Goldman Sachs Takes the Rap Again, This Time for Greece

Is there anything that Goldman Sachs won't be blamed for? A New York Times story highlights allegations that the investment bank created derivative instruments that allowed Greece to borrow billions of dollars and keep the debt off the national balance sheet so that the country did not appear to be inflating its deficit.

"Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts," the story, published Sunday, says.

Goldman wasn't the only bank named, although it was clearly the villain of the piece. JPMorgan Chase had a supporting role for a round of stealth borrowing it was said to have arranged for Italy (there seems to be an inverse relationship among European nations between fiscal rectitude and olive oil production).

"In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books," the story explains. "Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come. Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country's liabilities."

This latest report of financial sleight of hand is bound to worsen the reputation of investment banks, increasing concerns about legal and regulatory measures that could drastically limit their activities and profits. That could hurt their share prices, which are already well off recovery highs.

Goldman Sachs and JPMorgan have fallen more than 15 percent since mid-October, while the Standard & Poor's 500-stock index is roughly unchanged. Both stocks were up in line with the market on Tuesday, the first trading day after the Times story appeared.

What exactly did the banks do wrong in Europe? It's not clear whether Goldman, Morgan and other unnamed institutions made unsolicited approaches to governments there (it would be the mother of all brokerage cold calls if they did) or whether the governments initiated the contacts.

The banks' ethical culpability is certainly less than in the subprime mortgage scandal two years ago because of a key difference between the groups of borrowers: Some lower-income families with little financial knowledge may have been duped into taking out inappropriate loans. But it's hard to believe that European finance ministries, populated with civil servants trained at Harvard, the London School of Economics and their Continental European equivalents, could have had the wool pulled over their eyes.

As long as the economy remains weak and the global financial system shaky, there will be a bull market in scapegoating, with investment banks the main targets. But it remains to be seen just how successful the efforts to restrict their practices will be.

Bankers tend to be smarter than regulators and are adept at staying one step ahead of them, devising ever more creative ways to do what they and their customers want. Besides, governments, including our own, need their services. European officials have been aware for years of the use of exotic financial instruments by some countries, the Times story says, yet nothing has been done to control it.

Banks like Goldman and Morgan are leaders in an industry that has fewer participants, enhancing their strength, and the recent declines have left their shares trading at 7 or 8 times estimates of next year's earnings, barely half the valuation of the S&P 500. This may not be the best time to buy anything, with a correction gathering force across the market, but these stocks, especially Goldman's, could be solid long-term bargains.