Lloyd Blankfein, In Full Regalia As Goldman-Sachs's CEO
The U.S. Government filed a civil action against investment firm Goldman-Sachs (VAMPSQD) in Federal court today, accusing the Vampire Squid of the finance industry with defrauding investors.
In a nutshell: During those heady, good-for-the-'Investor class', Go-Go L'il Boots Bush years, G-S offered 25 different investments to clients. They were backed by CDO's -- Collateralized Debt Obligations -- which consisted of various 'pools' of mortgages.
So long as the mortgage-holders paid and didn't default on their home loans, the mortgage pools would perform well and the CDOs maintain their value. So long as the risk assumed by the lenders was low -- loans were made to people who could repay them.
Meaning, the loans weren't made to, say, a couple who had four children, with an income of $40,00 a year and no down payment, to buy a $3 Million-dollar home with interest-only payments for two years... which then reset, at higher payments they couldn't hope to make. Or loans that allowed the same family to refinance every six months or so in order to take cash loans on their property -- "treating them like ATMs" -- in order to upgrade their home with Viking ranges and a pool, and buy new SUVs, and finance a lifestyle stratospherically beyond their means.
Does this mean that most of the structure of 'Free-Range' American capitalism had been tied to the delusional belief that real estate prices would rise higher, forever? That we can (and should) live in a Robin Leach-esque fantasy world of instant gratification and elite access? Oh my yes.
In the first months of 2007, Bear-Stearns Had Yet To Show
Sign Of Trouble; The Crash Was 19 Months Away -- But All U.S.
Household Debt Nearly Equaled Our Gross Domestic Product
And the theory behind creating the CDOs was simple: Who would default on the loan for their 'primary residence'? Mortgages have traditionally been one of the most stable lines of income for a bank; people will default on credit cards or auto loans, but not on their house payments. So, when someone dreamed up the notion of bundling the mortgages into a pool and turn that into a vehicle for investment, it seemed like a good situation. Unless, of course, the loans being made created a massive, volatile amount of risk. Unless the economy collapsed.
John Paulson And Friend: Two Years Ago, It Was An Open Secret
He'd Made Billions 'Betting Against The Market' (New York Magazine, November 2008 -- Two Months After The Crash)
Goldman-Sachs' investment had some interesting twists, however. They went to John Paulson, a well-known hedge fund manager, and allowed Paulson to pick the mortgages that went into the CDOs. Some of them, Paulson could loan with bad ("toxic" "unsustainable") home loans.
Then, Johnny The Stuffer could bet against the performance of the very same CDO investments he created -- knowing which ones would fail! If they did, Paulson stood to make a lot of money -- and Goldman was allowing him to choose. Up front. In advance... so the Federal complaint alleges.
(For the five-minute explanation of this, with added yucks, go watch this).
Hey, Little Lloyd! Hey, Johnny! What role models you are for the kiddies, hah? I guess this is what all newly-immigrant parents tell their kids -- that this is the Promise Of America: If you work very hard, someday you may grow up to be a thief -- a very, very clever thief, and an Oligarch, whom no one can touch because you are so rich.
Ah, America; the land of Opportunity.
And Goldman-Sachs had taken care of their end, too, by allowing Paulson to create the investments. And as they were written, if the CDOs did fail... the investors would be on the hook to pay G-S for losses. How sweet was that? They couldn't lose, no matter what!! And Paulson could, uh, make out like a bandit!!
And, that's what happened. Only -- the investors were never let in on all the fun! And they got soaked!! Ha ha ha ha ha ha!!! Joke's on them, right?
From Last Year: Mr. & Mrs. Blankfein's G-S Holiday Season
That's to say, they lost a good bit of money. Billions of dollars, in fact -- most of which went to Goldman-Sachs, and John Paulson.
Isn't that funny? The Department Of Justice doesn't think so.
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