Goldman Sachs Scheme Was An Old Fashioned Mafia Insurance Scam

Posted by politicalpartypooper on April 20, 2010

An excerpt from my April 7, 2010 post called, Was the Financial Meltdown Manufactured By Banks-Too-Big-To-Fail? Yes, many of us in the investment business were talking about the probability of scams and frauds due to CDO insurance long before the SEC made its move.

How do we reign in these mammoths?  Do we need to get more serious about prosecuting some of these people?  An even bigger question lies unanswered:  Was the housing bubble artificially created?  With the advent of Credit default swaps, did these huge banks see a way to take on very risky debt at high interest rates and get paid anyway?  Did they use that opportunity to create a crisis where they knew the government would have to bail them out and honor AIG’s CDO commitments?

No one has answered these questions.  No one in our government has even asked them.  Why not?  I want to know.  Was the financial meltdown MANUFACTURED by these Banks-too-big-to-fail?  History is not on their side.  The only evidence we have from their collective pasts is that, hell yes, we ought to be massively investigating if they manufactured this crisis for a huge payday.

In light of the SEC’s lawsuit against Goldman Sachs for defrauding investors, I think the answer to the above question is yes, and as time goes by, we are going to see more and more evidence of this.  The trouble is, most of what Goldman Sachs did was legal, which begs the question, what idiot thought that allowing a giant like Goldman Sachs to create a tranche of mortgage bonds that it could sell as an “investment” while betting against it in a hedge fund and buying “insurance” on it was a good idea?  Who thought that this being legal was smart?

My God!  A five-year-old knows that if they want to be proven right about something, all they have to do is “make it happen”.  Example:

Spanky:  “Hey, Alfalfa!  I bet your new bike gets stolen!”

Alfalfa:  “No way!  You’re on!  How much?”

Spanky: “Five bucks!”

Next day, Alfalfa’s bike is stolen, by Spanky.

This is EXACTLY what Goldman Sachs and John Paulson did to investors.  And…

it was legal.

If you don’t think we need financial regulatory reform, I am going to suggest that you like America being run by the Mafia, because this type of scam, though it sounds sophisticated, is nothing more than a simple Mafia insurance scheme.

I recently made $5.00 per share by shorting Wellpoint after the healthcare bill passed.  I only did it to hurt Wellpoint and to prove a point.  But I will say this:  Shorting stocks should be illegal.  Allowing people to make a run on a company for no other reason than because they “bet that the company’s stock will drop” is not only immoral, but it flies in the face of everything America stands for.  We didn’t build this country by betting on its failure.  Likewise, you cannot and will not build a stable financial foundation by allowing the Mafia to bet on failure.

Take Hedge Funders and Shorters to Las Vegas, where that kind of asinine betting belongs.  Then guys like John Paulson and Lloyd Blankfein can work with their Mafia friends on devising new gambling schemes.  Take it to  Las Vegas, where fucking Americans with weighted dice is legal.  That’s what this was: a game of loaded-dice.  The outcome was never in doubt, and Goldman Sachs knew it.  At least in Vegas, they tell you they’re going to fuck you ahead of time.

As for the American press, I don’t know what the confusion is all about.  It’s not like we’ve never heard of or seen the oldest game in town; a Mafia insurance scam.  That’s all this was.


5 Responses to “Goldman Sachs Scheme Was An Old Fashioned Mafia Insurance Scam”

  1. […] Comments Goldman Sachs Scheme… on Was The Financial Meltdown Man…David Moulton on Why Move Your Money to a […]

  2. […] This post was mentioned on Twitter by Simon Peters. Simon Peters said: Goldman Sachs Scheme Was An Old Fashioned Mafia Insurance Scam …: If you don't think we need financial regulator… http://bit.ly/9wv2p1 […]

  3. Edith said

    Months ago I was watching a panel discussion about the meltdown where some bankers, academics, and reporters were attempting to assign blame for the “systemic credit crisis” emphasizing that there was more to it than housing. They proposed that the business schools (Wharton, Tuck, Kellogg, Harvard, Yale, Rutgers etc.) were incompetent frauds too. They also noted the utter failure of a media and academia that had been satisfied with puff pieces and celebrity worship of the financial titans, and never subjected there facts to a reality check. One of the writers proposed prosecuting everyone, but the others objected that you can’t criminalize stupidity and naivete.
    These financial yahoos (with or without fancy degrees) can only be held accountable to the degree that they knowingly and willfully misrepresented their financial reports or falsified documents. Undoubtedly some did, but many were just “believers” seduced by the herd, sold on their own talent and intelligence, and living in an echo chamber. Those people, whose claim to fame, is the assessment, analysis, and management of risk, relied on computer models and algorithms (that they learned in business school but didn’t necessarily master) which in turn relied on historical data. GARBAGE IN, GARBAGE OUT. These models obviouly can be misused. But the genuises have so much ego involvement and emotional investment in them, it is like they are wearing blinders. They see them as ends in themselves instead of tools. Since they are surrounded by yes men, they have round robins of mutual self congratulations that are self promoting and self serving. In other words, they actually believe their own hype and spin. After the dust settles, what makes them look so foolish is their defiance of common sense.
    Don’t forget that the real estate industry was complicit also. And I reserve my highest scorn for the rating agencies.

