Fed probing Goldman trades with Greece

By Jennifer Liberto, senior writer


WASHINGTON (CNNMoney.com) -- The Federal Reserve is looking into what role Goldman Sachs and other Wall Street firms may have played in Greece's debt problems, Fed Chairman 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.

Bernanke's response was to a question posed by Senate Banking chief Christopher Dodd, D-Conn., who asked about U.S. financial banks and hedge funds that are making financial bets that the Greek government will default on its loans.

Goldman Sachs (GS, Fortune 500) and other banks have been in the news over reports they secretly helped raise $1 billion in credit for Greece, in a way that was off the balance sheet and helped hide Greece's big debt woes from European Union regulators.

The New York Times reported recently that some of these same banks were also now making side bets that Greece defaults on loans it owes U.S. banks and hedge funds. By betting in favor of default, the U.S. banks and hedge funds win whether Greece pays off its loans or not.

Dodd asked whether Bernanke thought there should be limits on the use of these types of bets to prevent firms from creating intentional runs against government.

"The rising price of these contracts contribute to an atmosphere of crisis, making it even more difficult for the Greek government, in my opinion, to borrow," Dodd said.

Bernanke said that while such bets are an important financial tool to help mitigate risk, the Fed planned to look into reports that the financial bets were made.

"Obviously, using these instruments in a way that intentionally destabilizes a company or a country is -- is counterproductive, and I'm sure the SEC will be looking into that," Bernanke said. "We'll certainly be evaluating what we can learn from the activities of the holding companies that we supervise here in the U.S."

Goldman Sachs spokesman Michael Duvally declined to comment, adding the company doesn't talk about legal or regulatory matters.

The kinds of financial bets that regulators are concerned about are credit default swaps, which are insurance contracts -- the same kind of contracts that pushed the insurance giant American International Group (AIG, Fortune 500) to the brink of collapse.

During the real estate boom, investment firms were buying and selling securities backed by pieces of mortgages. The firms also paid AIG to back up the investments if they turned sour.

When all the real estate investments went bad at the same time, AIG didn't have enough money to pay back all the promises it had made.

Later in the hearing, Bernanke noted the similarity of the situation of banks making bets to hedge against Greek debt to banks that made bets to hedge against real estate debt, which imploded AIG.

"The poster child for that would be the capital arrangements that banks took out for AIG," Bernanke said. "Derivatives have a legitimate purpose, but if they're used to distort accounting results or regulatory ratios, that needs to be addressed."

Congress is considering legislation to make such financial bets more transparent in its regulatory overhaul package. The Senate has yet to pass a bill on that subject. To top of page

Frontline troops push for solar energy
The U.S. Marines are testing renewable energy technologies like solar to reduce costs and casualties associated with fossil fuels. Play
25 Best Places to find rich singles
Looking for Mr. or Ms. Moneybags? Hunt down the perfect mate in these wealthy cities, which are brimming with unattached professionals. More
Fun festivals: Twins to mustard to pirates!
You'll see double in Twinsburg, Ohio, and Ketchup lovers should beware in Middleton, WI. Here's some of the best and strangest town festivals. Play

Search for Jobs

Index Last Change % Change
Dow 18,095.99 58.02 0.32%
Nasdaq 5,067.79 7.54 0.15%
S&P 500 2,112.99 4.07 0.19%
Treasuries 1.96 0.03 1.77%
Data as of 12:33pm ET
Company Price Change % Change
Apple Inc 132.93 0.28 0.21%
Microsoft Corp 48.94 0.91 1.89%
Applied Materials In... 20.19 0.22 1.10%
Bank of America Corp... 15.61 0.05 0.32%
Ford Motor Co 15.78 -0.12 -0.75%
Data as of 12:19pm ET
Sponsors

Sections

Market timing is hard. And making investing decisions based on the calendar is just silly. If you sold in May and went away for the past three years, you missed out on stocks going up. More

A major earthquake was the last thing Nepal needed. Even before one of the country's major fault lines rumbled to life, the country was beset by challenges. More

SilverTech Ventures is a new accelerator that offers perks like free office space and access to its founders' extensive networks. More

At elite schools across the country, low-income students feel like outsiders and are working to make it better. More