WASHINGTON (Reuters) - U.S. regulators are probing how Wall Street firms like Goldman Sachs (GS.N) helped debt-stricken Greece arrange derivatives deals that critics say were used to disguise the size of its budget deficits.
“We are looking into a number of questions related to Goldman Sachs and other companies in their derivatives arrangements with Greece,” Federal Reserve Chairman Ben Bernanke told a Senate committee on Thursday.
The U.S. Securities and Exchange Commission also is “interested” in Wall Street’s activities in helping Greece do derivatives deals, he said.
The U.S. central bank, which regulates bank holding companies such as Goldman Sachs, is still in a fact-finding mode, checking Wall Street firms that have the sophistication to handle derivatives deals like the one with Greece.
If it was discovered bank supervisory rules were violated, the offending bank could be called upon to put in place a corrective plan or potentially face a more-formal enforcement action, up to and including fines.
Revelations that Greece’s deficit was three times bigger than originally forecast plunged the country into a debt crisis. The European Union has voiced support for a plan by Greece to tighten its purse strings, but has not pledged aid.
Bernanke’s comments coincided with a warning from ratings agencies that they might downgrade Greece’s sovereign debt, which refocused attention on the weak fiscal health of some euro-zone countries and weighed on global stocks.
“Obviously, using these instruments in a way that potentially destabilizes a company or a country is counterproductive,” Bernanke said, as he began a second day of testimony on the state of the U.S. economy. “We’ll certainly be evaluating what we learn from the activities of the holding companies that we supervise here.”
Bernanke was responding to a question from Senate Banking Committee Chairman Christopher Dodd, who wondered whether Greece was a case in which major financial institutions were “amplifying a public crisis purely for private gain.”
Asked about Bernanke’s comments, Goldman Sachs spokesman Michael DuVally said, “As a matter of policy, we don’t comment on legal or regulatory matters.”
Goldman Sachs Managing Director Gerald Corrigan told British lawmakers on Monday there was nothing inappropriate in the deals his firm arranged, although he agreed there could have been more transparency.
The SEC would not confirm or deny it was investigating Goldman’s role in helping Greece, but indicated it had concerns about the potential impacts of derivatives deals.
“As an agency, we have been examining potential abuses and destabilizing effects related to the use of credit default swaps and other opaque financial products and practices,” SEC spokesman John Nester said.
Bernanke did not specify whether regulators were simply trying to learn more to restrict future similar deals, of if they were concerned fraud or disclosure violations may have occurred.
The Greek crisis has pressured the euro and Greece’s EU partners fear it may spread to weaker euro-zone economies like Portugal and Spain.
Cross-currency derivatives that Goldman Sachs conducted for Greece in 2001 helped reduce the size of its debt at a time when the country was keen to meet criteria for entering the EU and adopting the euro.
Additional reporting by Pedro Nicolaci da Costa; Editing by Andrea Ricci