    Caution: These are the same kind of folks who bring you global warming.

  4. Edith said

    What about AIG?
    Were they victims or complicit? No one admits that capitalism is imperfect nor does anyone consider how modern day capitalism evolved. Examples are GE and AIG. Did you ever think that either of these companies would diversify to the point where they are for all intents and purposes holding companies? What business does AIG have owning resorts, motel chains, insurance companies, most of the worlds commercial airliners etc or likewise with GE owning telecommunications, health insurance, etc. These are now old business models developed in the 70s by the likes of Jack Welch et al. This concept has made these sorts of companies too highly levered for today’s economics. When things are good they are real good conversely when things are bad they are really bad.
    The more realistic business model should be to diversify but to do so in a way that if one company is not doing so well it is offset by a company or industry that is doing well; sort of a self-hedging concept.
    Obama is correct that Wall Street does need controls. Too much cheating and too many leaks for insider trading. It is a crying shame that Brooksley Born was cut off at the knees by the usual suspects when she proposed trading CDOs on an exchange modeled on the Chicago Mercantile Exchange.
    I do not know the answer as to why self correcting mechanisms failed but they are still my preference. Even if we beef up the SEC, CFTC and other regulating bodies they will now have to be international and intune with the reality that we now live in a global market. We can no longer count on monetary policies of the Fed to control the actions of American Corporations overseas and likewise there are other foreign comglomerates that need to be controlled too. There are at present, except for the EU, are no such bodies with the powers of the SEC or CFTC that are effective anymore.
    You have my thoughts; the answer is really above my paygrade except for the obvious one: There are more and more derivatives popping up each day, many more than there are stocks and bonds. Derivatives are the new game in town and there is NO legislation to my knowledge yet to get them under control. This has to be the priority of the global economy because these under the table deals are still haunting us and the capitalist system. They need to be controlled legally and now. Does that not strike you odd that such legislation is still not been addressed?

  5. Edith said

    This has gone around the internet a couple of times but it bears repeating:
    Heidi is the proprietor of a bar in Detroit. In order to increase sales, she decides to allow her loyal customers, most of whom are unemployed alcholics, to drink now but pay later.
    She keeps track of the drinks consumed on a ledger (therby granting the customers loans).
    Word gets around about Heidi’s drink now, pay later, marketing strategy and as a result increasing numbers of customers flock into Heidi’s bar.
    Soon she has the largest sales volume in the state.
    By providing her customers’ freedom from immediate payment demands, Heidi meets no resistance when she substantially increases her prices for wine and beer, the two products with the highest sales volume.
    Heidi is rolling now; her sales increase dramatically.
    A young and dynamic vice-president at the local bank, recognizes these debts as valuable future assets and increases Heidi’s credit line. He sees no reason for undue concern since he has the debts of the alcholics as collateral.
    At the bank’s headquarters, expert traders transform these loans into DRINKBONDS, ALKIBONDS, AND PUKEBONDS.
    These AAA secured securities are traded worldwide and purchased by investors who don’t know they are based on loans to uninsured alcoholics.
    Nevertheless, their prices continue to climb and become the top selling product of one of the leading brokerage houses.
    One day, despite the continuing success, a risk manager at the bank (subsequently fired for his negativity) decides the time has come to seek payment for the debts incurred at Heidi’s bar.
    Heidi demands payment from her alcoholic patrons, but being unemployed they cannot pay back their drinking debts. Therefore Heidi is forced to default and claim bankruptcy.
    DRINKBONDS AND ALKIBONDS drop by 90%. PUKEBONDS perform better and stabilize after an 80% drop. The decreased bond asset value destroys the banks liquidity and prevents them from issuing new loans.
    The suppliers of Heidi’s bar having granted her generous payment extentions and having invested in securities are faced with writing off her debt and losing 80% on her bonds.
    Her wine supplier claims bankruptcy, and her beer supplier is taken over by a competitor, who closes the local plant and lays off 50 workers.
    The bank and brokerage houses are saved by the government following dramatic round-the-clock negotiations by leaders of both political parties.
    The funds required for this bailout are obtained by a tax levied on employed middle class non-drinkers.
    Where did the money go?

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