Via The Telegraph:
Meanwhile Angela Merkel, the German Chancellor, criticised investment banks for the role they may have played in helping Greece to mask its fiscal problems: “It would be a disgrace if it turned out to be true that banks that already pushed us to the edge of the abyss were also party to falsifying Greek statistics.” Her comments were in reference to a derivatives deal arranged by Goldman Sachs in 2001 which allowed the Greek government to mask its budget deficit by deferring interest payments.
If questioned on the witness stand, wired to a polygraph, with the death penalty looming for any dishonest response most public officials who had employed “exotic” derivatives structures would admit that the main purpose of the transaction has been to deceive stakeholders in public entities. It is possible that some decision makers were merely genuinely incompetent, but that is hardly reassuring to taxpayers. It is worth noting that in every case we discuss on this site the accounting profession provides no defence barrier affording any protection for the taxpayer. I doubt whether accountants understand derivatives.
When the second phase of this crisis unfolds derivatives will be seen to have been employed for nefarious purposes on a grand and widespread scale.
In the UK I expect the quasi state housing association movement to experience problems when the huge volume of poorly understood debt instruments called “LOBOs” come up for refixing. The acronym stands for “Lender’s option, Borrrower’s option”. It is a 20 year loan instrument with early termination options, enabling the bank to play games with the yield curve. More detail later.
Needless to say any financial product with embedded derivatives purchased by the quasi public sector tends to lead to problems at some stage for the public sector. If LOBOs were such a good idea why don’t the private sector buy them?
