For those intirested in what exactly the allegations against Goldman Sachs are, and a laymens explanation of what happened during the crisis, including what these complicated "toxic assets and credit default swaps" are, I have written a small piece about it. Actually not small, so only read if you are intirested in this particular subject.
CASINOS, FANTASY SPORTS, AND BAILOUTS. A TALE OF RECESSION
By Sgreger1
The following is intended to educate the financially illiterate on exactly what happened during the housing crisis, and where all of our money went. It will explain what these “complicated financial vehicles” and “toxic assets” are, and will unveil for you a crime of such epic proportions that it makes Bernie Maddoff look like a saint in comparison.
Fantasy Baseball
Do you play? Even if you think you don’t, your bank account sure does. This all started when some financial genius went out and sought to make a lot of money for a very few people. The players here include Goldman Sach’s, AIG, and several other financial entities ranging from banks to investment brokers.
In fantasy baseball, people make fake teams by selecting real baseball players from many real world teams and consolidating them on paper into one “fantasy” team which they “own”. Throughout the year, as the real players accrue stats, those stats are tracked on paper and added up in your fantasy team. A bunch of guys get together and put money into a hat, and at the end of the season, whoever’s players stats are the highest, and whoever has the best team, wins the pot.
This is exactly what happened with toxic assets. Some brokers (namely Goldman Sachs) set up a very complicated fantasy sports team, and then told people their team was AAA guaranteed and sure to win. Like fantasy baseball, none of the parties involved actually owned any players (any assets), the broker (Goldman Sachs) simply collected data from real assets which it did not own, and turned the whole thing into a casino style bet. The players in this fantasy team were mainly mortgages. During the housing boom, real estate made a lot of money, and Goldman Sachs put together a fantasy baseball team with all of these mortgages as the players. But, like all casinos, the cards were stacked in the houses favor.
See, Goldman Sachs picked all of the WORST players for this fantasy team, knowing that at some point it would surely fail. They then told everyone else that their team was AAA guaranteed to win and was a great investment, so investors far and wide began betting on this team of soon to be failures, meanwhile, Goldman Sachs bet that the team would lose, since they knew the players they had chosen were all duds.
But how, you ask, can Goldman get away with giving a good rating on an obviously losing team? Aren’t there regulators or people who grade these types of investments? Why yes, of course there are, the largest of these is called Moody’s ratings, and as you expected, Goldman Sachs paid them off (indirectly) to give their team a good rating so investors would invest their money in it. See. Goldman pays companies to rate their team, and whoever they choose to do business with makes a lot of money, so Goldman shopped around, refusing to pay anyone who would give a bad rating, until it found one that, in exchange for Goldman’s business, would give it a good rating. Do you know what one of the fastest growing stocks on the market was right up to the crash? Moody’s. There was a lot of money being exchanged here, and therefore the rating agencies were obliged to give a better rating than Goldman’s fantasy team deserved.
So, what do they mean when they say that Goldman advertised their team as a winner, yet “bet” against their own team? Simple, they bought a massive insurance policy on the team. Now, for us normal people, insurance is high regulated. For example, the insurance company will not allow me to take out an insurance policy on my neighbor’s house, because then I may be inclined to burn their house down for a profit. For the big boys like Goldman Sachs however, these rules do not apply.
See they went around all that regulation and just invented something new, called credit default swaps. At the end of the day all they did was buy a huge insurance policy on their fantasy sports team, so that if it failed, they would get a check from the insurance company. This is what it means to bet against something; if I buy a skyscraper, I then get insurance because the thing might get bombed, therefore I have in essence “bet” against my own property, so I don’t lose even if the whole thing explodes.
So, whom did Goldman get such an elaborate insurance policy from? Why, AIG of course. But I’ll get back to that later.
