Why Goldman Sachs Needs to Penetrate the Corridors of Power

Paul Craig Roberts - admittedly not someone whose opinions I would normally consider balanced - believes that "Goldman Sachs has taken over". He thinks that something's off regarding the fact that a German bond auction failed while an Italian one succeeded, and while he may have a point, the real meat of the issue is this:

In my opinion, the failed German bond auction was orchestrated by the US Treasury, by the European Central Bank and EU authorities, and by the private banks that own the troubled sovereign debt.

My opinion is based on the following facts. Goldman Sachs and US banks have guaranteed perhaps one trillion dollars or more of European sovereign debt by selling swaps or insurance against which they have not reserved. The fees the US banks received for guaranteeing the values of European sovereign debt instruments simply went into profits and executive bonuses. This, of course, is what ruined the American insurance giant, AIG, leading to the TARP bailout at US taxpayer expense and Goldman Sachs’ enormous profits.

If any of the European sovereign debt fails, US financial institutions that issued swaps or unfunded guarantees against the debt are on the hook for large sums that they do not have. The reputation of the US financial system probably could not survive its default on the swaps it has issued. Therefore, the failure of European sovereign debt would renew the financial crisis in the US, requiring a new round of bailouts and/or a new round of Federal Reserve “quantitative easing,” that is, the printing of money in order to make good on irresponsible financial instruments, the issue of which enriched a tiny number of executives.

It may be recalled (for those of you who follow this stuff closely, anyway), that the 50% "haircut" on Greek debt that was negotiated was deemed "voluntary"; strange, that, why would it matter? For the reason Roberts avers above: an involuntary haircut on the debt would amount to a "credit event", and thus require the writers of CDSs like Goldman to either put up billions in collateral or actually pay in cash, that is, cash it doesn't have. This is, as Roberts notes, what brought down AIG. Guess no one has learned their lessons there.

Looking around a bit, one can confirm the above. JPMorgan Joins Goldman Keeping Italy Derivatives Risk in Dark (Bloomberg):

JPMorgan Chase & Co. (JPM) and Goldman Sachs Group Inc. (GS), among the world’s biggest traders of credit derivatives, disclosed to shareholders that they have sold protection on more than $5 trillion of debt globally.

Just don’t ask them how much of that was issued by Greece, Italy, Ireland, Portugal and Spain, known as the GIIPS. [Love the PC formulation here: they're usually known as "PIIGS". - ed.]

As concerns mount that those countries may not be creditworthy, investors are being kept in the dark about how much risk U.S. banks face from a default. Firms including Goldman Sachs and JPMorgan don’t provide a full picture of potential losses and gains in such a scenario, giving only net numbers or excluding some derivatives altogether.

U.S. Banks Dangerously Exposed to European Markets - Fitch:

U.S. banks are dangerously exposed to a "negative shock" from the spreading Eurozone sovereign debt crisis, Fitch Ratings warned.

Someone remarked that the Eurozone crisis has felt like being run over by a glacier: it just seems to go on and on with no resolution. But a financial shock, which looks increasingly likely, will hit the U.S. hard and would possibly ruin GS and the other banks that have long positions in European sovereign debt. (And writing a CDS amounts to being long.)