Fed probes Goldman Sachs's dealings with Greece

The US Federal Reserve is looking into claims Goldman Sachs and other Wall Street banks helped the previous Greek administration hide its spiralling debt using various financial instruments.

By Florence VILLEMINOT (video)
News Wires (text)

AFP - The US Federal Reserve is reviewing financing deals conducted by Goldman Sachs and others related to Greece's debt crisis, Fed chief Ben Bernanke said Thursday.

"We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece," Bernanke said in response to a lawmaker's question in his second day of testimony to Congress.

Senator Christopher Dodd noted that recent news reports have said that banks and hedge funds are using credit default swaps "to bet that Greece will default on its debt," which he said was making it more difficult for the government to borrow money.

"Since there is no requirement that purchasers of credit default swaps actually own any of the underlying debt, we have a situation in which major financial institutions are amplifying a public crisis for what would appear to be for private gain," said Dodd, the Senate Banking Committee chairman.

Asked whether the central bank chief believes there should be limits on the use of credit default swaps to prevent the intentional creation of runs against governments, Bernanke replied the Fed was looking into "this issue as well."

Bernanke recalled that credit default swaps (CDS), sophisticated financial instruments that provide insurance on defaults, "are properly used as hedging instruments."

"Obviously, using these instruments in a way that intentionally destabilizes a company or a country is -- is counterproductive, and I'm sure the SEC (Securities and Exchange Commission) will be looking into that," the Fed chief said.

"We'll certainly be evaluating what we can learn from the activities of the holding companies that we supervise here in the US," he added.

Dodd, a Connecticut Democrat, asked the Fed and the SEC to report back "very quickly" on the matter, "a critical issue for all of us."

Greece's total debt, estimated at about 300 billion euros (404.6 billion dollars), or 113 percent of gross domestic product, is nearly double the 60 percent eurozone limit, while its public deficit is over four times the allowed level at 12.7 percent of GDP.