Step Aside Greece: How Gustavo Piga Exposed Europe's Enron In 2001 - Focusing On Italy's Libor MINUS 16.77% Swap; Was "Counterpart N" A Threat To Piga's Life?

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It is not often that one finds smoking gun reports which refute all claims, such as those by EuroStat and Angela Merkel, in which the offended parties plead ignorance of the fiscal inferno raging around them, kindled by lies, deceit, and blatant mutually-endorsed fraud, and instead, now facing themselves in the spotlight of public fury, put the blame solely on related party participants, such as, in a recent case, Greece and Goldman Sachs. Yet a 2001 report prepared by Gustavo Piga, in collaboration with the Council on Foreign Relations and the International Securities Market Association, not only fits that particular smoking gun description, but the report itself was damning enough of another country, a country which used precisely the same off-market swap arrangement to end up with an interest expense of LIBOR minus 16.77% (in essence the counteparty was paying Italy 16.77% of notional each year as a function of the swap mechanics), in that long ago year of 1995. The country - Italy (for confidentiality reasons referred to in the report as Country M), was at the time panned as the Enron of the European Union due to precisely this kind of off-balance sheet arrangement by the Counsel of Foreign Relations. The counterparty bank: unknown (at least in theory, since the swap was highly confidential, and was referred to as Counterpart N), but considering the critical similarities in the structuring of the swap contract to that used by Greece in 2001, and that ISMA cancelled Piga's press conference discussing his findings out of fear for the academic's life, we can easily venture some guesses as to which banks value their recurring counterparty arrangements more than human life.

And only an idiot (here's looking at you, EuroStat) would miss this striking revelation in the ISMA report made almost 10 years ago, envisioning not only Italy but Greece, which joined the euro on January 1, 2001: "Piga has unearthed some rather striking documentary evidence: an actual swap contract, indicating that one EMU entrant (who, owing to an agreement with the source of the documentation, will remain anonymous) used swaps to mislead other EU governments and institutions as to the size of its budget deficit, so as to falsely suggest compliance with the Maastricht Treaty." Once all is said and done, and both the euro and the eurozone are forgotten history, it will be amusing to observe just how prevalent lies and deceit were in the Eurozone, where apparently it was a daily and thoroughly accepted occurrence to lie, both to others and to oneself, about the real state of financial affairs. Oh, and the "US-zone" which is doing precisely the same complete cover up of its true economic state, is certainly not too far behind.

Disclosures made in this report forced the Council on Foreign Relations to make an explicit comparison between Italy and the greatest corporate fraud of the early 2000's: Enron.

The parallel with the Enron transactions is uncanny. Like Enron,
Italy took on debt but chose to represent it as a hedge for a yen bond
it had issued in May 1995, which matured in September 1998.
As with
Enron, the hedge explanation was clearly misleading. If it had been a
hedge, the exchange rate used would simply have been the market rate at
the time the swap transaction was entered into. Off-market rate swaps
were clearly selected for the purpose of producing interest revenue in
1997, with euro entry as the goal.

The Treasury does not deny this. It justifies it, however, using an
explanation that is in part irrelevant and that in part implicates it

The irrelevant part of the explanation is that the Treasury was
concerned that a yen appreciation could increase Italy's debt, thus
jeopardising the country's hopes of entering the eurozone. So the swaps
were structured to protect against its debt rising over the course of
1997. But Italy's debt was 110 per cent of gross domestic product in
1997, well beyond the 60 per cent Maastricht barrier. The European
Union never intended to enforce the debt limitation, only the annual
deficit limitation. Italy's deficit was forecast to be within striking
distance of the 3 per cent barrier and the swaps legally affected only
the deficit. The debt argument is a red herring.

The damning part of the explanation is the admission that Italy was
taking a cash advance in 1997 against an expected foreign exchange
profit in 1998. Under accounting rules, this is simply impermissible.
Borrowers cannot use loans to anticipate capital gains on a bond.

In other words, cooking the public debt books in the EU started not with Greece and Goldman in 2001, but with Italy and Counteparty N in 1995; we are fully confident that many more examples will emerge shortly.

How widespread is this sort of financial chicanery among sovereign
borrowers? It is very difficult to know, since these deals are done
over the counter with no public paper trail. Gustavo Piga, author of
the ISMA/ CFR report, uncovered the Italian transaction quite
accidentally. But there are powerful reasons for concern.

First, governments have clear incentives to cook the books. The EU
continues to impose fiscal expenditure restrictions on eurozone
governments, violation of which can result in censure and fines. The
International Monetary Fund imposes fiscal conditionality on its client
governments, which naturally have a strong incentive to keep the Fund
from closing the money spigot. Derivatives can be used to shuffle cash
flows through time in ways that current accounting rules do not prevent.

Second, banks are only too willing to market derivatives tricks to
their big client governments
, particularly when it puts them at the
front of the queue for future bond issues and privatisations.

Third, if the integrity of government financial data is fatally
undermined, the damage to stock and bond markets will dwarf the "Enron
effect" that has recently pummelled the Dow.

We urge everyone to reread the last sentence as many times as needed, until the truth sinks in.

Before we get into the implications, here are the "revelations" (even though these have been part of the public record for nearly ten years) about Italy, which is now certain to attract everyone's attention as the source of potential near-term eurozone destabilization.

Below we present the critical section from Piga's report, a must read for all those who are still unsure how governments used banks such as Goldman Sachs to create borderline legal, off-balance sheet swaps to hide their debt:

Setting the stage

This sub-section provides a real-world example of how sovereign borrowers can use derivatives to window-dress public accounts as a means of achieving short-term political goals. It is by no means a theoretical example, but a real swap transaction undertaken by one of the sovereign borrowers cited in this book, which now belongs to the European monetary union.

In what follows we will call this sovereign borrower “M”. The author was given a copy of the swap contract by a public officer of M. This officer works in a public institution in charge of approving the accounting of derivative transactions entered into and recorded by sovereign borrower M. The public officer had no understanding of the nature of this contract and honestly believed he was giving the author a copy of a derivative contract that did not present accounting problems. This also indicates how officers in charge of verifying that sovereign borrowers implement proper accounting procedures sometimes lack the technical expertise to fulfill their duties optimally.

