You Can’t Cheat an Honest Man

An honest man knows that you can’t get something for nothing.  Discounts?  Sure, when warranted, but nothing is ever truly free.  Someone has to pay.

That is one reason why I have been skeptical about Greece and Goldman Sachs.  It would be really hard to trick an honest government into using derivatives in order to get into the EU.  Honesty requires full disclosure when the parties on the other side have asked for it, even if they are not checking too closely for their own reasons.

Which brings up another angle of the story.  If EU governments cared that much about the sanctity of the Euro, why did they not inquire more closely about derivatives?  Why is it a surprise now?  At the time when Greece entered the EU, the use of derivatives was well-known, why did the governments of the EU not challenge Greece, given its checkered history with respect to default.

Even if Goldman was marketing swaps to marginal European governments wanting to get into the EU, with many other investments banks imitating them, the governments weren’t dumb.  “What, we get to get into the EU, and all we have to do is pay a lot more 15-20 years from now?  That’s a deal.  (We will grow out of these promises.)”

Alas, but the growth does not come, but the debts come due.  As I often say, “you can’t cheat the cash flows.”  Income statements and balance sheets may lie, but it is hard to lie about cash flows.  Those are indisputable accounting entries.

Even if they did the swaps, I do not lay the major portion of the blame on Goldman Sachs, but on Greece.  Greece was the one in need, and they could have cut their budget, but would not do so for political reasons.  Now that trouble is back, bigger and badder than ever.

The same applies to Jefferson County, Alabama.  They played a variety of games to lower current costs, and assumed that it would be so for the future.  Fools.  You can’t get something for nothing.  You will either pay something in the future, or bear a risk that you do not understand.  Anyone who is mature enough to be a board member in the county had better be worldly wise enough to know that you can’t get something for nothing, and that advisors may have ulterior motives.

Did investment banks like Goldman Sachs take advantage of a bunch of rubes?  No.  They took advantage of politicians who were looking for a cheap deal, and were willing to cut corners in their due diligence.

You can’t cheat an honest man.  Honest men don’t cut corners, and they pay in full, on ordinary terms.  But those wishing for a low-cost way out of the political troubles on the cheap are great targets for those that want to cheat others.


  • steve says:

    re: “An honest man knows that you can’t get something for nothing.”

    What does this tell you about all the people who claim that tax cuts not only pay for themselves, nut produce a substantial return?

  • Ted K says:

    David, you point is a valid point. I don’t see Greece as “little red riding hood” in this little adventure. And also let me add (full disclosure, I am American with German blood) Greece is acting like 100% babies expecting Germany to run in and save their little spoiled, lazy, lying butts on this. Germany should help them a LITTLE, but basically Greece needs to clean their own mess. That being said…… if Charles Manson does a deal with Genghis Khan to lie and steal from people, does that mean Charles Manson is innocent and that Charles Manson shouldn’t be punished and banished from dealing in Credit Default Swaps????? My Answer would be a resounding “YES!!!!!” and I would expect any man with ANY moral compass at all, to agree.

    I have an update on the slow progress of derivatives legislation on my blog if anyone is interested.

  • Ted K says:

    I miss-communicated a little above. I should say “YES!!!!!” as in “yes Charles SHOULD be punished” oh, got a little emotional there, haha.

  • Bob_in_MA says:

    The buyer of heroin knows what he’s asking for, but that doesn’t make his dealer a pillar of the community. Likewise, the existence of these swaps might not be Goldman Sach’s fault (though who’d be surprised to find out they came up with the concept?), but that doesn’t mean they aren’t scum.

    Remember, the character who made that line famous was W.C. Fields, who was invariably trying to cheat everyone he encountered.

    It seems pretty obvious no more than 30% of Wall Streets profits can be attributed to some effort that makes markets more efficient, or provides some other benefit. And 70+% comes from rigging the system and playing the rubes.

  • Stevie b. says:

    I’m not a lawyer, but isn’t aiding and abetting still a crime? If it is, it clearly isn’t if you’re Golden Scumbags.

  • I am not saying that any investment banks were guiltless here, but that the nations employing them were more guilty, because their goals drove the transactions.

  • IF says:

    There were many honest people in Greece (as were in Iceland), but their elites are the ones to blame. A distinction that neither your article nor your comment allows for. So, yes, it is possible to cheat an honest man, especially if two con artists work together.

  • Ted K says:

    So, David, your thinking is very fascinating. It just so happened that Goldman was the same company behind BOTH the AIG blowup and the Greece blow up?? I think you’re letting your dealer/trader bias show through a little there Dave. Did you ever read this story? The memos and letters between AIG and Goldman at that time were very fascinating, Including the fact Goldman didn’t want third parties involved to judge the instruments they themselves had created. Some of the letters were subtle threats.

  • Aristid says:

    Either your writing is very sloppy, or you confuse the euro and the EU. You consistently talk about “get into the EU” in the article… and… Greece already was in the EU (since 1981), so I guess what you wanted to say is “get into the eurozone”. The eurozone comprises 16 countries while the EU comprises 27.

    I love your blog, but here _you_ didn’t do your due diligence.

  • westerebus says:

    A- Hi, we’re from the government and we’re here to help.
    B-Hi, we’re Goldman-Sacks and we’re here to help the government.

