Monday, July 26, 2010

Let's count the reasons, 1, 2, 3... 180 billion

The Financial Crisis Inquiry Commission that was appointed by Congress is threatening to drain the swamp over at Goldman Sachs to find out how much of its business comes from derivatives trading. The creatures living in the slime nearly took down the entire world economy from the sheer size of the derivatives trade estimated to be between 600 and a 1000 trillion. It was these contracts starting to unwind in 2008 that nearly destroyed civilization as we know it.

When questioned by the panel, Goldman’s executives maintained they had no idea how much of their trading business came from derivatives. (derivatives, that would be the buying and selling of huge dollar amounts of “nothing” (should this be called Seinfelding?)) The recent settlement with SEC for over half a billion dollars involved Goldman creating a nearly worthless mortgage backed security or synthetic collateralized debt obligation (CDO) called ABACUS 2007-AC1 to sell to their ordinary clients.

Your pension plan or the manager of your 401k would be the likely victim. Then Paulson & Co, another client who was in on the scam and had hand picked the mortgages so that they were sure that CDO would fail. Paulson then bought derivatives betting against the same CDO and the people who took the other side of the derivatives bet (your investment manager again) lost a billion dollars (that would be a billion of your money).

Paulson & Co “earned” three billion dollars last year by Mr Paulson’s “smart” betting against Wall Street’s synthetic investments. The Wall Street banks like Goldman made hundreds of billions selling these instruments and then selling bets for and against them but really cleaned up when they “bet” for the house.

The FCIC has said they won’t back down and will send in auditors if necessary to uncover the extent of Goldman’s involvement in derivatives trading. This all started with rumors swirling around the collapse of AIG that had required a 180 billion dollar bailout from the Bush Administration to keep a couple of trillion dollars worth of insurance and annuities from disappearing in a flash. This money appears to have gone directly to cover derivative bets won by Goldman Sachs. The commission would like to know if Goldman was playing AIG for a sucker the same way they did the people who bought derivatives based on ABACUS 2007-AC1.

Goldman executives claim they only started to hedge their bets when AIG started missing margin calls. The thing is that margin calls only become necessary because of a wild swing in one direction by the market. The question is who was driving the market? Goldman says, who us? There is a 180 billion reasons to think that was exactly who was doing it.

Oh, by the way, back in 2008 the Wall Street banks owned more oil than the oil companies, remember $4.00 gas?  They also were driving up the price of food commodities and that put one billion human beings into chronic hunger and starvation. Republicans and conserva-Dems have fought and have been largely successful in blocking any regulation of these practices that had always been illegal until Reagan and his friends decriminalized them. One, two, three….


Jason said...

It's scary because it is true.