Anyways, in fantasy sports, if the real life players were to say, go on strike, and no actual baseball games occurred, the entire fantasy sports industry would collapse, because they don’t own any players, they just collect stats on other players they don’t own, and use that to make a bet. Same thing happened here. Goldman purposely made a fantasy team out of all the worst players, in this case, bad mortgages given to people who could not afford them in the long term were those players. They were sure to fail at some point. So once the housing market started correcting itself, and people started not being able to afford their mortgage payments, the assets were now worth nothing. In other words, there was no real life baseball players left to get statistics from for your fantasy team, hence the whole thing collapsed.
But the real beauty here is that if you own the mortgages, only so many people can “invest in them”, because there are a finite number of mortgages available. But in the fantasy sports world, since none of the parties involved actually own any players, anyone who feels inclined can place their bet. Even if there are only 100 baseball teams, 30 million people could make their own fantasy baseball teams, and the same went for the team Goldman Sachs created.
So, the whole thing collapses, and everyone loses a LOT of money. Everyone is pissed because they were told by Goldman that this team was a winner, and yet they lost miserably.
So now some of our biggest companies, such as AIG are screwed, they backed these toxic assets and now have no way to pay out what they owe, therefore they will collapse. That is, unless the government gives them free money. So the president rallies people and says that if we don’t bail these companies out, we will fall into a depression. Even though they made bad investments, they are “too big to fail”. So the bailout money got approved and divvied out to individuals such as AIG. The president sold it as though this money would be used for lending and would in the end help the economy and save it from stagnation, but the plot was far too sinister for anything like that to happen. So AIG gets $12 billion from the gov (read as: Taxpayers), and what do they do with it? Do they push it out into the economy, lend to small businesses etc? No, they used that money to pay what they owed to Goldman Sachs. Goldman Sachs building got bombed, and they wanted their damn insurance money. So the money went from the taxpayer, to AIG, and ultimately right back into Goldman Sach’s hands in the form of an insurance claim.
So not only did Goldman make billions from charging a brokers fee each time someone wanted to bet on their team, they also got the money back for their failed team in the form of an insurance check from AIG. Talk about double dipping profits. It’s like if I opened a pizza store, sold a million pizzas, then burned the thing to the ground and claimed my insurance money, recouping my initial costs for setting up the pizza store, plus some extra profit. It’s the perfect crime.
CASINOS, FANTASY SPORTS, AND BAILOUTS. A TALE OF RECESSION
By Sgreger1
The following is intended to educate the financially illiterate on exactly what happened during the housing crisis, and where all of our money went. It will explain what these “complicated financial vehicles” and “toxic assets” are, and will unveil for you a crime of such epic proportions that it makes Bernie Maddoff look like a saint in comparison.
Fantasy Baseball
Do you play? Even if you think you don’t, your bank account sure does. This all started when some financial genius went out and sought to make a lot of money for a very few people. The players here include Goldman Sach’s, AIG, and several other financial entities ranging from banks to investment brokers.
In fantasy baseball, people make fake teams by selecting real baseball players from many real world teams and consolidating them on paper into one “fantasy” team which they “own”. Throughout the year, as the real players accrue stats, those stats are tracked on paper and added up in your fantasy team. A bunch of guys get together and put money into a hat, and at the end of the season, whoever’s players stats are the highest, and whoever has the best team, wins the pot.
This is exactly what happened with toxic assets. Some brokers (namely Goldman Sachs) set up a very complicated fantasy sports team, and then told people their team was AAA guaranteed and sure to win. Like fantasy baseball, none of the parties involved actually owned any players (any assets), the broker (Goldman Sachs) simply collected data from real assets which it did not own, and turned the whole thing into a casino style bet. The players in this fantasy team were mainly mortgages. During the housing boom, real estate made a lot of money, and Goldman Sachs put together a fantasy baseball team with all of these mortgages as the players. But, like all casinos, the cards were stacked in the houses favor.
See, Goldman Sachs picked all of the WORST players for this fantasy team, knowing that at some point it would surely fail. They then told everyone else that their team was AAA guaranteed to win and was a great investment, so investors far and wide began betting on this team of soon to be failures, meanwhile, Goldman Sachs bet that the team would lose, since they knew the players they had chosen were all duds.
