The big heist

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.