Am I oversimplying what Goldman Sachs (and others) did?

[StageLeft]

It seems to me that they sold sub-prime loans, which presumably they knew were fairly crappy, but they made money selling them, and since they knew they were junk they took out credit default swaps--insurance that says if the loans don't perform they get money even if GS no longer has actual exposure to them (doesn't own them in any way)--and so they made money twice:

1) Selling crap
2) Betting on the crap they sold being crap and taking profit when it turns into crap

So then they got paid at least initially at full 100% dollar on the dollar. Isn't this like me building you a house and covering up all my mistakes with drywall but who cares I don't live there and then once the sale closes I take out insurance betting on the fact the house I built you is going to fall down (and I should know, since I was the one who built it) and so when it does I make even more money, this time not fvcking you but whoever I bought the insurance from?

Anyway, a link from today is how Geithner told AIG to be hush hush about all the money it was spending (taxpayers' money).

http://www.bloomberg.com/apps/news?pid=20601087&sid=aXIvW4igKV38

Are corporations like GS still allowed to take out CDS on sh*t that they sell being sh*t? I'm sure they are.

 

[JS80]

Poor example. It's more like taking a company public they know will fail and buying put options on them.

 

[StageLeft]

Poor example. It's more like taking a company public they know will fail and buying put options on them.

My example is better because in yours you're a totally passive observer not a motivating force in the likelihood of failure like in my example.

 

[zephyrprime]

Yeah pretty much. They knew the stuff was crap but they used their fake math to make it seem like it was a solid investment and then sold it. Then they place bets against the stuff knowing it sucked. In the insurance industry, this is called moral hazard. But wallstreet was able to buy off congress and prevent CDS's from being regulated like insurance so moral hazards were legal in the CDS market. Then government money is used to pay out on those CDS's which AIG didn't have enough money to do so itself.

That's not all that happened though.

 

[JS80]

My example is better because in yours you're a totally passive observer not a motivating force in the likelihood of failure like in my example.

Nope. Making your example better would be building a house, and selling it for more than it's worth and buying puts on the case shiller index.

 

[UglyCasanova]

Urm I don't believe that Goldman sold subprime loans. They were an investment bank. I'm sure they traded these mortgage backed securities along with everyone else and were famous for shorting the mortgage market and making a profit when everyone else was tanking, but they were not the people who advertised a mortgage of 120% of your home's value to people with poor or no credit.

 

[cubeless]

gs created the market for the stuff and stayed at arms distance playing both sides... and then got their final piece (now are a bank) as they made money on all the swirl... these are some scary smart evil dudes...

 

[Fern]

It seems to me that they sold sub-prime loans, which presumably they knew were fairly crappy, but they made money selling them, and since they knew they were junk they took out credit default swaps--insurance that says if the loans don't perform they get money even if GS no longer has actual exposure to them (doesn't own them in any way)--and so they made money twice:
-snip-

I'm sure there are others who know better than I, but I'd say - you're close, but a little off.

They didn't (technically) sell sub-prime loans. The sub prime loans originated elsewhere, they bought them, packaged them up into CDO's (collateralized debt obligations) and sold those to institutional and other investors.

I don't think they "took out credit default swaps", I think they 'made them up' and sold them to others. Thus, when the loans/CDO went bad they were on the hook for all the credit default swaps they sold.

Actually, (IIRC) GS owned a bunch of CDO's and were one of the first to sell them off (again IIRC, at a steep discount) because they saw the problem coming before most others.

But I probably shouldn't even post about it because I think it was all a bunch of BS. A bunch of fear mongering, along with claims of Obama diverting us away from a financial crisis etc. A lot of TARP money just went overseas. IMO, if you invested in CDS and got burned that's your fvking problem, not mine, yet it's us who picked up the tab. Also, IMO, nothing's been averted because money the government borrowed for TARP (and the stimulus bill) was raised by selling Treasury securities; that just sucked up money that otherwise could have gone out as loans to the private sector (businesses). I've read many banks have been investing in these treasury securities, that's one (big) reason why they've got no money/funds to make loans.

Anyway, at the end of the day you're right - it's fvcking ridiculous and we're the ones who got screwed.

Fern

 

[K1052]

I don't think a lot of investors really knew (including the I banks) what was really in the securities they bought/traded. They saw a highly rated package of housing debt and went for it. Overeliance on the rating agencies, belief that the housing market would continue to climb, and sheer greed got a lot of people's tit in the wringer. It took a while for investment firms to comb through what they owned and figure out what amount of the securitized debt they held was really worthless but AAA rated. The rating agencies looked the other way or just assumed everything would be fine since they were insured.

GS just figured out what had really happened before anyone else and acted accordingly to offset the massive losses they were about to sustain.

 

[theeedude]

It's even worse, because GS could buy naked distressed CDS for pennies on the dollar and then profit greatly off taxpayers by redeeming them for a full buck. So I don't buy when the banks claim they've repaid taxpayers. Not until they are taxed enough to repay AIG bailout money.

 

[heyheybooboo]

1) Selling crap - At this point it appears in 2006 & 2007 GS sold more than $50 billion steaming piles of it
2) Betting on the crap they sold being crap and taking profit when it turns into crap - the steaming piles from '06 & '07 leveraged more than $500 billion in 'private' under-the-radar investments, many of which seem to center on deals made through the Cayman Islands

I think the current tally for GS 'passed-thru taxpayer dollars' from AIG is around $14 billion with an additional $8 billion exposure.

You are correct that a significant portion of GS revenue and profits over the last 3 years have been derived from their exotic financial maneuvering.

So much so that $16 billion has been set aside by GS to pay bonuses for 2009.

If there is any good news to come out of this, GS is currently in litigation with Merrill Lynch over one of the 'Cayman Deals'. Where this may lead I have no clue, but there are rumblings that many of these transactions were huge conflicts of interest under SEC regulations.




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