The swap transaction, translated into English and reproduced in the Appendix, was undertaken in 1996 by M solely to reduce the level of interest expenditure in years 1997 and 1998 - two critical years for the EMU process - so as to keep the budget deficit-to-GDP ratio within the 3% level required by the Stability and Growth Pact. As this transaction only helped postpone interest expenditure, one of its consequences was to raise unduly the level of interest expenditure in the years after 1998.

Had proper national accounting procedures been in place, this transaction would have been recorded without allowing window-dressing of public accounts in 1997 and 1998 at the expense of public account balances after 1998. We will demonstrate that M undertook such a swap transaction only to window-dress its accounts. To do so, we will first show in sub section 4.2.b that standard derivative contracts to achieve proper debt management goals were disregarded because they would not help in substantially decreasing interest expenditure in the years 1997 and 1998. Sub-section 4.2.c describes the swap transaction entered into by sovereign borrower M, reveals its window dressing nature, and documents its impact on the public accounts of sovereign borrower M.

Standard active debt management with derivatives

In 1995, M issued an international 3-year and 3-month yen-denominated bond maturing in 1998 with a face value of JPY 200 billion and a yearly coupon of 2.3%. This bond was sold at par. The net proceeds for sovereign borrower M were y unis, where the uni is the fictitious name we will give to the currency in M. The exchange rate on the day the bond was issued was 193.44 unis for JPY 1.

That same day, domestic (uni) interest rates for a similar maturity were higher than yen interest rates. By issuing the yen-denominated bond instead of a domestic bond in unis, the debt office would have paid less interest on its yen-denominated liability. However, any appreciation of the yen over the life of the bond, if realized, would have made yen-denominated payments more expensive once converted into unis. At issuance (barring superior knowledge on the part of sovereign borrower M as to future movements in the yen/uni exchange rate), issuing in yen or in unis would have looked equally costly to sovereign borrower M. Nevertheless sovereign borrower M decided to issue this yen-denominated bond rather than a domestic uni-denominated bond over the 3-year and 3-month maturity. It is likely that sovereign borrower M issued the yen-denominated bond primarily to achieve greater diversification of its bond portfolio.

In 1996, almost one year and six months after the issuance of the yen-denominated bond, the yen had instead substantially depreciated against the uni. The yen traded at 134.1 unis per yen. The yen-denominated bond had at that date a remaining life to maturity of approximately one year and nine months. Had the yen continued to trade at such low levels compared to those of 1995, the debt office in M would definitely have gained from having issued in 1995 in yen rather than in unis. However, at the date when the yen was trading at 134.1 unis per yen, the debt office in M was still exposed to exchange rate changes in the remaining one-year-and-nine-month’s life of the yen-denominated bond. Had the yen substantially appreciated in that remaining period, M’s debt office would have lost some or all of the earlier gains obtained through the initial depreciation of the yen.

It is at this point that active debt management through derivatives could have been used effectively to achieve a specific goal. Imagine that in 1996 when the yen-denominated bond had a one-year and nine-month residual life to maturity, the sovereign borrower M had entered into a standard oneyear and nine-month JPY 200 billion notional amount cross-currency swap. Such a theoretical standard cross-currency swap would have matured in 1998, on the same date the yen-denominated bond matured.

At maturity, the theoretical currency swap would have required M to pay an amount of unis equal to JPY 200 billion multiplied by the market exchange rate on the day the swap was transacted, 134.1 unis for one yen. In exchange, always at maturity, M would have received JPY 200 billion from its counterpart.

During the life of this theoretical cross currency swap, sovereign borrower M would have paid a short-term floating rate in unis to its counterpart while receiving a yen-denominated fixed swap rate. In 1996 the one-year and nine month yen swap-market rate was approximately 0.75%. To be perfectly hedged against exchange rate risk, sovereign borrower M would have received a 2.3% yen fixed rate, or a fixed payment 155 basis points higher, rather than the swap-market rate equal to 0.75%. In exchange for these extra fixed payments, M’s counterpart would clearly have asked to receive from M larger amounts on the floating-rate leg of the swap. M would have thus paid to its counterpart the uni’s Libor rate plus 155 basis points on a uni-notional amount of JPY 200 billion multiplied by the market exchange rate between the yen and the uni (134.1 unis per yen). Figure 4.1 illustrates this theoretical transaction.

After this theoretical transaction, by eliminating currency risk and turning a yendenominated liability at a low value of the yen into a uni-denominated liability, sovereign borrower M would have locked-in a capital gain by having issued, in 1995, in yen rather than in unis. What matters for our purposes is to show that this gain would have, by and large, not affected interest expenditure in 1997 and 1998, but only affected it from 1999 onwards. In this case, the theoretical transaction we are describing would have proved useless in reducing the budget deficit in 1997 and 1998. Where would the savings arising from this theoretical swap have appeared in the budget of M? Recall that after the theoretical cross-currency swap illustrated in Figure. 4.1, M’s liability would have become a synthetic uni-Libor liability on a notional amount in unis (JPY 200 billion converted at the market exchange rate of 134.1 unis for JPY 1). The lower the yen exchange rate established in the swap contract, the lower this liability would have been. M would therefore have had, through this theoretical currency swap, a lower net cash outflow at maturity than the one it would have had by issuing a domestic  uni-denominated bond in 1995.

Such lower cash outflow due to a lower reimbursement of principal would not have affected the interest expenditure of sovereign borrower M in the years when the crosscurrency swap would have been outstanding (i.e., 1996 to 1998). Instead, it would have decreased the public sector borrowing requirement of M in 1998, when the bond and the swap would have expired. Such a lower public sector borrowing requirement in 1998 would have implied a lower public debt in M in 1998, compared to the level of public debt that M would have had to roll over had it instead issued in unis in 1995. In turn, this lower public debt would have implied lower interest expenditure and lower deficits only from 1999 onwards.

Enter "Counterpart N" or, allegedly, Goldman Sachs

Using derivatives to window-dress public accounts

Had sovereign borrower M wanted to eliminate currency risk due to the issuance of a yen-denominated bond it could have made use of the standard cross-currency swap illustrated in Figure 4.1. By doing so, it would have also locked-in a substantial capital gain due to the yen depreciation that had occurred since the issuance of the yen-denominated bond.

However, such a transaction would have had an impact on M’s interest expenditure only after 1998. We showed in the previous sub-section that such a standard cross-currency swap would have allowed the sovereign borrower to decrease the value of public debt in 1998 and, therefore, to accrue savings in interest expenditure only after 1998.

