US Federal Reserve Chairman Ben Bernanke said the use of credit default swaps to destabilize a country is “counterproductive,” and added the central bank is reviewing the arrangements of Goldman Sachs Group Inc and other companies with Greece.
“We are looking into a number of questions related to Goldman Sachs and other companies and their derivatives arrangements with Greece,” Bernanke said yesterday in testimony before the Senate Banking Committee in Washington.
Greek bonds slid on Thursday, amid concern the country’s credit ratings may be cut.
Federal Reserve officials are using new supervisory powers over firms such as Goldman Sachs and Morgan Stanley to gather information on financial system risks. Bernanke was responding to a question from Senator Christopher Dodd, a Connecticut Democrat, who asked if there should be limits on the use of credit default swaps to prevent “runs against governments.”
“Obviously, using these instruments in a way that intentionally destabilizes a company or a country is — is counterproductive, and I’m sure the SEC [Securities and Exchange Commission] will be looking into that,” Bernanke said. “We’ll certainly be evaluating what we can learn from the activities of the holding companies.”
US stocks fell on Thursday, in part as Moody’s Investors Service said it may downgrade Greek debt. The Standard & Poor’s 500 Index was down 1.52 percent at 10:51am in New York. Yields on US two-year notes declined 0.03 percentage point to 0.828 percent.
Goldman Sachs helped Greek officials raise US$1 billion of off-balance-sheet funding in 2002 through swaps, which EU regulators said they knew nothing about until recent days.
A top executive said Goldman Sachs did “nothing inappropriate” when it arranged currency swaps for Greece that reduced the nation’s national debt by 2.37 billion euros (US$3.2 billion).
“They did produce a rather small, but nevertheless not insignificant reduction, in Greece’s debt-to-GDP ratio,” Gerald Corrigan, chairman of Goldman Sachs’s regulated bank subsidiary, told a panel of UK lawmakers on Monday.
The swaps were “in conformity with existing rules and procedures,” he said.
“As a matter of policy, we don’t comment on legal or regulatory matters,” Michael DuVally, a Goldman Sachs spokesman, said on Thursday.
Corrigan is the former president of the Federal Reserve Bank of New York. The Federal Reserve gained oversight powers over Goldman Sachs and Morgan Stanley following their conversion to bank holding companies in Sept. 2008.
Yields on two-year Greek bonds rose to the highest since Feb. 9 after Standard & Poor’s and Moody’s said they may cut their ratings if Greece fails to implement a plan to reduce its budget deficit. Pierre Cailleteau, managing director of sovereign risk at Moody’s, said a downgrade may come by the end of next month.
“Greece is able to make headlines every day, and for now volatility is here to stay,” said Michiel de Bruin, who helps manage US$28 billion of assets as head of euro government bonds at F&C Investments in Amsterdam. “The market is also taking into account the possibility of a double dip in economic growth, and that’s causing risk aversion.”
The cost of insuring against default on Greek government bonds increased for a fourth day, with the credit-default swaps on the debt rising by 10 basis points to 392, the highest in more than two weeks, according to CMA DataVision.
The Greek 10-year bond increased 12 basis points to 6.64 percent as of 3:02pm in London. The 6 percent security maturing in July 2019 lost 0.82, or 8.2 euros per 1,000-euro face amount, to 95.56.
The two-year yield jumped 61 basis points, the most since Jan. 29, to 6.35 percent.
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