Economics: Engineering an EU Fraud Conspiracy

Something still doesn't seem right when it comes to many companies taking their share of the taxpayer pie. The biggest conundrum continues to be Goldman Sachs.

According to Bloomberg, "Goldman Sachs Group Inc. managed $15 billion of bond sales for Greece after arranging a currency swap that allowed the government to hide the extent of its deficit."

So what was the role of credit default swaps in this scheme?

Very simply put, a credit default swap is an insurance policy. The premiums are assigned by what the marketplace perceives as the risk of guaranteeing payment on a certain financial instrument.

Bloomberg further reports that Goldman Sachs "raised $1 Billion in off-balance sheet funding" using credit default swaps. According to the Wall Street Journal (Feb 22, 2010), "Goldman Sachs did 12 swaps for Greece from 1998 to 2001, according to people familiar with the matter."(You gotta love the Journal's anonymous faceless sources.)

In other words, Goldman Sachs created a complex series of default swaps on behalf of the Greek treasury, or more specifically the Department of Finance in Greece, which effectively turned "liabilities" into "assets.

And that was the net effect - making it appear that liabilities, which were discounted assets, were not worth, let's say, 30 cents on the dollar, but were worth 50 cents on the dollar. This financial fraud is now roiling the Euro-zone.

So what will happen next in this latest Euro-crisis? Will it spread to the United States?

And think about this: Since the fall of Bear Stearns Cos. a little more than two years ago, Goldman has taken more than $20 billion in taxpayer cash through loans, payments and backstops. Goldman's latest bailout coup was a $12.5 billion paid out of AIG's $180 billion government cash infusion.

Until it was fully extricated, Goldman always characterized its exposure to AIG as "immaterial," and that its $20 billion notional exposure to AIG was hedged. Turns out that it was - through government bailouts that didn't exist when Goldman entered the contracts.