The ascension of Mario Monti to the Italian prime ministership is
remarkable for more reasons than it is possible to count. By replacing
the scandal-surfing Silvio Berlusconi, Italy has dislodged the
undislodgeable. By imposing rule by unelected technocrats, it has
suspended the normal rules of democracy, and maybe democracy itself.
And by putting a senior adviser at Goldman Sachs in charge of a Western
nation, it has taken to new heights the political power of an
investment bank that you might have thought was prohibitively
politically toxic.
This is the most remarkable thing of all: a giant leap forward for,
or perhaps even the successful culmination of, the Goldman Sachs
Project.
It is not just Mr Monti. The European Central Bank, another crucial
player in the sovereign debt drama, is under ex-Goldman management, and
the investment bank’s alumni hold sway in the corridors of power in
almost every European nation, as they have done in the US throughout
the financial crisis. Until Wednesday, the International Monetary
Fund’s European division was also run by a Goldman man, Antonio Borges,
who just resigned for personal reasons.
Even before the upheaval in Italy, there was no sign of Goldman
Sachs living down its nickname as “the Vampire Squid”, and now that its
tentacles reach to the top of the eurozone, sceptical voices are
raising questions over its influence. The political decisions taken in
the coming weeks will determine if the eurozone can and will pay its
debts – and Goldman’s interests are intricately tied up with the answer
to that question.
Simon Johnson, the former International Monetary Fund economist, in
his book 13 Bankers, argued that Goldman Sachs and the other large
banks had become so close to government in the run-up to the financial
crisis that the US was effectively an oligarchy. At least European
politicians aren’t “bought and paid for” by corporations, as in the US,
he says. “Instead what you have in Europe is a shared world-view among
the policy elite and the bankers, a shared set of goals and mutual
reinforcement of illusions.”
This is The Goldman Sachs Project. Put simply, it is to hug
governments close. Every business wants to advance its interests with
the regulators that can stymie them and the politicians who can give
them a tax break, but this is no mere lobbying effort. Goldman is there
to provide advice for governments and to provide financing, to send its
people into public service and to dangle lucrative jobs in front of
people coming out of government. The Project is to create such a deep
exchange of people and ideas and money that it is impossible to tell
the difference between the public interest and the Goldman Sachs
interest.
Mr Monti is one of Italy’s most eminent economists, and he spent
most of his career in academia and thinktankery, but it was when Mr
Berlusconi appointed him to the European Commission in 1995 that
Goldman Sachs started to get interested in him. First as commissioner
for the internal market, and then especially as commissioner for
competition, he has made decisions that could make or break the
takeover and merger deals that Goldman’s bankers were working on or
providing the funding for. Mr Monti also later chaired the Italian
Treasury’s committee on the banking and financial system, which set the
country’s financial policies.
With these connections, it was natural for Goldman to invite him to
join its board of international advisers. The bank’s two dozen-strong
international advisers act as informal lobbyists for its interests with
the politicians that regulate its work. Other advisers include Otmar
Issing who, as a board member of the German Bundesbank and then the
European Central Bank, was one of the architects of the euro.
Perhaps the most prominent ex-politician inside the bank is Peter
Sutherland, Attorney General of Ireland in the 1980s and another former
EU Competition Commissioner. He is now non-executive chairman of
Goldman’s UK-based broker-dealer arm, Goldman Sachs International, and
until its
collapse
and nationalisation he was also a non-executive director of Royal Bank
of Scotland. He has been a prominent voice within Ireland on its
bailout by the EU, arguing that the terms of emergency loans should be
eased, so as not to exacerbate the country’s financial woes. The EU
agreed to cut Ireland’s interest rate this summer.
Picking up well-connected policymakers on their way out of
government is only one half of the Project, sending Goldman alumni into
government is the other half. Like Mr Monti, Mario Draghi, who took
over as President of the ECB on 1 November, has been in and out of
government and in and out of Goldman. He was a member of the World Bank
and managing director of the Italian Treasury before spending three
years as managing director of Goldman Sachs International between 2002
and 2005 – only to return to government as president of the Italian
central bank.
Mr Draghi has been dogged by controversy over the accounting tricks
conducted by Italy and other nations on the eurozone periphery as they
tried to squeeze into the single currency a decade ago. By using
complex derivatives, Italy and Greece were able to slim down the
apparent size of their government debt, which euro rules mandated
shouldn’t be above 60 per cent of the size of the economy. And the
brains behind several of those derivatives were the men and women of
Goldman Sachs.
The bank’s traders created a number of financial deals that allowed
Greece to raise money to cut its budget deficit immediately, in return
for repayments over time. In one deal, Goldman channelled $1bn of
funding to the Greek government in 2002 in a transaction called a
cross-currency swap. On the other side of the deal, working in the
National Bank of Greece, was Petros Christodoulou, who had begun his
career at Goldman, and who has been promoted now to head the office
managing government Greek debt. Lucas Papademos, now installed as Prime
Minister in Greece’s unity government, was a technocrat running the
Central Bank of Greece at the time.
Goldman says that the debt reduction achieved by the swaps was
negligible in relation to euro rules, but it expressed some regrets
over the deals. Gerald Corrigan, a Goldman partner who came to the bank
after running the New York branch of the US Federal Reserve, told a UK
parliamentary hearing last year: “It is clear with hindsight that the
standards of transparency could have been and probably should have been
higher.”
When the issue was raised at confirmation hearings in the European
Parliament for his job at the ECB, Mr Draghi says he wasn’t involved in
the swaps deals either at the Treasury or at Goldman.
It has proved impossible to hold the line on Greece, which under the
latest EU proposals is effectively going to default on its debt by
asking creditors to take a “voluntary” haircut of 50 per cent on its
bonds, but the current consensus in the eurozone is that the creditors
of bigger nations like Italy and Spain must be paid in full. These
creditors, of course, are the continent’s big banks, and it is their
health that is the primary concern of policymakers. The combination of
austerity measures imposed by the new technocratic governments in
Athens and Rome and the leaders of other eurozone countries, such as
Ireland, and rescue funds from the IMF and the largely German-backed
European Financial Stability Facility, can all be traced to this
consensus.
“My former colleagues at the IMF are running around trying to
justify bailouts of €1.5trn-€4trn, but what does that mean?” says Simon
Johnson. “It means bailing out the creditors 100 per cent. It is
another bank bailout, like in 2008: The mechanism is different, in that
this is happening at the sovereign level not the bank level, but the
rationale is the same.”
So certain is the financial elite that the banks will be bailed out,
that some are placing bet-the-company wagers on just such an outcome.
Jon Corzine, a former chief executive of Goldman Sachs, returned to
Wall Street last year after almost a decade in
politics
and took control of a historic firm called MF Global. He placed a $6bn
bet with the firm’s money that Italian government bonds will not
default.
When the bet was revealed last month, clients and trading partners
decided it was too risky to do business with MF Global and the firm
collapsed within days. It was one of the ten biggest bankruptcies in US
history.
The grave danger is that, if Italy stops paying its debts, creditor
banks could be made insolvent. Goldman Sachs, which has written over
$2trn of insurance, including an undisclosed amount on eurozone
countries’ debt, would not escape unharmed, especially if some of the
$2trn of insurance it has purchased on that insurance turns out to be
with a bank that has gone under. No bank – and especially not the
Vampire Squid – can easily untangle its tentacles from the tentacles of
its peers. This is the rationale for the bailouts and the austerity,
the reason we are getting more Goldman, not less. The alternative is a
second financial crisis, a second economic
collapse.
Shared illusions, perhaps? Who would dare test it?
Source.
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