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In a deal that barely registered with the mainstream media, Ecuador’s central bank agreed earlier this week to swap half of its gold reserves – worth $580 million – with Goldman in exchange for liquid assets.
The Ecuadorian central bank thinks it’s going to earn $16 million to $20 million in profit over the three-year duration of the deal. Of course, the details of the transaction, such as the fees and interest rate that Goldman is charging, were not disclosed.
And as we all know, the devil is in the details – particularly when you’re dealing with a Wall Street pirate like Goldman Sachs.
“They’ve invited the wolf to dinner without realizing they’re on the menu,” said Money Morning Chief Investment Strategist Keith Fit-Gerald. “There’s no doubt that Goldman will come out the winner. We just don’t know exactly how they plan to do it.”
Goldman Sidesteps Washington… Again
Fitz-Gerald said that the Ecuador gold deal matters because it’s telling us that Goldman and its nefarious brethren on Wall Street have not changed their behavior one iota in the wake of the 2008 financial crisis for which they were mostly to blame.
What’s more, he said that U.S. politicians who believe that efforts like the 2010 Dodd-Frank Act have put a lid on Wall Street’s bad behavior are dreaming.
“Washington thinks they have this thing under control,” Fitz-Gerald said. “All they’ve done is just a slap on the wrist. The Big Banks have just reconstituted their business elsewhere, where they don’t have the same regulatory burden. If you think anything has changed in New York, you’re sadly mistaken.”
And whatever Ecuador is saying publicly, that it was willing to make any kind of deal with the likes of Goldman Sachs indicates that the country is in serious trouble.
That much is obvious to everyone.
“It does raise a red flag,” Bianca Taylor, a sovereign analyst at Loomis Sayles, told Bloomberg News. “Whenever a country needs to sell or monetize its gold reserves, it’s definitely a signal that the sovereign is strapped for cash.”
Maybe Ecuador genuinely believes that swapping its gold with a shark like Goldman will work out for the best, but history says otherwise…
The Damning Track Record of Goldman Sachs (NYSE: GS)
One thing that anyone should know entering into a deal with Goldman Sachs is that they will come out on the short end. Goldman plays to win.
And it’s more than willing to bend the rules in its favor. Just look at what Goldman did last spring…
GS made several moves to manipulate gold prices, advising investors to sell while snapping up the yellow metal as people followed their advice and prices dropped.
Goldman does much the same thing with stocks, mostly through its Conviction Buy List.
“The truth is that Goldman Sachs and the rest of the big banks on Wall Street invariably ‘blow up’ customers to make money for themselves,” said Money Morning Capital Wave Strategist Shah Gilani. “And not only do big banks like Goldman run roughshod over their customers and clients, they manipulate markets, industries, economies, and countries to fatten their already gigantic bonus pools and personal fortunes.”
Yes, countries. Ecuador wouldn’t be the first nation to be seduced by Goldman’s promise of rescue from a financial pickle.
Last fall, Goldman tried a similar stunt with Venezuela.
Like, Ecuador, Venezuela is strapped for cash and thought it could use its gold reserves to obtain some extra liquidity.
The deal that was negotiated would have swapped 1.45 million ounces of Venezuelan gold – to be held for seven years by the Bank of England – in exchange for $1.6 billion from Goldman.
But the gold at that time was worth $1.8 billion, representing an immediate 10% profit for GS. In addition, Venezuela would have paid about 8% a year for the loan. And the gold collateral was to be subject to margin calls, adding more uncertainty.
Recognizing that Goldman probably did not have Venezuela’s best interests at heart, the South American nation backed away from the deal before signing anything. Good for them.
But then there’s the tragedy that was Greece.
Goldman Sachs Makes Greece Pay
Greece made a deal with Goldman back in 2001 borrow about 2.8 billion euros disguised as a derivative so it would not show up as new debt and draw the ire of European Union regulators.
Right off the bat Greece owed 600 million euros more than it had borrowed. But things got much worse very quickly.
Because of how the derivative was structured, the drop in U.S. bond yields following the Sept. 11 attacks created huge paper losses for Greece. Goldman kindly offered to revise the deal to help out the struggling nation.
The inflation-based swap Goldman proposed went into effect in 2002. But then bond yields fell, driving Greece’s losses on the deal to an appalling 5.1 billion euros.
Chalk up another victory for Goldman, which pocketed a fortune. Greece, on the other hand, was one step closer to a sovereign debt crisis that rippled out across Europe and was felt around the world.
It’s a tale the Ecuadoran central bank should have brushed up on before shaking hands with anyone from Goldman.
“Greece is just another example of a poorly governed client that got taken apart,” Satyajit Das, a risk consultant and author of “Extreme Money: Masters of the Universe and the Cult of Risk,” told Bloomberg News. “These trades are structured not to be unwound, and Goldman is ruthless about ensuring that its interests aren’t compromised – it’s part of the DNA of that organization.”
You may recall that the unbridled greed of the Big Banks was also a primary force behind the subprime mortgage crisis. Amazingly, with the wounds from the last housing crisis still fresh, Wall Street is making a new gamble that threatens a $1 trillion mortgage meltdown…
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