I have written several posts here talking about how the most recent economic downturn was not directly the fault of subprime mortgage defaults but a result of the inherent instability of fractional-reserve banking and the AAA rating and selling of Mortgage Backed Security Derivatives/Toxic Assets/Collaterized Debt Obligations.
April 16th, the SEC filed a civil suit against Goldman Sachs for knowingly selling these Toxic Assets while at the same time betting against them and buying other derivatives that would increase in value in the event of a housing market downturn. So, while many banks bought up these MBS/ABS/CDO's, Goldman and Hedge Funds like Paulson and Co made billions first selling and then shorting the market. Goldman investors in ABACUS 2007-AC1 lost $10.9 Billion.
The evidence behind this civil suit involved several leaked internal emails discussing the racket. Goldman employee Fabrice Tourre is quoted/exerpted in an email to a friend on January 23, 2007 as saying:
“More and more leverage in the system, The whole building is about to collapse anytime now…"
"Only potential survivor, the fabulous Fab[rice Tourre]…"
"standing in the middle of all these complex, highly leveraged, exotic trades he created
without necessarily understanding all of the implications of those monstruosities!!!”
Similarly, an email on February 11, 2007 to Tourre from the head of the GS&Co structured product correlation trading desk stated in part, “the cdo biz is dead we don’t have a lot of time left.”
Goldman released the following statement: "We certainly did not know the future of the residential housing market in the first half of 2007 any more than we can predict the future of markets today,” Goldman wrote. “We also did not know whether the value of the instruments we sold would increase or decrease...Although Goldman Sachs held various positions in residential mortgage-related products in 2007, our short positions were not a ‘bet against our clients.’ Instead, the trades were used to hedge other trading positions,"
Goldman seems to be arguing that their shorting these CDO's is not much different than playing the "Don't Pass" Bar in Craps. But, even if Goldman Sachs and Paulson and Co take the fall for this, I am of the opinion that this is only the tip of the iceberg. Because although Paulson and Co made billions shorting these CDO's, The Banks who initially lost money and then were given bailout TARP money are the ones making trillions. Banks who received TARP money and additional money in the $11 trillion bailout turned around and bought US Treasury Bonds which earn 3%. And don't forget when a bank gets money from the government, it creates money on that money due to fractional-reserve lending, so that due to the money multiplier that $11 Trillion could have turned into hundreds of trillions. Who knows how many trillions of T-Bills the Banks purchased and how many billions the US government is now having to pay at 3% rate of return.
Again, Goldman and Paulson and Co. are just the tip of the iceberg. Goldman seemed to know from the emails that the housing market balloon was soon to burst in 2008. And that implicates the FED who stopped releasing M3 money supply numbers in 2006 when M3 immediately inflated to record levels and then was sharply contracted in 2008.
My hope is that this investigation does not begin and end with Fabrice Tourre. I have a hard time believing this deal was pulled off by a lone gunman.
1. Why were speculative Derivatives/ABS/MBS/CDOs created?
2. How did ENRON abuse derivatives based on internet bandwidth?
3. Why did the SEC institute a "Mark-to-Market" policy for derivatives?
4. How were S&P and Moody's fooled into giving "Tranched" CDO's a AAA rating?
5. Why were banks and cities lured into buying AAA "tranched" collaterized debt obligations instead of the usual safe AAA corporate bonds?
6. Why did the FED stop releasing M3 data in 2006?
7. Why did the M3 money supply immediately balloon 2006 and then contract sharply in 2008?
8. If the FED was no longer watching M3, why did the FED know to contract M1 at the same time M3 was ballooning thus keeping the money multipler M3/M0 constant until M3 was sharply contracted.
9. Why would the FED contract the Money Supply sharply knowing according to Bernake's confession at Milton Freedman's 90th Birthday that contraction of the money supply by the FED caused the Great Depression?
10. What did the Banks do with all the free TARP money they received from US Treasury?
11. If banks operate on fractional reserve lending, how much money did banks create from the trillions of dollars they received in TARP and other programs?
12. According to the FED's recent buying of 300 billion in long-term T-Bills, how many T-Bills did banks purchase and how much money is the US Taxpayer paying our banks to hold T-Bills which were paying 3% up until the FED bought a load of them.