    Pick the statement that’s false.

  • Aristid — you are right, that was sloppy — usually when writing on this topic, I make the right distinction — I’m not sure why I didn’t here. Apologies.

    IF — There are many honest people in Greece, but to some degree cultures are responsible for the leaders they elect. In an era where voters allow themselves to listen to those who promise “something for nothing,” then, they too are partially to blame. Yes, the leaders of Greece bear the onus of guilt here. That said, there are a lot of parties deserving blame — societal failure creates finger-pointers.

  • DougT says:

    If people at Goldman helped Greece manipulate its financial statements so as to materially misrepresent its position, those people violated Standard II.B. of the CFA Institute Standards of Professional conduct.

    Since the CFA Institute can take away your charter (and publish your name with your story), they have the power to destroy some careers. Seems to me that while this may not be a crime, it is pretty clearly an ethical violation.

    But there are always lots of sides to any story. I would be surprised if someone doesn’t get spanked over this.

  • IF says:

    Sigh. You assume that the Balkans have a democratic tradition like the US (it seems). Even in the US it does not go down well if a republican voter is blamed for democratic party action. But Greece seems very tribal to me. Family names repeat once a generation in governments, a military junta in the 70s, and an opposition that does not mind to “water the tree of liberty with the blood of patriots and tyrants” – unlike in the US, where the clans are forming, but the saying has been plain rhetoric. In short, I am confident the Greek will deal with their government officials come time. But who will take care of GS?

  • IF — those in the minority aren’t responsible for the actions of the majority, generally. But unless you live in a society where there is no say from an electorate on matters, then the voters for the winning side have some culpability. I understand that elites bear most of the blame. Even in America, the elites do what they can to maintain power through their influence on both parties.

  • J Lee says:

    Where are the proposals to enforce the collection of taxes in Greece? When tax evasion becomes a national sport are you really surprised that the government is short of cash? Or are you really surprised that the government cheats when the Greek people cheat or vice versa. Seems to me that GS was dealing with people of its own kind: tax cheats and fraud artists.

  • matt says:

    Millions of Baby Boomers are about to prove, beyond the shadow of any doubt, that you CAN get something for free; you just have to make someone else pay for it. The Baby Boomers constructed a large scale time machine (the Federal Government) to send money from the future to the present. Most Boomers will die without ever feeling the consequences of their entitlements binge, leaving the bill for many future generations.

  • Ted K says:

    One thing also is worth pointing out, that the debt being hidden was a big fat lie to the Greece bondholders. And I do believe Goldman has to take some (please don’t laugh) moral responsibility there as well. If Goldman got caught (yes I know Goldman is probably too smart to do that) holding risky bonds when the debt picture was lied about on some bonds they had purchased you can bet damn good and well they wouldn’t sit quiet on it. And who are the other countries who Goldman said are also doing similar type transactions??? How does Goldman know there are other countries doing that if they are not a direct party in the transaction???

  • john says:

    > Honest men don’t cut corners, and they pay in full, on ordinary terms.

    So…~80% of Americans are dishonest and the remaining are split between either being too poor or too rich to care.

  • No John, paying in full means paying according to agreed terms whether at once, or over time. That is not 80%, it is more like 20%.

  • Matt says:

    You have no idea what you’re talking about.
    First off, “honest government”??? are you crazy? what an oxymoron.

    Second, what makes you think Goldman sachs needs to use security derivatives to get in to the EU or help greece get in? They don’t they’ve been there long before CDSs were invented and they weren’t invented by Goldmansachs. Blythe Masters, a 34-year Cambridge graduate who was then the head of JP Morgan’s Global Credit Derivatives Group invented default swaps in 1995.

    Do you know what a CDS is? it has nothing to do with borrowing money. It’s a bet that a company, or other entity for that matter, will default on their debt. Investors will pay the holder of the debt a premium during regular periods until maturity of the debt. In the event of default, the holder of the debt obligation is required to pay the buyer of the CDS the full amount of the original debt.

    Greece never bought CDSs and if they did, it wasn’t enough to bankrupt a nation.

    Dude, this whole European crisis has little to do with financial institutions and derivatives, it has to do with European governments spending too much money on social programs and contiuously cutting taxes. The European consensus is “we shouldn’t have to pay, the government should. We don’t have to work as hard as americans or the rest of the world, we’re better than that because our government pays” Yeah, well guess who pays for all that stuff, investors do by lending governments money in the form of buying bonds and many of them are americans or american firms. Now when it comes close to the time to pay them back, they shold raise taxes but no politicians are concerned with winning popularity contests and the prospect of raising taxes is enough to cause riots in Europe. So they do nothing hoping that the Germans won’t let them default. Even after Greece announced debt problems and needed to cut spending, there were protests and small riots in Athens, are they retarded? Their country is on the verge of collapse and they’re protesting the few measures that would prevent it because they like the government paying for stuff? What children.

    You really need to understand what you’re talking about before talking about this topic. Go to school, get a business or economics degree and then maybe you can go back to blogging, or get a real job.

  • Matt — you don’t read closely enough, or enough of what I have written. Once you have read enough of my stuff, then fine, say what you would like. I am open to informed criticism.