Back when I used to ride my dinosaur to work at 60 Wall Street, I was a quant on the commodity derivatives desk. And one of my very first tasks in that role was building pricing models for commodity swaps. One in particular sticks in my memory. The government of Argentina wanted to swap a series of crude oil deliveries at a set of forward dates, for a big bunch of cash today. The model for the deal was pretty straightforward. But what struck me about the whole thing was that for reasons too lofty to explain to a little drone like me, Argentina decided to do the whole thing as an SPV so it could be held totally off balance sheet.
Given the checkered history of some of the past governments in Argentina, it wouldn’t’ shock me to learn that they wanted to do it that way so that they could steal the money without anyone finding out. The truth is I really have no idea. But this was my first experience with the SPV which later became famous as a tool in the Enron and Credit market scandals.
The use of the SPV (short for Special Purpose Vehicle) is unbelievably common. Argentina used them and so did Greece. The State of New Jersey uses them to get around its constitutional debt limits. It’s used by every government in the western world as well as banks, insurance companies, pensions, investment managers, and all manner of commercial entities. It’s a much more common phenomenon than most people apparently realize. But it’s not the tool itself that’s bad, but the way it’s used.
The fuss in the media over the way the Greek balance sheet was manipulated to get into the Euro has nothing to do with Goldman any more than I can be held personally responsible for those Argentine Commodity swaps. If someone in Greece decided to hide the existence of those liabilities by placing them off balance sheet, it’s not the fault of the guy who structured their finances. That’s like blaming the guy who sold them the car because they hid a body in the trunk. No one at Goldman compelled the Greek government to defraud their currency partners. The Greek government had a responsibility to be forthcoming about their finances to the examiners when they entered the Euro. It’s no fault of Goldman if they didn’t.
The press, being a day late and a dollar short as always, are asking that critical question “Did any of the other Euro members use this horrible financial practice.” It’s been 20 years since I’ve worked on a swaps desk and I can still tell you with absolute certainty that Yes… yes they did. All of them did. The Spanish, the Irish, the Portuguese, the Italians, the British, and every other major western country has some of their debt carried off balance sheet. No one but the press could ask such an idiotic question with a straight face.
The real question should be, have they adequately disclosed the state of their finances in total. In most cases I’m sure the answer is yes. But even if they didn’t, it’s no fault of Goldman Sachs.
%%%%%%%UPDATE%%%%%%%%
Apparently Goldman is saying the same thing I am.... the ALL did it... every last one of them. They all used off balance sheet tools and SPV's. Whether they fully disclosed their situation however remains a mystery.
From ZeroHedge.com
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