Back in 2001, Greece had a problem.  The struggling country’s debt levels were simply too high to qualify for admittance to the European Union.  While these regulations were in place to protect the structure of the European economy, Goldman Sachs was more than willing to step in with a timely loan which provided the necessary liquidity to hide the nation’s accumulated debt load.  Essentially a perfect solution for both Greece and Goldman, here is the situation illustrated by Bloomberg:

“The Goldman Sachs transaction swapped debt issued by Greece in dollars and yen for euros using an historical exchange rate, a mechanism that implied a reduction in debt, Sardelis said. It also used an off-market interest-rate swap to repay the loan. Those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.
The trading costs on the swap rose because the deal had a notional value of more than 15 billion euros, more than the amount of the loan itself, said a former Greek official with knowledge of the transaction who asked not to be identified because the pricing was private. The size and complexity of the deal meant that Goldman Sachs charged proportionately higher trading fees than for deals of a more standard size and structure, he said.”

Now any seasoned investor knows that when something is too complex to fully understand, chances are you should walk away.  And when the other side of the trade demands that you accept the terms without shopping the price around, you definitely walk away.  However, the hands of Greece’s Debt Chief were tied by Goldman’s conditions:

“Sardelis couldn’t actually do what every debt manager should do when offered something, which is go to the market to check the price,” said Papanicolaou, who retired in 2010. “He didn’t do that because he was told by Goldman that if he did that, the deal is off.”

Again, this should have been another indicator that Greece was heading into dark waters.  Yet greed overcame caution and both parties came to an agreement with a complex structure that exchanged Greek issued debt (in dollars and yen) for euros.  Using and off-market interest rate swap to repay the principal, this exchange suggested that the overall load would be reduced.  However, “those swaps allow counterparties to exchange two forms of interest payment, such as fixed or floating rates, referenced to a notional amount of debt.”  As a result, the trading costs of the deal skyrocketed to more than the total value of the loan itself, allowing Goldman to increasingly charge higher trading fees as the value rose.

If you have a hard time following the intricacies of the loan, that’s the point.  It took Greece’s Debt Chief over three months to realize the terms of the loan weren’t nearly as attractive as first believed.  How could this happen on such a large scale you ask? Derivatives expert Satyajit Das has a simple explanation, “Like the municipalities, Greece is just another example of a poorly governed client that got taken apart… These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised — it’s part of the DNA of that organization.”

A “sexy story between two sinners” indeed.


Goldman’s Secret Greece Loan Reveals Sinners – Bloomberg.