9 October 2013

The Troika, the US Hedge Funds and the Diversion of Taxpayers' Money

A guest post by Stephan Lindner

Do you remember John Paulson? In 2007 he became famous for having the highest income of all hedge fund managers on Wall Street, because he bet against the US housing market. Not all of his deals were fair, to say it politely. Later the SEC investigated a deal called ABACUS 2007-AC1, for which Paulson told Goldman Sachs to create a CDO with bad subprime mortgages, so that he could bet against it. Goldman Sachs agreed 2010 to pay $550 million to settle with the SEC and a former vice president of Goldman Sachs, who was responsible for the deal inside of Goldman Sachs was found liable for fraud in front of a jury. With that single deal Paulson earned around $1 billion and never had to justify himself in front of a court. And now he tells the whole world, that he owns shares in two Greek banks, Piraeus Bank and Alpha bank. Reuters cites from a statement: ‘They have good management and we think the Greek economy is improving, which should benefit the banking sector.'

What does this management looks like? In Greece after the haircut the banks are more or less bankrupt and need to be recapitalized. Officially they are solvent thanks to the $50bn. they received from the troika, but most experts still estimate that the non-performing loans are still higher than the injected capital. Normally nobody would like to give capital to such banks. Here is the explanation the owner of Piraeus bank found for this situation: Reuters reported in summer 2012, that he used credit in his own bank to buy shares of his bank (read the full story here). In this New York Times article from June you can read even more of what the president of Piraeus bank did to make his bank grow during the crisis to become the biggest bank in Greece:

If you think you get into trouble if someone finds out about such business practices, you are wrong. Mr Salinas is still the President of Piraeus bank and the Greek Central Bank, which investigated all allegations, could find no evidence of wrongdoing. And they have the ideal informant: the president of the Greek central bank is a former vice president of Piraeus bank. So what happens to people who report about such practices in Greece? It isn’t pretty.

We might also ask how the troika did everything possible to make the buying shares of Greek banks as lucrative as possible? For each Euro someone invests in banks like Piraeus the troika pays an additional nine Euros, and if the share price aises to a certain level, the investor gets the right to buy this additional 90 per cent of shares, not for the then actual much higher price, but for the low price at which they made their first investment. Hurrah for the troika for making such lucrative deals with taxpayers’ money. Read the full explanation of the Paulson deal in todays blogpost of Yanis Varoufakis.

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