March 18, 2010

Fed Examines Swaps Deals by Goldman and Others

Filed under: Uncategorized — ktetaichinh @ 12:05 am
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Federal Reserve Chairman Ben Bernanke said the central bank is examining controversial derivatives transactions that Goldman Sachs Group Inc. and other banks made with Greece.

“We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece,” Mr. Bernanke told the Senate Banking Committee on Thursday. The Securities and Exchange Commission also is exploring the matter, he said.

Charles Forelle of the Wall Street Journal and Greg Morcroft of MarketWatch discuss the latest developments in Greece’s debt problems amid a recent downgrade warning and news the Fed plans to look at Goldman Sachs’s derivative arrangements with the country.

Mr. Bernanke’s comments came in response to questions from Senate Banking Committee Chairman Chris Dodd (D., Conn.), who said the transactions structured with Greece by “major financial firms are amplifying a public crisis for what would appear to be for private gain.”

The Fed’s scrutiny is aimed broadly at Wall Street’s role in creating financial instruments that might have helped Greece and other European countries mask their debt levels, according to people familiar with the matter. J.P. Morgan Chase & Co. arranged a currency swap with Italy in 1996 that resulted in large, upfront payments that helped to keep Italy’s budget deficit in line ahead of its entry into the euro.

Goldman and J.P. Morgan declined to comment Thursday on Mr. Bernanke’s remarks. Goldman has said the firm did nothing inappropriate when it structured a 2001 swap for Greece. The deal reduced Greece’s outstanding debt by converting the debt into euros and then restructuring the debt at more favorable rates. In return for the lower rates, Greece paid Goldman back over time through payments attached to another derivative product.

Such trades were allowed under European Union rules at the time, but the European Commission has demanded more details about the deal from Greece.

The Fed has authority to scrutinize the transactions as part of its oversight of bank holding companies. Fed officials can weigh the legal and reputational risks caused by financial products or business practices.

An SEC spokesman would neither confirm nor deny that the agency is investigating U.S. financial firms that arranged complex financial transactions in Europe. “As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit-default swaps and other opaque financial products and practices,” he said.

Credit-default swaps are insurance-like contracts that protect against a debt default.

Mr. Bernanke told the Senate committee on Thursday that credit-default swaps can be useful hedges, but “using these instruments in a way that intentionally destabilizes a company or country is counterproductive.”


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