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<DIV style="FONT: 10pt arial">----- Original Message -----
<DIV style="BACKGROUND: #e4e4e4; font-color: black"><B>From:</B> <A
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<DIV><B>Sent:</B> Friday, May 11, 2012 5:42 PM</DIV></DIV>
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price the new democracy? Goldman Sachs conquers Europe </LI></UL></DIV></DIV>
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<LI><A href="http://www.independent.co.uk/topic/Banking">Banking</A>
<LI><A href="http://www.independent.co.uk/topic/Europe">Europe</A>
<LI><A href="http://www.independent.co.uk/topic/Investment">Investment</A>
<LI><A
href="http://www.independent.co.uk/topic/InternationalMonetaryFund">International
Monetary Fund</A> </LI></UL></DIV></DIV></DIV>
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<P>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.</P></SPAN>
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<P>This is the most remarkable thing of all: a giant leap forward for, or
perhaps even the successful culmination of, the Goldman Sachs Project.</P>
<P>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.</P>
<P>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.</P>
<P>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."</P>
<P>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.</P>
<P>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.</P>
<P>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.</P>
<P>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.</P>
<P>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.</P>
<P>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.</P>
<P>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.</P>
<P>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."</P>
<P>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.</P>
<P>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.</P>
<P>"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."</P>
<P>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.</P>
<P>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.</P>
<P>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.</P>
<P>Shared illusions, perhaps? Who would dare test
it?</P></DIV></DIV></DIV></DIV></DIV></DIV></DIV></DIV></FONT></DIV></BODY></HTML>