Goldman Sachs is being sued for fraud by the Securities and Exchange Commission (SEC), which is a good thing. Wall Street in general, and firms like Goldman Sachs, have been bundling, selling, and then betting against toxic investments for years. Those of you who've read my book or follow this site regularly know the story.
Rather than get into the technical details of Goldman Sachs' deals (which you can access in this article) let's have a little fun, and try to understand what happened with another conceptual picture...
Suppose you're my next door neighbor. I tell you that I like you and decide that I want to purchase life insurance on your life. You naturally get suspicious. But I tell you not to worry. I'm purchasing insurance for everyone that I am close to in my life. You think I have money, so this helps allay your concerns. And besides, I'm only doing this because I want your family to be able to stay in the house should something happen to you.
Trust me.
Still what I'm really after is the insurance money. But I can't make it look like I want the insurance money, or that I want you dead. Instead I provide some people with cash to help you change your lifestyle.
To push things along I determine that you need to start living like there's no tomorrow. My "friends" invite you to Roman-like orgies, where you can drink and smoke to your heart's content.
I invite others, who I make sure are infected with something out of a sci-fi thriller. The goal is simple. I need you dead.
I even put on a few of these orgies at my own expense, and invite some of the hygiene-challenged guests from The Jerry Springer Show ... you know, to stack the deck in my favor.
I invite you to take up fun activities like rock climbing and para sailing. I encourage you to get creative.
Unfortunately, for me, you're in too good of shape. You simply won't expire. I start thinking the unthinkable. But instead of kidnapping you and forcing you to watch Sylvester Stallone movies until you pass out, I come up with something better. I hire the mob ... but not these guys.
Ultimately, I hire the real mob to do the job. Things go well, for me.
Comfortable with what I just did, I start doing the same thing with others and become rich in the process. I don't have to worry about the police. I own them. Others follow my trail blazing path. Death becomes us ...
This is what happened in simple terms ...
In market-speak this is what Goldman Sachs (and Wall Street) did ...
While there are more details - again, you can go here to read the story - the concept is clear: Buy insurance and then work hard to make sure what you insured fails (or dies).
- Mark
ADDENDUM: For those of you wondering why the "insurers" aren't complaining about paying out on these fraudulent claims, your instincts are correct. Several are suing in court to prevent payouts. They're claiming that they were mislead. On the other end of it - and I'm not sure about the extent here - it's reported that many CDS (insurance) contracts have been paid out through the bailouts, and other practices. We don't know enough about how this has happened, and who's benefited. But to the extent that it's occurred, the U.S. taxpayer is the one who paid out on the CDS contracts (100 cents on the dollar). This explains, in part, why Treasury Secretary, Tim Geithner, and Fed Chair, Ben Bernanke, are being pressed to detail how the bailout and Fed (trillions in credits) money has been lent out and spent. They, to date, are not being very helpful.
Rather than get into the technical details of Goldman Sachs' deals (which you can access in this article) let's have a little fun, and try to understand what happened with another conceptual picture...
Suppose you're my next door neighbor. I tell you that I like you and decide that I want to purchase life insurance on your life. You naturally get suspicious. But I tell you not to worry. I'm purchasing insurance for everyone that I am close to in my life. You think I have money, so this helps allay your concerns. And besides, I'm only doing this because I want your family to be able to stay in the house should something happen to you.
Trust me.
Still what I'm really after is the insurance money. But I can't make it look like I want the insurance money, or that I want you dead. Instead I provide some people with cash to help you change your lifestyle.
To push things along I determine that you need to start living like there's no tomorrow. My "friends" invite you to Roman-like orgies, where you can drink and smoke to your heart's content.
I invite others, who I make sure are infected with something out of a sci-fi thriller. The goal is simple. I need you dead.
I even put on a few of these orgies at my own expense, and invite some of the hygiene-challenged guests from The Jerry Springer Show ... you know, to stack the deck in my favor.
I invite you to take up fun activities like rock climbing and para sailing. I encourage you to get creative.
Unfortunately, for me, you're in too good of shape. You simply won't expire. I start thinking the unthinkable. But instead of kidnapping you and forcing you to watch Sylvester Stallone movies until you pass out, I come up with something better. I hire the mob ... but not these guys.
Ultimately, I hire the real mob to do the job. Things go well, for me.
Comfortable with what I just did, I start doing the same thing with others and become rich in the process. I don't have to worry about the police. I own them. Others follow my trail blazing path. Death becomes us ...
This is what happened in simple terms ...
1. Life insurance policies are purchased.
2. Death is pushed along by encouraging reckless living.
3. When reckless living doesn't produce desired results I rig the game by hiring the mob. I buy off the police. End of story.
In market-speak this is what Goldman Sachs (and Wall Street) did ...
1. Goldman knows they can purchase insurance (Credit Default Swaps) policies on security instruments.
2. To push defaults on security instruments Goldman encouraged reckless lending practices (no doc loans, NINJAs, etc.). Still, no one will insure a pile of toxic mortgages, which is why good was mixed with bad into a toxic brew.
3. Like mixing a drink, Goldman mixed toxic mortgages with many good mortgages. To encourage defaults more toxic contracts (e.g. mortgages) were added. Congress is bought off. The End.
While there are more details - again, you can go here to read the story - the concept is clear: Buy insurance and then work hard to make sure what you insured fails (or dies).
- Mark
ADDENDUM: For those of you wondering why the "insurers" aren't complaining about paying out on these fraudulent claims, your instincts are correct. Several are suing in court to prevent payouts. They're claiming that they were mislead. On the other end of it - and I'm not sure about the extent here - it's reported that many CDS (insurance) contracts have been paid out through the bailouts, and other practices. We don't know enough about how this has happened, and who's benefited. But to the extent that it's occurred, the U.S. taxpayer is the one who paid out on the CDS contracts (100 cents on the dollar). This explains, in part, why Treasury Secretary, Tim Geithner, and Fed Chair, Ben Bernanke, are being pressed to detail how the bailout and Fed (trillions in credits) money has been lent out and spent. They, to date, are not being very helpful.
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