However, countries like M aiming at entering into the euro area during the period considered were not concerned with the reduction of debt. Rather, they were pressed to limit interest expenditure, especially for 1997, so as to contain the value of the budget deficit. Perhaps political pressure was formidable on debt managers in M, which would have been hard to resist. Whatever the reason, M’s debt office did not enter into a standard cross-currency swap as described in the previous section. Instead, it implemented, through a complicated cross-currency swap, a scheme that transferred the gains described in the previous sub-section to the fiscal years 1997 and 1998. By so doing, M’s debt office lowered interest expenditure in those two years and raised interest expenditure in the years after 1998. It did so by taking advantage of a lack of expertise on the part of officials in charge of monitoring the accounting of such operations.

The cross-currency swap which sovereign borrower M transacted with counterpart “N” (a large market maker in the derivative market) was entered into in 1996 for one year and nine months and matured in 1998. This swap matured on the same day when the yen-denominated bond issued in 1995 expired. In this real swap transaction, counterpart N paid in 1997 and in 1998 a 2.3% yearly fixed interest on a JPY 200 billion notional to M, the sovereign borrower. Also in 1998, when the swap matured, N paid an amount of JPY 200 billion to its counterpart M. Notice that in this way, starting from the day the swap was negotiated, the debt manager in M was perfectly hedged on its original yen-denominated bond liability, just as the debt manager would have been with a standard cross-currency swap transaction (see Figure 4.1).

However the similarities with the previously described standard cross-currency swap contract end here. Indeed, the exchange rate used in the contract (on which the notional amount in unis of M’s paying leg of the swap was set) was not the exchange rate prevailing in the market the day the swap was transacted, 134.1 unis per yen. Rather, the exchange rate used was 193.44 unis per yen, a much higher level than the market level. This implied that at maturity sovereign borrower M paid to counterpart N a much larger amount, 38.668 trillion unis (200 times 193.44 billion), than what it would have paid in a regular cross-currency swap entered into at the market exchange rate.

Finally, the currency swap contract required sovereign borrower M to pay, semiannually starting in 1997, on a uni-notional amount of JPY 200 billion times the 193.44 agreed exchange rate, the uni’s Libor rate minus 1,677 basis points (16.77%). The transaction is synthesized in Figure 4.2 (below).

Sovereign borrowers like M could borrow, at the time when the transaction took place, at levels around Libor with no spread added. It is, therefore, very puzzling that in this case it borrowed at Libor minus 1,677 basis points, which implies a negative interest rate. Sovereign borrower M was therefore going to receive interest payments on both legs of the swap until maturity. Why did it enter into such a strange transaction?

By entering into a cross-currency swap at a higher yen exchange rate (193.44 unis per yen) than the one it could have fixed on the same day (the market exchange rate of 134.1 unis per yen) sovereign borrower M did in fact romise to pay to counterpart N at maturity a much larger amount of unis than it would have done had the swap been transacted at the market exchange rate. Actually, sovereign borrower M paid at maturity approximately 200 multiplied by (193.44-134.1) unis more that it would have paid under a standard cross currency swap.

Sovereign borrower M, in exchange for these extra cash outflows, received from N a series of extra cash inflows during the life of the swap. These cash inflows would not have been part of a standard cross-currency swap transaction. Indeed, counterpart N, instead of receiving uni-Libor rate plus 155 basis points from sovereign borrower M on the floating leg of the swap (as it would have in a standard transaction, see Figure 4.1), received a uni-Libor rate minus 1,688 basis points. This implies that counterpart N paid to sovereign borrower M, in four regular installments every six months starting from 1997 and until the maturity of the swap in 1998, approximately 1,843 basis points per annum more than what it would have had in a standard cross-currency swap transaction.

De facto, the sovereign borrower received four loans from counterpart N, every six months from 1997 to 1998. These loans were paid back at maturity in 1998 by disbursing a greater amount than would have been disbursed had the currency swap been constructed in a standard way.

It is a clever transaction that is initially difficult to comprehend and which hides a simple principle: advancing future cash flows to the present. The transaction in Figure 4.2 had nothing to do with hedging the currency risk in the cash flows related to the underlying yen-denominated liability. Nor did it have anything to do with locking-in with certainty the capital gain that derived from the yen depreciation. These goals could have easily been achieved with a standard cross-currency swap, such as the one shown in Figure 4.1. Rather, the type of transaction that sovereign borrower M entered into allowed the debt management office to receive in advance cash flows that were supposed to be received only in the distant future. The accounting for these cash flows was then implemented as if these represented reductions in interest payments. This accounting choice hid the true nature of the cash inflows, the one of a liability that should impact on the public debt rather than on the budget deficit.

As for the regulatory chaos endorsing or preventing such schemes, here is what Piga had to say about that:

In country A, the author was told: “Maastricht has no exact rule on this, and we would like a rule on it. In A, politicians do not know about these rules, but for us it is scary; if they knew about it they would press for these deals.” In country B, the author was told: “I would love the guidelines to prohibit up-front payments so as to remove any temptation.” In country C, the author was told: “We have a self-imposed, ethical unwritten rule not to use up-front payments. However, we would not like to bring it to the attention of politicians by asking to insert it into the guidelines: That would give them an incentive to put political pressures on us.” When the author asked a debt manager in country C whether politicians would notice such a change in the rules, she said: “Oh yes, they are very careful about these things.” Asked why the politicians would not exert pressure now, if they are so careful, the debt manager did not give an answer. It should be pointed out that not all of these debt managers were in state treasuries. ‘Independent’ agencies are also under pressure from politicians, albeit to a lesser extent. It is worth noting that these political pressures might be particularly intense also on the issue of when to terminate a contract, as positive value transactions would help the budget in a given year in almost all countries.

