Recent reports that financial legerdemain engineered by Goldman Sachs helped destabilize the Greek economy ought to make Californians nervous. It’s time to ask if Goldman could do to us what it appears to have done to the Greeks and, indirectly, to the rest of Europe.
In February, major news organizations reported that the Federal Reserve Board is investigating the role that Goldman – a major recipient of federal bailout funds during our own financial meltdown – played in the Greek debt crisis. The firm used complex financial instruments called “derivatives” to help the Greek government hide the fact that it was in debt up to its eyeballs and getting in deeper.
That, in turn, allowed Greece’s participation in the Euro, Europe’s common currency, under what may have been false pretenses. “One deal created by Goldman Sachs helped obscure billions in debt from budget overseers in Brussels,” the New York Times reported. The deal, “hidden from public view … helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.”
There are reasons to be nervous about California’s entanglement with Goldman, which has been a major participant in bond sales to finance our state’s ballooning deficit.
For example, the Los Angeles Times reported in November 2008 that Goldman had urged some of its biggest clients to place investment bets against the very California bonds that it had helped sell. Such actions could increase investors’ fears about the state’s credit, officials told the paper, thereby driving up the interest rate the state must pay to sell the bonds, increasing the cost to taxpayers.
More recently, Bloomberg News reported that a $4.5 billion state bond offering, handled by Goldman, Citigroup, and JPMorgan Chase, fizzled last October, bringing in less money and costing the state more in interest than anticipated. The state had chosen to forego competitive bids in giving the deal to the trio of companies – which, according to Bloomberg, “made 12.4 million on the deal, contributing to record bonuses in the securities industry a year after getting a total of $80 billion in a federal bailout.”
It is time for the legislature to hold an investigatory hearing into the possible risks of California’s relationship with Goldman Sachs. Legislators should ask some basic questions: Just how much exposure does the state have to Goldman? Has the firm been transparent about any counsel it has provided to the state regarding finances?
At the same time, officials might ask why Goldman is happy to profit from our bond business while refusing to invest in California’s needs. In a February 2 meeting with the Greenlining Institute, the company claimed that it does not do business in California and therefore does not intend to invest in California in the foreseeable future – even as it is developing a major program of community development and investments in New York.
That seems an odd statement in light of the firm’s considerable California bond business. In fact, in 2008, about seven percent of Goldman’s global business could be attributed to California operations. In dollar terms, that means our state contributed about $2.1 billion to the company’s profits from 2006 through 2008.
All major banks doing business in California have substantial community reinvestment commitments aimed at low and moderate income communities. Bank of America, for example, has committed half a trillion dollars to Community Reinvestment Act programs in California over 10 years. Goldman, which managed to pay $11 billion in bonuses during the financial crisis year of 2008, has committed zero.
Something looks wrong here. It’s time for officials to ask some serious questions about California’s relationship with a firm whose track record can only be described as disturbing.