Now robbery is a strong term. If I was anyone important and I had used the term ‘robbery’ instead of ‘affair’ then I might be hearing from Goldman’s lawyers. Luckily I didn’t and I’m not anyone important.
But here is why I might have considered using the word robbery – as in ‘daylight’.
Goldman – and to be fair not only Goldman but also Merrill, Deutsche and Societe General of France – created securities called Collateralized-Debt Obligations CDO’s. These are derivatives based on Mortgages. Nothing illegal there.
Trillions of the things have been created and traded. They are in my opinion a large part of the unregulated debt-based paper currency the banks created for themselves and which caused the financial melt down. But that’s another story.
Goldman et al created these derivatives. They then took out insurance on those CDO’s from AIG. Remember them? Bailed by the US taxpayer to the tune of about $185B – so far. More needed without any shadow of a doubt. By insuring the CDO’s AIG guarantees to pay the banks IF the CDO’s lose value.
Of course the DCO’s all erupted like buboes on a plague victim. AIG was sent the bill and promptly fainted. AIG admitted it had never, in fact, ever had sufficient capital to have ever paid out on the insurance they had written. A fine business model if you ask me.
Luckily for the US tax payer, Goldman and the other banks had already been writing to AIG (this is all on the public record) to accept a reduction in the pay out down from 100% to a lower more ‘reasonable’ amount. Unluckily for the US taxpayer the FED stepped in and ‘ordered’ the banks to stop this sort of lose talk and told AIG to pay all the banks foreign as well as US ones, full 100% face value. AIG did. The tax payer got the bill. This became known as the ‘Backdoor bail out’.
‘But wait’. as they say in cheap US adverts, ‘there’s more’ – in fact its the best bit…
Goldman et al create derivatives. They therefore know very well what mortgages are in them and therefore can estimate how ‘risky’ they are. They would need to do this to price them. But what do they tell their insurer, AIG? After all you are supposed to be honest with your insurer. Do you smoke, take drugs have you got cancer or a heart condition?
AIG’s job as insurers is to take a look at what they are being asked to insure and assess what they think the risk of the CDO’s losing value is.
Of course what happened is that the CDO’s collapsed not by a bit, or even a lo, but catastrophically, by 50% of their value or more. Tens of Billions of dollars worth of them.
Now on the face of it AIG were just stupid, criminally negligent or bent, or all three. Goldman et al will say, we just hedged the CDO’s in the standard way banks protect themselves. But isn’t it odd that Goldman creates stuff which all fails?
If Goldman made cars for example. And sold them without disclosing a ‘slight’ design fault with say the brakes or the accelerator and lots of them crashed would that be a tiny bit of an ‘affair’?
The suspicion is that banks, not only Goldman, but all of them, may sometimes create securities/derivatives knowing they are risky, in part so that they and ‘other favoured clients’ can bet against them as soon as they are created and sold, A custom made inside trade.
Hi Golem
When the securities/loans were packaged up and sold on, the ratings agencies were supposed to rate them, as you know, these NINJA mortgages ended up rated at AAA.
The CDO`s that Goldman claimed for on these were either 1) never rated at all just stamped AAA so by neglect 2) the ratings agencies lied outright about them.
AIG were lazy and didnt do any due diligence. They took the word of the ratings agency rating the underlying loan or security whether to accept the liability if it tanked.
AS you know, the ratings agencies earn their fees from….the big banks eg. Goldman. It doesnt take much effort to suggest that someone like Goldman used their muscle and reputation in the market to lean on the ratings agencies to push whatever rating they likes for whatever crap they packaged.
The worse the debts passed with a greater rating, the greater the potential for greater profits when it goes down the toilet. Its in Goldmans interest to sell on crap.
How the ratings agencies were able to give a AAA rating to junk debt packaged up and resold by Goldman beggars belief, at worst its fraudulent. If Goldman are not to blame for any of this, why didnt they query the ratings for the junk they were selling on? Do they have no duty of care to their clients? No duty of care to the Federal Authorities? They would have known the ratings they were getting were not warranted. Was it all too convenient to turn a blind eye?
At best its a cynical manipulation and exploitation of a market with no regulation designed to royally screw their customer and the insurance company. At worst its just fraud.