As to Goldman's culpability, aside from fears of retaliation against all those who report the truth, it seems the "Counterpart N" liability is limited. Goldman did not do anything that was not endorsed and allowed explicitly by host domiciles that benefited explicitly from masking their interest rates as they were entering the EMU. Yet the issue does not end there: when one grasps the extent and severity of such swap transactions, one realizes the massive opportunity for conflict of interest, of mutual blackmail, of the desire for secrecy, and of counterparty risk, which is why Goldman is and has always been the preferred party of interest - just how many other such deals is Goldman on the hook for? Were Hank Paulson to have allowed Goldman to implode, it is likely that most if not all European governments, which one guesses currently have numerous other comparable secret arrangements with "Counterpart N", would have all suffered massive and irreparable losses on existing swap arrangements. This is merely yet another way in which the Federal Reserve-Goldman Sachs complex bailed out the world, however this time using the threat of the unravelling of completely confidential swap arrangements, which were known to at most several high level bureaucrats, and of course Lloyd Blankfein (and Hank Paulson, and Jon Corzine prior).

The author did not expect to be told the whole truth, but hoped to acquire some understanding of the decision-making process in these cases. Two things were learned. First, market makers consult with their legal office, since ignorance of the reason for the sovereign’s request is not legally excusable. Second, while explaining the transaction to the sovereign, the market maker makes sure that all possible risks are presented to the government before signing the deal, so that the government cannot blame the market maker. Interestingly, a market maker told the author that the strategy outlined here is something the industry learned after Merrill Lynch and the Belgian government were engulfed in a conflict that turned out unfavorably for Merrill Lynch. Governments are large and powerful actors, and every precaution has to be taken by market makers to avoid a legal challenge: “My advice to a firm,” one market maker told the author, “is never present a positioning strategy as a hedged strategy. Define which asset you want to hedge against and, if it is a positioning strategy, always show the downside.” The same market maker said: “As for the ethics within our firm, we do look at it very seriously. We do try to see the client’s intention as well. If we do see a window-dressing intention, we discuss it at the highest level, with the chairman. I remember one case when we said no.” Why does this window-dressing per se constitute a reason to halt derivative operations? Governments and market makers (especially the large ones that dominate the derivative market) have a special kind of relationship that is ongoing and often wideranging, including privatizations, syndicated loans, securitizations, asset and liability management, risk management advice and software provision. If a market maker has provided a government with window-dressing advice, window-dressing operations or other inappropriate transactions, it links itself in a tight embrace with the sovereign. Both know something about the counterpart that might hurt them if this activity were to be made public. While it is obvious that it is in their mutual interest not to go on record about such activities, there is also the possibility that one of the two parties might be able to exert undue pressure on the other in future transactions. A market maker might obtain a privatization mandate that it would otherwise not have deserved, possibly damaging the taxpayer or the consumer. A government official might obtain additional advantages, either personal or for the office itself. Keep in mind that such a possibility was not deemed as being so farfetched as to prevent its consideration in the IMF and World Bank guidelines: “Staff involved in debt management should be subject to code-of-conduct and conflict-of-interest guidelines regarding the management of their personal financial affairs. This will help to allay concerns that staff’s personal financial interests may undermine sound debt management practices.”

More generally, concern might arise in counterpart risk management with those counterparts that have a ‘special relationship’ with debt managers for the wrong reasons. We have seen that credit-line ceilings often do not automatically lead to the reduction of exposure to the required level even under normal conditions. How easy would it be to reduce the exposure of a counterpart that has knowledge of a possible improper handling of contracts for accounting purposes by the sovereign borrower? Demonstrating their extreme candor, Danish authorities have underlined the risks of one-to-one relationships in their comprehensive 1998 annual report in a passage on credit-risk management that is worth quoting: “Since the [Danish] central government began to use swaps in debt management in 1983 it has not suffered any loss owing to counterparty default. Certain counterparties used by the central government have faced very serious economic problems, however. A few have ceased to exist or could only continue with the support of public funds or after being acquired by a competitor,” [emphasis added]. In other circumstances it might be tempting to establish a connection between public support for a failing counterpart and its special relationship with the government.

Nearly 8 years before the world was about to end following Lehman's bankruptcy, Piga classified precisely the moral hazard associated with Goldman's too big to fail status, courtesy of the Enron-style accounting treatment that made Goldman an inexorable link at the heart of the viability of the Euro and the European Union. Was Goldman kept alive just to make sure the eurozone did not collapse? We sincerely hope Congressmen and Senators ask Mr. Blankfein this question at the next possible opportunity. And if not that, perhaps it should finally be made public just how many such deals Goldman has underwritten over the past 20 years, what the full masking impact to domestic economies has been as a result, and how many of these deals are currently still outstanding?

As to the next logical question: how many such deals exist, Piga provides the following table of swaps outstanding shortly before the time of the paper's publication, or ~2000.

Following up on this same question, Euromoney made the following observation back when in 2001:

Italy's public debt was around 110% of GDP in 1997 - way over the 60% outlined by Maastricht. As it was so far over the limit, Italy was unlikely to worry about the negligible effect of a foreign exchange loss. Even a large appreciation of the yen was unlikely to have a significant impact on Italy's chances of joining the eurozone. However, the cash advance from the negative interest rate on the swap would have made some difference on  the budget deficit, which stood at 3.2% in 1997. All the political emphasis in the run-up to joining the single currency was on Italy meeting the deficit criteria and showing a move towards reducing its debt. In the end, it failed to do this - the country's debt grew to 120% of GDP in 1999, without causing Italy too many problems with the EU. But it did manage to reduce its deficit to meet the 3% target, though only just, with three months to spare, and this could have meant the difference between being able to join the eurozone or, like Greece, being forced to wait.

In 1997, when Italy's prime minister, Romano Prodi, was canvassing for Italy to be a founder member of the EMU charter, he pointed to the fall in budget deficit, where Italy was one of the stronger of the tested countries. This strengthened Prodi's hand enormously against Germany, which had doubts about Italy's ability to meet the criteria. Indeed, Germany itself had some difficulty in meeting the 3% deficit target.  Back in 1998, several countries' public debt was over the 60% mark - Austria's was 65% of GDP, Sweden's was 75%, Italy's was 121.9% and Belgium's was 121.3%. Greece, the only country to be refused entry to the eurozone in 1998, had a public debt ratio of 106.4%. The reason it was refused, while Belgium and Italy were allowed to join, was that it had a deficit of 4.2%, while those of Italy and Belgium were under the deficit target.

The stunning revelation: Goldman would come to the rescue again and again, likely extracting many pounds of flesh to wave its magice wand and allow countries to not only enter the EU, but to subsequently mooch billions of dollars off of its various structural funds. Without Goldman's assistance Italy would not have been let into the eurozone. And Goldman did some critical window dressing not just Italy and Greece, but very likely most of Europe! We, for one, can't wait for disclosure of all the heretofore confidential swap agreements underwritten by Goldman.

