Politicians and bankers

With Greece’s financial woes alarming (and exciting) markets, the lords of investment banking, Goldman Sachs, find themselves in the dock for putting in place a scheme to massage Greek financial figures in the early part of the decade.

http://www.spiegel.de/international/europe/0,1518,676634,00.html

The Goldman boss admitted to a panel of MPs that the arrangements were perhaps a bit too close to the line dividing the legal and not legal. Still, it wasn’t just the bankers who knew they were sailing close to the wind. The Greek government knew the score. More generally, governments have a pretty good idea of what the markets are doing and the ways in which transactions are being structured. That’s not to say they have a command of all the fine detail, nor to suppose they possess a capacity to see how things are going to pan out any better than the market participants. My supposition is, though, that governments tend to understand the way financial markets are operating and the extent to which this suits their political ends or not. Indeed, that consideration may inform the pronouncements of politicians rather than any real judgement about the intrinsic rights or wrongs of the way financial institutions or capital markets operate. As the article linked below notes, few leading politicians in the Euro-zone were heard complaining about the markets or speculators when major financial institutions took a big market bet in the late 1990s on the ‘convergence trade’ under which investors bought the government bonds of habitually high-inflation European economies (Greece and Spain included) on the grounds that yields would fall to German levels once the euro zone was in full swing. Back then speculators were lowering the debt costs of many European nations, which seemed happy enough to accept their money.

http://www.economist.com/business-finance/displaystory.cfm?story_id=15546105

On credit default swaps (for those who are not financial geeks or who have not had the joy of working in the world of corporate or investment banking)…

http://www.investopedia.com/terms/c/creditdefaultswap.asp

http://en.wikipedia.org/wiki/Credit_default_swap