You Can’t Cheat an Honest Man

An honest man knows that you can’t get something for nothing. Discounts? Sure, when warranted, but nothing is ever truly free. Someone has to pay.

That is one reason why I have been skeptical about Greece and Goldman Sachs (GS). It would be really hard to trick an honest government into using derivatives in order to get into the EU. Honesty requires full disclosure when the parties on the other side have asked for it, even if they are not checking too closely for their own reasons.

Which brings up another angle of the story. If EU governments cared that much about the sanctity of the Euro, why did they not inquire more closely about derivatives? Why is it a surprise now? At the time when Greece entered the EU, the use of derivatives was well-known, why did the governments of the EU not challenge Greece, given its checkered history with respect to default.

Even if Goldman was marketing swaps to marginal European governments wanting to get into the EU, with many other investments banks imitating them, the governments weren’t dumb. “What, we get to get into the EU, and all we have to do is pay a lot more 15-20 years from now? That’s a deal. (We will grow out of these promises.)”

Alas, but the growth does not come, but the debts come due. As I often say, “you can’t cheat the cash flows.” Income statements and balance sheets may lie, but it is hard to lie about cash flows. Those are indisputable accounting entries.

Even if they did the swaps, I do not lay the major portion of the blame on Goldman Sachs, but on Greece. Greece was the one in need, and they could have cut their budget, but would not do so for political reasons. Now that trouble is back, bigger and badder than ever.

The same applies to Jefferson County, Alabama. They played a variety of games to lower current costs, and assumed that it would be so for the future. Fools. You can’t get something for nothing. You will either pay something in the future, or bear a risk that you do not understand. Anyone who is mature enough to be a board member in the county had better be worldly wise enough to know that you can’t get something for nothing, and that advisors may have ulterior motives.

Did investment banks like Goldman Sachs take advantage of a bunch of rubes? No. They took advantage of politicians who were looking for a cheap deal, and were willing to cut corners in their due diligence.

You can’t cheat an honest man. Honest men don’t cut corners, and they pay in full, on ordinary terms. But those wishing for a low-cost way out of the political troubles on the cheap are great targets for those that want to cheat others.

About David Merkel 144 Articles

Affiliation: Finacorp Securities

David J. Merkel, CFA, FSA — From 2003-2007, I was a leading commentator at the excellent investment website ( Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and now I write for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I still contribute to RealMoney, but I have scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After one year of operation, I believe I have achieved that.

In 2008, I became the Chief Economist and Director of Research of Finacorp Securities. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm.

Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life.

I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.

Visit: The Aleph Blog

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