If Greece and Italy are any indication, it only took a phone call by any of these governments to former Goldman CEOs Jon Corzine (latter part of 90's) and Hank Paulson (Goldman CEO until 2006), to arrange the same kind of non-standard, off-market swaps as has now been evidenced were used by both Greece and Italy. After all, keep in mind, the whole purposes of these "Goldman" swaps is to merely reduce public debt interest payment to align with EU and EMU artificially low fiscal requirements, at the expense of debt notional, which is not as constrictive an economic barrier according to Maastricht and other supervisory requirements. When the truth finally comes out that all of Europe's finances over the past 10 years have been a sham, covered up and facilitated very legally by Goldman Sachs, the Euro was collapse under the weight of the decade of lies that have made it seem that the eurozone is an economically viable construct.

As for Mr. Piga's report, on second thought we may have been too harsh on EuroStat. In 2001, Euromoney reported that:

ISMA was concerned enough to cancel a press conference with Gustavo Piga, the author of the report, because it said his safety was not certain.

It is thus very likely that most if not all may have missed it. After all, it was caught by just a few publications at the time, the CFR, which went so far as to claim Italy is Europe's Enron, being, of course, one of them. Yet inquiring minds would be very curious to uncover whether the danger to Mr. Piga's life came from representatives of Country M or Countepart N. If in the distant 2001 disclosure of facts about shady involvements of countries such as Italy and their counterparties such as Goldman Sachs, raised the specter of a threat on a person's life, we dread to imagine just how much other recent facts have been "silenced" over the past 2 years.

Link for absolutely must read, and completely public for the past 8 years report from Gustavo Piga and ISMA.

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Anonymous's picture

wow - zerohedge might consider itself a walking deadblog (a threat to the entire internet) if this type of overzealous research keeps turning up.

Harbourcity's picture

Hopefully they don't use Microsoft Windows.



Anonymous's picture

Maybe Tyler will sustain a fatal accident within the near future.

Anonymous's picture

That would have repercussions.

Harbourcity's picture

I take offense at the repeated accusations of Goldman Sachs shady deals - didn't you hear Obama?  These are smart guys, they deserve their bonuses.


john_connor's picture

Awesome article.  Thanks.

"This implied that at maturity sovereign borrower M paid to counterpart N a much larger amount, 38.668 trillion unis (200 times 193.44 billion), than what it would have paid in a regular cross-currency swap entered into at the market exchange rate.

Finally, the currency swap contract required sovereign borrower M to pay, semiannually starting in 1997, on a uni-notional amount of JPY 200 billion times the 193.44 agreed exchange rate, the uni’s Libor rate minus 1,677 basis points (16.77%)."

So counterparty N (presumably Goldman) gave Sovereign M additional cash flow during the years leading up to Euro zone treaty and then got a gangster like payout (relative to market exchange rates) on the swap after the treaty was enacted.

ROTFL LMAO.  Just a complicated way of pulling synthetic positive cash flow forward, out of thin air.

And this:

"In other circumstances it might be tempting to establish a connection between public support for a failing counterpart and its special relationship with the government."

Yeah, no sh!t.  And also add another counterparty (AIG) to insure against catastrophic loss suffered by counterparty N.  The tertiary counterparty would also be covered by Sovereign A, the biggest sovereign of all, on the backs of unwitting taxpayers.

What a phuckin' joke!

Tick Tock, Tick Tock.

As an extension to the above, how many of these types of transactions have occured after the EuroZone was created, especially in the last decade, allowing the Euro to appear stronger than it actually is, and thus allowing for a stealth devaluation of the dollar.

Anonymous's picture

I wonder who that counterparty N was. I was hoping to find out by the end of the article. The article seems to automatically switch from counterpart N to Goldman, only because of the greece fiasco and not any evidence from the article.

"goldman" swaps. I think thats the new name for that try of swap.

tom a taxpayer's picture

At first, I thought the N counterparty would be "Ndrangheta" (Calabrian Mafia). However, I am now leaning towards Goldman Sachs.

What is the difference between "Ndrangheta" (Calabrian Mafia) and Goldman Sachs?

The national government of Italy  denies support of "Ndrangheta" (Calabrian Mafia).

The national government of U.S. openly supports of Goldman Sachs.

Anonymous's picture

it is noteworthy that Gustavo still lives and is not too worried about keeping what he "discovered" to himself. IDEA - perhaps Gustavo revealed and is still revealing what he is told to reveal?

CombustibleAssets's picture

Gustovo is "protected" by counterparties.

Anonymous's picture

ZeroHedge - I will have to ask you to stop posting all these awesome findings. I leaves very little time for a social life.

Joking aside, awesome find guys. Keep up the great work.

DoChenRollingBearing's picture

When I started reading the article, I too was curious about Counterpart N...

Anonymous's picture

I hope when this thing blows up it leads to riots

35Pete's picture

God I hope not. Bro, we don't want riots. Trust me. 

Anonymous's picture

On the other hand, I want riots.

CombustibleAssets's picture

It's hard to profit from anarchy.

jeff montanye's picture

it is hard to profit during anarchy.

Anonymous's picture

No riots, riots are good for making the state criminals look like the good guys.
People should make their voices heard, take these criminals of their posts, replace them, expose their dirt, have them encarcerated until they reveal all they know.

Crab Cake's picture

Goldman Sachs, the Council on Foreign Relations....grrrr....

I'm near my breaking point.  America's middle class is being liquidated.  They are dumping misery and impoverishment on billions of people, and it's not because there aren't enough resources, it's because TPTB want more.  They want more power more money, MORE, MORE, and MORE.

The Fed, the corrupted Republicans and Democrats, the ratings agencies, the aristocrats who run the huge corporations, the bankers, the CFR, the Bilderberger group, the Trilateral commission....


Somebody please, line these people up and pull the trigger.  What is it going to take for the good people of this country to say no more, and stop believing the lies.  Do we really have to go Joe Stack on them?  Do we really have to fire bomb their homes?  Must we stom the Fed offices and execute everyone in sight? 

Can this not be done peacefully?