But how, you ask, can Goldman get away with giving a good rating on an obviously losing team? Aren’t there regulators or people who grade these types of investments? Why yes, of course there are, the largest of these is called Moody’s ratings, and as you expected, Goldman Sachs paid them off (indirectly) to give their team a good rating so investors would invest their money in it. See. Goldman pays companies to rate their team, and whoever they choose to do business with makes a lot of money, so Goldman shopped around, refusing to pay anyone who would give a bad rating, until it found one that, in exchange for Goldman’s business, would give it a good rating. Do you know what one of the fastest growing stocks on the market was right up to the crash? Moody’s. There was a lot of money being exchanged here, and therefore the rating agencies were obliged to give a better rating than Goldman’s fantasy team deserved.
So, what do they mean when they say that Goldman advertised their team as a winner, yet “bet” against their own team? Simple, they bought a massive insurance policy on the team. Now, for us normal people, insurance is high regulated. For example, the insurance company will not allow me to take out an insurance policy on my neighbor’s house, because then I may be inclined to burn their house down for a profit. For the big boys like Goldman Sachs however, these rules do not apply.
See they went around all that regulation and just invented something new, called credit default swaps. At the end of the day all they did was buy a huge insurance policy on their fantasy sports team, so that if it failed, they would get a check from the insurance company. This is what it means to bet against something; if I buy a skyscraper, I then get insurance because the thing might get bombed, therefore I have in essence “bet” against my own property, so I don’t lose even if the whole thing explodes.
So, whom did Goldman get such an elaborate insurance policy from? Why, AIG of course. But I’ll get back to that later.
Anyways, in fantasy sports, if the real life players were to say, go on strike, and no actual baseball games occurred, the entire fantasy sports industry would collapse, because they don’t own any players, they just collect stats on other players they don’t own, and use that to make a bet. Same thing happened here. Goldman purposely made a fantasy team out of all the worst players, in this case, bad mortgages given to people who could not afford them in the long term were those players. They were sure to fail at some point. So once the housing market started correcting itself, and people started not being able to afford their mortgage payments, the assets were now worth nothing. In other words, there was no real life baseball players left to get statistics from for your fantasy team, hence the whole thing collapsed.
But the real beauty here is that if you own the mortgages, only so many people can “invest in them”, because there are a finite number of mortgages available. But in the fantasy sports world, since none of the parties involved actually own any players, anyone who feels inclined can place their bet. Even if there are only 100 baseball teams, 30 million people could make their own fantasy baseball teams, and the same went for the team Goldman Sachs created.
So, the whole thing collapses, and everyone loses a LOT of money. Everyone is pissed because they were told by Goldman that this team was a winner, and yet they lost miserably.
So now some of our biggest companies, such as AIG are screwed, they backed these toxic assets and now have no way to pay out what they owe, therefore they will collapse. That is, unless the government gives them free money. So the president rallies people and says that if we don’t bail these companies out, we will fall into a depression. Even though they made bad investments, they are “too big to fail”. So the bailout money got approved and divvied out to individuals such as AIG. The president sold it as though this money would be used for lending and would in the end help the economy and save it from stagnation, but the plot was far too sinister for anything like that to happen. So AIG gets $12 billion from the gov (read as: Taxpayers), and what do they do with it? Do they push it out into the economy, lend to small businesses etc? No, they used that money to pay what they owed to Goldman Sachs. Goldman Sachs building got bombed, and they wanted their damn insurance money. So the money went from the taxpayer, to AIG, and ultimately right back into Goldman Sach’s hands in the form of an insurance claim.
So not only did Goldman make billions from charging a brokers fee each time someone wanted to bet on their team, they also got the money back for their failed team in the form of an insurance check from AIG. Talk about double dipping profits. It’s like if I opened a pizza store, sold a million pizzas, then burned the thing to the ground and claimed my insurance money, recouping my initial costs for setting up the pizza store, plus some extra profit. It’s the perfect crime.
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