Stories
of corruption are always chilling since the participants always seem to
get away with it and we are left feeling very vulnerable.
The
scams that are enacted against us by con-men, be it the rogue house
builder or the data fraud specialist, where our bank information is
stolen or sold and we find money haemorrhaging out of our account is
becoming a common event.
We become more accessible to
the "baddy" through the Internet, as we use it to trawl through to find
someone to do that loft conversion or we type in our password to access
our bank account, and inadvertently leave a trail of opportunity.
Corruption is seen as something that someone carries out on us, a sort of personal attack on our probity.
But what if the corruption is done in our name on behalf of us by the very people we have put in place to manage our affairs.
Our
lives are busy with events which are close to us and seem personnel and
so the events that are carried out, on a National and (more often these
days), on a Global scale, seem outside our scope of reasoning and
anyway we comfort ourselves that we can't do anything about these
matters anyway. Of course this is just the kind of apathy that the rogue
builder or any rogue for that matter thrives on.
I have
just read a description of how the authorities, in our name, committed
the greatest heist in living memory, a financial scam greater than
anything Bernie Madoff dreamt up.
Who remembers the CDOs
and the CDSs, those acronyms that bled our financial system dry as
tools for the banks to trade a different sort of market to the ones
normally used to sell goods and services.
The
market in derivatives (something based on something else) and the
insurance created to lessen the loss (if the something that was
something else got found out for what it was) became the "market to
beat all markets", crashing, in 2007/8 when everyone discovered where
everyone else's hand was, in this poker game to beat all poker games.
The
players, the Banks, were all bust. Like the weary player who has
mortgaged his house on his last round of cards, pulling on his jacket he
stumble out into the bright light of day to explain to the wife how he
had lost the house. In the case of the banks help was on hand. The
friendly taxpayer.
Having doled out trillions of dollars to
offset the so called book value of the Derivative Market which had lay,
like a heavy meal, on the banks balance sheet, someone saw an
opportunity.
Oh yes, another opportunity to make money out of the disaster but again at the taxpayers expense.
Now
remember, this is not Dave the dodgy builder or Han the Internet
hacker. These are the people at the very pinnacle of American finance.
You've
heard of Henry Paulson, do you remember Timothy Geithner and Larry
Summers.
Geithner succeeded Paulson as Us Treasury Secretary and was
portrayed as the steadying hand on the US economy, post the meltdown.
The political refrain "we are all in this together" is often used but of course they never define the "we".
Geithner's
hand, after the massive taxpayer (Federal Reserve) bail out was to put
the financial system back on its feet and part of the method was to create the conditions for a market in the unsalable CDOs.
This is how it works :-
Suppose Bank B bought a COD for $100, of which, $40 was its own money and $60 was money borrowed.
After the crash the COD is now worth $5 and the banks have millions of these in their vaults, in other words they are bankrupt.
The
Geithner- Summers post crash plan is to create an 'account' in which
the banks and hedge funds are asked to participate to buy the COCs.
The
account is valued at $60 (the amount borrowed) and each participant the
Hedge Fund and the US Treasury, is asked to pay in each $5 with the
balance, $50 being backed by the Federal Reserve in the form of a loan.
Positive scenario
We
have a government sponsored auction in which the COD is to be sold.
Let's say the hedge fund bids $60 and the bank clears its debt.
But
of course you ask, why would the hedge fund pay $60 for something which
has a value of $5. Well remember a new market has been created and a
stimulated market is primed to rise as speculators enter. After a while
we see the value of our COD has now traded higher at $80, a profit of
$20.
The Fed
who loaned $50 has to be repaid and the remaining equity, $30 is sheared
between the Hedge Fund and the Treasury, a $15 return for a $5
investment.
The negative scenario
The
market not being sufficiently stimulated to clear the $60 reserve
price, the sale of the CDO raises only $30, the Hedge Fund is $20 out of
pocket. However the $50 loan by the Fed is in the form of a non-recourse loan which means that the Fed will not pursue repayment of outstanding monies
But you might ask yourself, "why would even a hedge fund risk money on buying a worthless asset".
The answer is the bank, desperate to get the toxic CODs off its balance sheet, immediately set up its own Hedge Fund
from money given to it by the taxpayer, (money which had become locked
up in the banks vaults to provide loans to business as was intended when
the money was handed out).
So
the Banks new 'parented hedge fund', which you remember was created
with our money now begins to take part in the newly created market for
CODs, CODs which "it" has on "its" balance sheet.
The new hedge fund contributes $7 whilst the Treasury chips in $7 and the Fed loans $86.
With this $100 the bank, through its own hedge fund, now bids for its own COD.
In
this manner it has rid itself of the toxic COD for only $7 (the hedge
fund contribution) which was itself a government handout.
It
was a devilish plan allowing the banks to get away with murder, it went
far beyond any ethical stance one hoped a government would take and
whilst denuding both the current tax payer and future generations of
taxpayers who will continue to pick up the bill, the bank walked away
with a profit and worse, without any penalty. They are free to think
they are above the law and beyond the strength of government and will do
it again with impunity.
An interesting footnote is that all the major players were Goldman sacs placements i.e. ex senior Goldman Sacs executives.
When
you include the fact that the Governor of the Bank of England and the
Chairman of the ECB are also Goldman Sacs place men, you see that Cosa
Nostra, the Sicilian Mafia, were small fry in comparison.