I feel physically sick.  I feel so trapped.  I'm damned if I continue to play along as the oligarchs squeeze my generation and my kids generation into dust.  I'm damned if I go to war and leave my family stranded without a father.  WTF?! 

Can we not just stand as one, and say no more?  That's all it would take.  We just stop working, stop investing, stop spending, and stop paying taxes.  If we do this together, they will have no recourse but to bow to our demands.

I have to turn the computer off for awhile...

MsCreant's picture

I'm feeling it too Crabcake. For those of us who have given ourselves permission to delve into these issues, it is really painful. You could give a fuck about someone else saying you are not alone, I am in exactly the same place you are, but hey, you aren't and I am.

I have not read this particular piece yet, because I know I'm peeking down another Rabbit hole and I am asking myself "What do I need to get done today before I do this to myself." I can tell from the comments I am going to wait until this evening and a glass of wine.

I wish I had the guts to not pay my taxes. If my brothers and sisters were doing this all over the country, I'd join.

Our problem is we want to follow the rules. They don't. We need to find a way to enforce the rules that exist, and I actually think we would be okay enough.

Okay... I've fucking got it.


This shit storm is driven by money, it will take money to motivate some real COPS to move on these fraudsters.

If I really thought it would work, I'd donate a lot of money (for me any way) to it.


Prosecutions, Bitches.


Lndmvr's picture

Maybe it starts with " An army of one?"

assumptionblindness's picture

Where are the whistleblowers?  Oh, I know where they are.  They're giving Mr. Hoffa some company.  

It's pretty obvious that there aren't any cops on this beat, only criminals.

tip e. canoe's picture

Where are the whistleblowers? 

serving 40 months at FCI Schuylkill

(or afraid to join him)

Anonymous's picture

Talk about Wall St/Washington corruption. They are sending a clear message to whistle blowers everywhere, AIG, GS, FED, Treasury etc, etc.

Shame on America.

geopol's picture

Discuss this if you will,,

On Tuesday Feb. 23, Iran announced the capture of Abdulmalek Rigi, the boss of the terror organization Jundullah, which works for NATO. The capture of Rigi represents a serious setback for the US-UK strategy of using false flag state-sponsored terrorism against Iran and Pakistan, and ultimately to sabotage China’s geopolitics of oil. The Iranians claim to have captured Rigi all by themselves, but the Pakistani ambassador to Teheran is quoted in The Dawn as claiming an important role for Pakistan. The Iranians say that Rigi was attempting to fly from Dubai to Kyrgystan, and that his plane was forced to land in Iran by Iranian interceptors. This exploit recalls Oliver North’s 1985 intercept of the accused Achille Lauro perpetrators, including Abu Abbas, forcing their Egyptian plane to land at Sigonella, Sicily. But other and perhaps more realistic versions suggest that Iran was tipped off by the Pakistanis, or even that Rigi was captured by Pakistan and delivered to the Iranians.

Jundullah, otherwise known as the Rigi organization, is a clan-based Mafia organization that has long infested the Iran-Pakistan border. The Rigis are traditionally smugglers and drug pushers of royalist persuasion, and now they have branched out into terrorism. Jundullah is mounting a Sunni rebellion against the Shiite Iranian regime in Iranian Baluchistan. They have blown up a Shiite mosque, killing 25, and managed to kill 50 in a bombing in Pishin last October, where their victims included some top commanders of Iran’s Revolutionary Guard, against which Mrs. Clinton has now declared war. There is no doubt that Jundullah is on the US payroll. This fact has been confirmed by Brian Ross of ABC News, the London Daily Telegraph, and by Seymour Hersh in the New Yorker. Hersh noted that Jundullah has received some of the $400 million appropriated by the US Congress in the most recent Bush-era regime change legislation targeting Iran.

Jundullah is a key part of the US-UK strategy of fomenting ethnic and religious civil war in both Iran and Pakistan. Jundullah is a twofer in this context, since it can help destabilize both sides of the Iran-Pakistan border. Baluchistan has special importance because any oil pipeline linking Iran with China must go straight across Baluchistan. Jundullah’s false flag jihad is a means to make sure that strategic pipeline, which would help solve China’s energy problem, is never built.

There is also no doubt that Jundullah functions as an arm of NATO, a kind of irregular warfare asset similar in some ways to the KLA of Kosovo. Rigi is reported by the Iranians to have met with Jop de Hoop Scheffer when he was NATO Secretary General. Rigi has also met with various NATO generals operating in Afghanistan. Who knows — he may have met with McChrystal himself, a covert ops veteran from Iraq.

This capture comes at a moment when Baluchistan is the object of intense US-UK exertions. The current US-NATO offensive in southern Afghanistan targets Marjah and the rest of Helmand province, which directly faces Baluchistan. Many observers were puzzled when the US and NATO publicized the Marjah offensive in advance. Militarist talking heads like General Barry McCaffrey responded that the main goal of the Marjah offensive was not to destroy the Taliban, but to drive them out of the province. It was thus clear from the beginning that the real goal was to drive the Helmand Taliban fighters into Pakistani Baluchistan. Why?

A statement from the Afghan Taliban covered on the RIA Novosti web site suggests that the real goal of the US-NATO offensive in Marjah-Helmand is to attack Chinese economic interests in Pakistani Baluchistan, and especially the port of Gwadar, one of China’s largest overseas projects. If the US can push the Taliban into Pakistani Baluchistan and into the area around Gwadar, they will have a pretext for militarization – perhaps through Blackwater mercenaries, who are already operating massively in Pakistan, or perhaps through direct US military involvement in the zone. US jackboots on the ground in Baluchistan would interfere mightily with Chinese economic development plans. They would also allow the US to commandeer Gwadar as the home port of a new NATO supply line into southern Afghanistan, allowing the avoidance of the Khyber Pass bottleneck. The US could also use Baluchistan as a springboard for bigger and better terror ops into Iran, electronic surveillance of Iranian activities, and so forth.

The US and NATO had evidently planned a double envelopment of Baluchistan, with Taliban fighters from Helmand arriving from the north, while the Jundullah escalated their own activity on the ground. Now that Rigi has joined his brother in Iranian jails, Jundullah has been decapitated, and the NATO strategy has consequently been undermined. Iran has bagged a dangerous terrorist foe. Another winner is Pakistan, where The Dawn celebrated the capture of Rigi as “a godsend” and “a lucky break” for Pakistan. By helping Rigi to fall into Iranian hands, Pakistan may have finally found an effective way to counter the US-UK strategy, which notoriously aims at the breakup and partition of Pakistan. The coming Iranian trial of Rigi may go far towards exposing the real mechanism of terrorism in today’s world, with the CIA sitting in the dock next to Rigi.

