–Goldman-Greece Dealings Modestly Distorted Debt Figures

By Brai Odion-Esene

WASHINGTON (MNI) – The Federal Reserve has not found large credit
default swaps positions in U.S. banks vis a vis European governments,
Fed Chairman Ben Bernanke said Wednesday.

He told the members of the Joint Economic Committee, however, that
the central bank has yet to specifically address the question of using
credit default swaps to manipulate prices, an issue he said the
Securities and Exchange Commission is looking at.

“Exposures of U.S. banks via credit default swaps or direct
holdings to European governments is relatively limited,” Bernanke told
lawmakers.

Commenting on the financial aid package put together by the EU and
IMF should Greece need it, Bernanke called it “a work in progress.” He
added that it is politically difficult as on the one hand Europeans do
not want to assist Greece unless they are convinced it has made a “good
faith” effort on its own to reduce its deficit and improve their own
fiscal position.

At the same time, Europeans have to agree on how to share the
burden of aiding Greece and how the arrangements will be set up.

“I think there is a broad understanding that its very important for
them to come to a solution and they’ve made a good bit of progress
there,” he said.

“But I think there will still be further discussions going
forward,” Bernanke added. “I’ve been informed that they’ve made good
progress and that they are quite confident that a solution will be
forthcoming.”

Asked to discuss the Fed’s findings following its investigation of
CDS on sovereign debt and any role played by U.S. banks, Bernanke said
most of the Fed’s focus was on Goldman Sachs’ arrangement with Greece.

The Fed discovered that in 2000 and 2001, there was a contract
between the Greek government and Goldman that — by using exchange rates
that were different from the market rates — had the effect of modestly
changing the reported debt and deficit ratios that Greece reported to
the EU, he said.

Goldman then sold this position in 2005 to a Greek bank, he added.

However, the effects “were relatively modest,” Bernanke said,
noting that the debt-to-GDP ratio changed from about 101% to 100%, so it
was not a large effect.

This happened not only before Goldman came under the supervision of
the Fed, but also before the Enron scandal, after which the Fed and
other regulators strengthened rules against arrangements that are
intended to have accounting impacts.

“We have discussed the issue with Goldman,” the Fed chairman said,
“and they have a much more elaborate procedure now to evaluate such
possible deals to make sure that they are not being motivated by
accounting and other kinds of appearance issues.”

** Market News International Washington Bureau: 202-371-2121 **

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