US Fed examines Goldman deals in Greece

The US Federal Reserve is reviewing the role of Goldman Sachs and other firms to helped Greece hide its debt problems, chairman Ben Bernanke said Thursday.

Bernanke said the central bank was examining Wall Street firms' transactions with Greek authorities that could have exacerbated Greece's fiscal woes.

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

Greece's troubled finances are already under close scrutiny by European Union regulators amid fears that its problems could spread to other members of the 16-nation eurozone.

Greece's total debt, estimated at 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 at 12.7 percent of GDP is more than four times the maximum level under eurozone rules.

The Greek authorities also have come under fire over a currency swap arranged with Goldman Sachs that allegedly enabled Athens to mask debt almost a decade ago as the country joined the eurozone.

Bernanke, wrapping up two-day report on monetary policy, was asked by Senator Christopher Dodd whether Bernanke believed there should be limits on the use of credit default swaps (CDS) to prevent the intentional creation of runs against governments.

Dodd, chairman of the Senate Banking Committee, noted that banks and hedge funds are reportedly using credit default swaps -- a sophisticated instrument that provides insurance against defaults -- "to bet that Greece will default on its debt."

Dodd said those bets were making it more difficult for the crisis-hit Greek government to borrow critically needed 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," he said.

Bernanke said the Fed was looking into "this issue as well," noting that CDS "are properly used as hedging instruments."

But, the Fed chief said, "obviously, using these instruments in a way that intentionally destabilizes a company or a country is -- is counterproductive."

Bernanke said he was "sure" the financial markets watchdog, the Securities and Exchange Commission (SEC), would be looking into that.

"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 said he was formally asking the Fed and the SEC to report back "very quickly" on the matter, "a critical issue for all of us."

The SEC, contacted by AFP, declined to say whether there was an investigation of Goldman Sachs underway.

SEC spokesman John Nester said: "We have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices."

Douglas McIntyre at 24/7WallSt.com said Goldman Sachs helped Greece defer but not eliminate its day of reckoning.

"Goldman?s argument will be, as it usually is, that is was the only company smart enough to help Greece with its debt problems but it is not at fault in the matter of the deception," he said. "It supplied the gun, but did not pull the trigger."

Jobless claims rise in weak recovery

JOB PICTURE STILL BLEAK: New claims for jobless benefits rose sharply last week, the Labor Department said Thursday. Most of the rise resulted from state agencies processing a backlog of claims left over from two weeks ago when snowstorms closed government offices.

IMPROVEMENT STALLS: Still, a steady drop in claims in the second half of last year has stalled, a sign layoffs are no longer declining. More layoffs could weaken consumer spending and slow the recovery.

WEAK ECONOMY: Other recent economic reports have also been disappointing, evidence that economic growth may weaken later this year.

Fed emergency loans to banks decline

Banks borrowed less from the Federal Reserve's emergency lending program over the past week, another sign that strains on private credit markets are easing.

Commercial banks averaged $13.96 billion in daily borrowing for the week that ended Wednesday, the Fed reported. That was down from $14.26 billion in average borrowing in the previous week. At the height of the financial crisis, discount window borrowing exceeded a daily average of $100 billion.

The Fed last week boosted the interest rate it charges on discount window borrowing by a quarter-point to 0.75 percent as part of the central bank's efforts to unwind the exceptional support that had been provided during the financial crisis.

Banks have been scaling back their use of the Fed's emergency discount loan window as the financial crisis has eased and banks have found their normal sources of credit more readily available.

The central bank is phasing out a number of emergency programs it had created to deal with the financial crisis which struck with force in the fall of 2008.

The Fed's weekly status report on Thursday showed that banks are making less use of many of these programs.

The average value of the central bank's holdings of short-term debt known as "commercial paper" stood at an average of zero for the week ending Wednesday.

The Fed had established the program to purchase commercial paper as a way to increase the availability of financing used by businesses to fund crucial operations such as payroll and supplies. At its peak in January 2009, the Fed held almost $350 billion worth of commercial paper.

The Fed said that banks' use of short-term loans drawn from the Fed's "term auction credit" program stood at an average of $15.43 billion for the last week, down by $1 billion from the previous week.

Even with all the reductions, the Fed's balance sheet — a broad measure that tracks the Fed's lending activities — stood at $2.29 trillion for the recent week, more than double the level before the financial crisis struck.

www.yahoo.com

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