Is America what you think it is?????

JR's picture

Tonight, geopol, you have posted the kind of report that qualifies as protection of our liberties, that will not be seen in the main stream media, and is the perfect example of why new media is taking the place of the media monopoly and its five corporate owners; this is the type of analysis that is essential to the survival of the American system. 

geopol's picture

Just another data point not worth noting by the MSM....


The Detroit Christmas bomber was deliberately and intentionally allowed to keep his US entry visa as the result of a national security override issued by an as yet unknown US intelligence or law-enforcement agency with the goal of blocking the State Department’s planned revocation of that visa. This is the result of hearings held on January 27 before the House Homeland Security Committee, and in particular of the testimony of Patrick F. Kennedy, Undersecretary of State for Management. The rickety US government official version of the December 25 Detroit underwear bomber incident, which has been jerry-built over the past month and a half, has now totally collapsed, and key elements of the terrorism-spawning rogue network inside US agencies and departments are unusually vulnerable to a determined campaign of exposure.

These developments decisively confirm the analysis offered by the present writer in a Dec. 28, 2009 television interview on Russia Today.1 On that occasion, my estimate was that Mutallab was a protected patsy being used by rogue elements of the US intelligence community for the deliberate and intentional creation of a high profile incident with the goal of obtaining a large-scale political effect. On January 4, Richard Wolffe reported on the MSNBC Countdown program that the Obama White House was investigating whether the Detroit Christmas incident had been “intentionally” created by an intelligence network with an “alternative agenda.”2 It was in this report that Wolffe posed the alternative of “cock-up or conspiracy.”3 Unfortunately, Obama opted for the screw-up version on January 5.

Based on what was already known a few days after this incident, it was clear that normal screening and surveillance procedures had been scrapped and aborted in order to allow the youthful patsy Umar Farouk Abdulmutallab of Nigeria to board his flight from Amsterdam in the Netherlands to Detroit. Mutallab’s father, a rich, well known, and reputable Nigerian banker had gone to the US Embassy in his country and formally warned a State Department official as well as a CIA representative that his son was in Yemen and in all probability consorting with terrorists. Under normal circumstances, this report alone would have been more than enough to get Mutallab’s US visa revoked in the same way he had already been denied entry to Great Britain. He also would normally have been placed on the no-fly list, thus setting up two insuperable obstacles to getting on his Detroit bound flight and winging off to produce an incident which caused several weeks of public hysteria in this country, completely with demands for body scanners in airports. In addition, the US intelligence community had reports that a Nigerian was training with the purported “Al Qaeda in the Arabian Peninsula” in Yemen. Obama had called a December 22 meeting with top CIA, FBI, and DHS officials because of reports of a terrorist attack looming during the Christmas holiday.

The January 27 hearings of the House Homeland Security Committee were also addressed by Michael Leiter, the AWOL Director of the National Counterterrorism Center, along with Jane Holl Lute, the Deputy Secretary of Homeland Security, who was sent in place of HHS Secretary Janet Napolitano, who boycotted the hearings. But the important testimony came from Kennedy, whose responsibilities include Consular Services, and therefore visas. In his opening statement, Kennedy offered a tortured circumlocution to describe what had happened. Attempting to head off the question of why the State Department had not revoked Mutallab’s visa, Kennedy stated: Continue reading State Department Admits: Detroit Christmas Bomber Was Deliberately Allowed to Keep US Entry Visa, Board His Flight

Hephasteus's picture

I hope they make this all crystal clear. So the american people can think twice about cooperating with our home grown psychopaths.

jeff montanye's picture

so true, so true.  wish we would have followed general marshall's advice to truman.

Anonymous's picture

Ummmm. I remember back when this was a blog people were stating that "airport security is unnecessary, its all a false flag"...

So, what is it? False flag, conspiracy, or govt failure?

Looks like you chose 'conspiracy'. After the fact.

If only we all had the anger and hindsight you do.

Or not, cause if there were no irrational anger this website would be dead.

Your move.

geopol's picture


My post,,,Historically

Nothing after the fact..Enjoy

The case of Umar Farouk Abdulmutallab is not a matter of unconnected dots, but rather that of a protected patsy or puppet deliberately used by the US intelligence community for a Christmas Day provocation designed to facilitate US meddling in the civil war in Yemen, which is where Umar Farouk allegedly trained and was given his PETN device. Banker's son Umar Farouk had been denied an entrance visa to Great Britain and had been denounced to the US Embassy in Lagos, Nigeria as a possible terrorist by his own father in mid-November. His one-way ticket to Detroit was bought in Ghana for $2800 in cash, and he reportedly entered Nigeria illegally. In Amsterdam, he was assisted at the Northwest Airlines gate by a "well-dressed Indian" who explained that Umar Farouk had no passport. He did have PETN, the same substance supposedly used by the mentally impaired shoe bomber Richard Reid in his abortive attack of eight years ago. In spite of all this, Umar Farouk's US entry visa was never revoked, he never made it onto the no-fly list, and he was never thoroughly searched. These egregious lapses in normal procedure show that Umar Farouk was part of an orchestration sponsored by the CIA, which has now yielded 4 solid days of media hysteria. Obama has formulated his new version of the Axis of Evil, composed of Afghanistan-Pakistan, Somalia, and Yemen. In Yemen, a civil war pits the Saudi-backed central government against the Iranian-backed Shiite Houthi rebels, whom the US has bombed at least twice this month. The goal here is to play Iran against Saudi Arabia so as to weaken both the pro-Moscow Achmadinejad government in Iran, and also those Saudi forces that are fed up with their status as a US protectorate. The US is openly now sponsoring a regroupment of "al Qaeda" (the CIA Moslem legion) in Yemen, including by sending fighters direct from Guantanamo. The new CIA-promoted entity synthetic entity is "Al Qaeda on the Arabian Peninsula" or AQAP, a gaggle of US patsies, dupes, and fanatics which is claiming credit for the Umar Farouk incident. The US hopes to further dominate the exit from the Red Sea and the Suez Canal, while also easing pressure on the battered US dollar by jacking up the price of oil in an atmosphere of tension on the Arabian peninsula.

