Wednesday, April 21, 2010

Springtime for Goldman

A bloggy friend recently twitted me that I have a bit of an unhealthy obsession with Goldman Sachs.

And honestly, I don't have much of a defense. I do think Goldman Sachs is one of the groups most responsible for the global financial meltdown of the last two years. They've got their greedy little fingers in pretty much every nefarious deal that has been brought to light.

Goldman Sachs employees or former employees are in positions of power in multiple governments (just ask the Greeks how well that works out). They masterfully pulled strings to get bajillions of dollars in government bailouts for themselves and their sweetheart business partners (courtesy of what every Obama apologist I meet tells me is a lower tax burden for myself). The result of that bailout? How about a second quarter of record profits
Goldman Sachs said today its first-quarter earnings almost doubled to $3.3 billion as its trading business again surpassed the rest of the financial industry. … It was Goldman's second most profitable quarter since going public in 1999. In the fourth quarter, Goldman Sachs earned a record $4.79 billion.
So yeah, I don't think I'm alone when I took a little delight in seeing that Goldman Sachs was the target of a civil fraud lawsuit from the SEC (although I do wonder what took the SEC so long. Must have taken longer than they thought to bury the worst evidence connecting Goldman to the Obama administration… but that's a different post.)

There's a lot of financial industry jargon and legalese involved in the complaint by the SEC. NPR's Planet Money does a great job of explaining it, but I'm going to try to make it even simpler.

It basically breaks down like this:
  1. A hedge fund scumbag named John Paulson wanted to make a huge bet against the ability of suckas to pay their NINJA mortgages, hoping to make a ton of money when the real estate bubble (that Goldman helped create) burst and people started losing their homes. To do this he needed a kind of bond that would be composed of high risk mortgages that were sure to fail soon.

  2. Goldman stepped in and said their buddies at ACA Management, a kind of wholesale company in the bond business, would be happy to build this bond (or else!) and then Goldman Sachs would sell it for them.

  3. So Paulson and ACA got together, picked out a shit-ton of absolute crap mortgages and built the bond, also called a CDO (collateralized debt obligation). The mortgages in the bond were carefully selected so that Paulson and Goldman Sachs could be sure the CDO would fail.

  4. Paulson then bought a bunch of insurance on the CDO that would pay him off big when the CDO eventually when tits up.

  5. In the meantime, Goldman sold the CDO to institutional investors like banks, pension funds and orphanages. Note, they raked in a lot of cabbage in commissions from these deals.

  6. When the housing market collapsed, the CDO failed just like it was designed to, and Paulson and Goldman Sachs made a fuckwad of money from their insurance bets (their short positions).
This scheme may sound vaguely familiar, especially to you Broadway and/or Mel Brooks fans. It's basically the same thing Max Bialystock was trying to do in The Producers, except Goldman Sachs succeeded in failing.

So, the SEC says Goldman Sachs and Paulson defrauded investors by saying that the CDO was built to succeed when in fact they themselves had engineered it to fail.

Of course, it also looks like they engineered a patsy in this whole scheme as well. They've bought a witness to say that he told ACA that Paulson's hedge fun planned to bet against the CDO, thus putting the responsibility on ACA to disclose how crappy of an investment it would be.

So apparently Goldman will get away with defrauding investors and the public. But that's okay, at least the Obama administration can claim that they tried.

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  1. I liked the Producers comparison better when it was on Planet Money.

  2. Agreed. That's why I linked to Planet Money.

  3. and for these special skills obama hired a bunch of them to run this here economy

  4. Emawck:

    As a bit of a digression, I couldn't help but notice you failed to mention the billions of dollars made by the government in the TARP bailouts. Not only was all TARP money paid back; but at a huge profit to the government. Even Citi's loan (the most volatile of the banks) would yield a $10 billion profit to the government if we cashed-in our Citi stock now. But the government's waiting 'cause we'll make a lot more money than that. Obama's handling of the financial crisis (the worst since the Depression--'caused by Libertarian speculators that didn't want SEC oversight within the financial institutions) has been nothing short of genius. Particularly when you consider he handled it while planning war strategy in Afghanistan, passed health care reform (easy task I know), and had to appoint a Supreme Court judge. GM has paid back close to $2 billion dollars of their loan, and once they start selling stock again, the government's gonna clean up on that deal. All while maintaining 900,000 jobs. When you're wrong, you're wrong. And you should admit that the bailouts worked and retract comments you've made in the past that said they wouldn't.


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