers to come to agreement on measures for shrinking soaring U.S. budget deficits.

Republicans are reluctant to raise taxes and Democrats have measures before Congress, including healthcare reform, that would at least initially raise deficits, leaving the two sides stalemated on a wide range of fiscal issues and making progress on deficit reduction next to impossible.

"It could become a problem tomorrow if bond markets are not persuaded that Congress is serious about bringing down the deficit over time," Bernanke warned. Big deficits can erode confidence in a country's ability to repay debt, in turn driving the value of currency down and push inflation up.

(Editing by Andrew Hay)