Anonymous's picture

Yes! awesome, can I call you a 'neo-truther'?

geopol's picture

The fact the you understand it, is enough for me....




Anonymous's picture

Wow, double great stories and insights, and they help illustrate what a small play the thermate used to implode the steel framed buildings was for men of such cunning.

macfly's picture

Wow, terrifying, and so sad. We really are the evil empire. Helps me better understand the callous use of thermate to implode three steel framed sky scrapers.

delacroix's picture

the one way ticket factoid, has been refuted.

Anonymous's picture

Yes, pretty much....except the guff about "cutting off China's oil". Recall that the Iraq war was, according to the the Left, "about oil" too. Not. About the security of Israel, as events have proved. Ditto the de-stabilization and eventual ZOG war on Iran.

geopol's picture

For her Jan. 29 speech at the Ecole Militaire in Paris, Mrs. Clinton was evidently wearing that stylish new French perfume from the House of Sarkozy called Chantage – meaning blackmail. Mrs. Clinton gloats because she thinks she has the Chinese leadership in a bind. As she stated, she knows that China increasingly depends on oil from the Gulf. She demanded that China vote for crippling sanctions against Iran in the UN Security Council this month, while Sarkozy — the craziest of all western leaders against Iran — controls the presidency of that body. For China, approving crippling sanctions against Iran means in all probability the loss of 10% to 12% of its oil imports, the aborting of some $80 billion in development projects by Beijing in Iran, the sacrifice of hundreds of billions of dollars worth of oil which the Chinese have locked in via futures contracts, and, above all, a farewell to the best chance of getting a secure overland oil pipeline far away from the US-UK fleets — the pipeline from Iran via Pakistan into China.
If the Chinese fail to captitulate on this point, Mrs. Clinton darkly hinted, the US would no longer restrain the Israelis, who might then launch their long-threatened air attack on Iran, which the US has emphatically vetoed over the past two years. At that point, the Iranians would try to interdict Gulf maritime traffic and close the strait of Hormuz, meaning that about a third of China’s oil could be cut off. (The other 20% comes from Saudi Arabia.)
The US-UK elite is in a state of collective hysteria about the growth of Chinese economic power. China is now the largest exporter in the world, and officially about to become the second largest economy, passing Japan to challenge the US.
The US is way behind China in fast rail, and will soon fall behind in modern nuclear energy production. China is clearly aiming to put astronauts on the moon, but the Obama-Orszag NASA budget makes clear that the US is going nowhere when it comes to manned space flight. If US elites really want to keep pace, they should put aside their feckless attempts to contain China by subversion, economic warfare, and fomenting conflicts in the Guif and on the India-China border. Match the Chinese programs in nuclear reactors, fast rail, and manned space flight, or prepare for the status of has-been.
But for right now, the Iran attack scenario, which had been pushed to the back burner by the US National Intelligence Estimate of December 2007 — which stated that there was no Iranian nuclear weapons program — is once again operational, this time as a means at striking at China’s oil supply.

macfly's picture

Oh hell, they're going to play the war card aren't they?


It is the only way they'll unite a widely discontented populace, finding a common enemy. There has been a lot of provoking China lately, something I fail to grasp having always believed you don't bite the hand that feeds you. China could do to us what our bankers did to Germany in 1922-3, and the results could play out the same way, with us ending up with a ferociously nationalistic uniter, who will lead us into the jaws of MAD. 


Interesting times indeed.

Anonymous's picture

Interesting words. But just a reflexion, dont bite the hand that feeds you? Seems to me that's China's problem here. If China got bitten, they can kiss goodbye to their hand.
Maybe more cautious for China to have this in mind. And to have looked at the jaws of the animal they feed. I suppose they have this in mind as in the western world in general and in the US, I have been impressed by the high level of mob mind existing against China. The populace only asks for a pseudo reason to turn against China.

GoldSilverDoc's picture

Read about Gandhi.  Read about the salt.

caconhma's picture

This is why I have a great admiration for the Great French Revolution. In just a few years, dying France became a great country.

Regardless who Obama is (marxist, socialist, welfare-lover, etc.), he is a totally incompetent POS leading the USA and its people to a slaughter house. Unfortunately for us, the US Congress is terribly corrupt. 

Oracle of Kypseli's picture

Counterparty "N" Humm!

I am going to repost my "what if" question.

What If: The Financial Glitterati of the US, utilizing the "Calamari Cartel" and "The house of Morgan" are conspiring to control the rest of the world in order to hide their own mess and in the process enslave everyone else?

What if: Greece was selected by the speculators to be the first for default because of its size, instead of Italy?

Is the spaghetti cartel conspiring with the calamari cartel?

Can someone tackle this?

Getting hungry talking like that.

Anonymous's picture

OK, someone must be able to explain this post in 10 - 20 sentences for the ones who try - but have problems - to understand exactly what is going on. Thanks in advance.

truont's picture



TD:  "First, governments have clear incentives to cook the books. The EU continues to impose fiscal expenditure restrictions on eurozone governments, violation of which can result in censure and fines. The International Monetary Fund imposes fiscal conditionality on its client governments, which naturally have a strong incentive to keep the Fund from closing the money spigot. Derivatives can be used to shuffle cash flows through time in ways that current accounting rules do not prevent.

Second, banks are only too willing to market derivatives tricks to their big client governments, particularly when it puts them at the front of the queue for future bond issues and privatisations.

Third, if the integrity of government financial data is fatally undermined, the damage to stock and bond markets will dwarf the "Enron effect" that has recently pummelled the Dow."

MsCreant's picture

I have not read the article, when I think it is going to be "involved" I will sometimes scan the comments for context clues to help me.

I could hug you right now. Thanks.

Shorter version: Everyone is cooperating to kite everyone's checks. If they never "land" no one gets in trouble. Margin calls make balls come out of the air and money stand still for counting. This is what the collapse will really be.

Anonymous's picture

As such, and I would prefer CD to comment on this, what is the worth of this website? The community that bashes people or a community that learns based upon a website that challenges itself?

I have to say mscreant, you are guilty of having the same tendencies that many perceive 'will take this country down'.

Just like fox news, is this a community or an evolving news source? It will be y'alls call.

Sometimes effort is required to form your own opinion.