How Goldman Sachs Made Tens of Billions of Dollars From Economic Collapse

January 4, 2010

TheEconomicCollapseBlog.com

Investment banking giant Goldman Sachs has become perhaps the most prominent symbol for everything that is wrong with the U.S. financial system, but most Americans cannot even begin to explain what they do or how they have made tens of billions of dollars from the economic collapse of America.  The truth is that what Goldman Sachs did was fairly simple, and there may not have even been anything “illegal” about it (although they are now being investigated by the SEC among others).

The following is how Goldman Sachs made tens of billions of dollars from the economic collapse of America in four easy steps…. 

Step 1: Sell mortgage-related securities that are absolute junk to trusting clients at vastly overinflated prices.

Step 2: Bet against those same mortgage-related securities and make massive bets against the U.S. housing market so that your firm will make massive profits when the U.S. economy collapses.

Step 3: Have ex-Goldman executives in key positions of power in the U.S. government so that bailout money can be funneled to entities such as AIG that Goldman has made these bets with so that they can get paid after they win their bets.  

Step 4: Collect the profits – Goldman Sachs is having their “most successful year” and will end up reporting approximately $50 billion in revenue for 2009.

So is it right for the biggest fish on Wall Street to make tens of billions of dollars by betting that the U.S. housing market will collapse?

You see, when you are talking about a financial giant the size of Goldman Sachs, the line between “betting that something will happen” and “making something happen” gets blurred very quickly.

Not that Goldman Sachs was the only one betting against the housing market.

According to the New York Times, firms like Deutsche Bank and Morgan Stanley also created mortgage-related securities and then bet that they would fail…..

Goldman was not the only firm that peddled these complex securities — known as synthetic collateralized debt obligations, or C.D.O.’s — and then made financial bets against them, called selling short in Wall Street parlance. Others that created similar securities and then bet they would fail, according to Wall Street traders, include Deutsche Bank and Morgan Stanley, as well as smaller firms like Tricadia Inc.

But certainly Goldman Sachs was the most prominent financial player involved in this type of activity.

In fact, without mentioning specifics, Goldman has even admitted publicly to wrongdoing.  On November 17th, 2008 Goldman Sachs CEO Lloyd Blankfein even issued a public apology….

“We participated in things that were clearly wrong and have reason to regret.”

But complicated financial transactions are something that most Americans simply do not understand, so the public outrage towards Goldman Sachs and others has been somewhat limited.  But that does not change the very serious nature of the activities that Goldman was involved in….

“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” Sylvain Raynes, an expert in structured finance at R & R Consulting in New York, recently told The New York Times. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”

But the sad thing is that many Americans do not even understand what Goldman Sachs is.  Goldman Sachs was founded in 1869 and has forged a reputation as one of the elite financial institutions in the entire world.  They only hire “the best and the brightest” and Ivy League graduates flock to the firm.  Of the five major investment banks that dominated Wall Street before the crash, only Goldman Sachs and Morgan Stanley have survived.  Merrill Lynch and Bear Stearns were severely damaged by the crash and ended up being purchased by retail banks and Lehman Brothers ended up folding.

There are persistent rumors that Goldman played a major role in the collapse of Bear Stearns and that ex-Goldman CEO Hank Paulson could have done much more to bail out Lehman Brothers, but perhaps nobody will ever know the full truth.  All we do know is that at the end of the crash several of Goldman’s competitors were destroyed and Goldman found itself in a more dominant position than ever.

The truth is that Goldman is a financial shark and they do not apologize for it.

An article in Rolling Stone recently put it this way….

The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

So how did Goldman Sachs prosper so greatly in an environment that destroyed their competitors?

The following is an extended breakdown of just how Goldman Sachs was able to reap tens of billions of dollars in profits from the collapse of the U.S. housing market….

Step 1: Sell mortgage-related securities that are absolute junk to trusting clients at vastly overinflated prices.

In late 2006, Goldman Sachs made some fundamental changes in the way that they were approaching the U.S. housing market.  According to a McClatchy report, Goldman spokesman Michael DuVally said that the firm decided at that time to reduce its mortgage risks by selling off subprime mortgage-related securities and by purchasing credit-default swaps to hedge against a serious downturn in the U.S. housing market.

The key moment came in December 2006.  After “10 straight days of losses” in Goldman’s mortgage business, Chief Financial Officer David Viniar called a meeting of key Goldman personnel.

Vanity Fair described the results of that meeting this way…

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The War on the Dollar

October 27, 2009

Money and Markets

By Martin D. Weiss

Last week, I showed you the most shocking numbers I’ve seen in my lifetime:

Up until the day Lehman Brothers collapsed in September of last year, it took the Fed 5,012 days — 13 years and 8 months — to double the cash currency and reserves in the coffers of U.S. banks.

In contrast, after the Lehman Brothers collapse, it took Bernanke’s Fed only 112 days to double the size of those reserves. He accelerated the pace of bank reserve expansion by a factor of 45 to 1.

 
Even the Fed’s response to the biggest emergencies of the recent past was far smaller by comparison: Before the feared Y2K crisis and after the 9/11 attacks, the Fed’s money infusions were 14 times and 25 times smaller, respectively.

Moreover, they were quickly reversed as soon as the crisis subsided.

This time, the Fed has done precisely the opposite: Despite its largest money infusion of all time in late 2008, the Fed has added still more reserves in 2009!

The end result is a massive supply of U.S. dollars, driving down their value. (See “Bernanke gone berserk.”)

And unfortunately, this is just one aspect of the U.S. government’s efforts to devalue our money, the subject of our recent webinar …

To continue reading this report, click here.

U.S. Issues $7 Trillion Debt, Supply to Stabilize

September 23, 2009

Yahoo! News

By Burton Frierson

The U.S. government will have issued $7 trillion in bonds by the time the current fiscal year ends next week, but it expects the debt deluge to stabilize by mid 2010, a Treasury official said on Wednesday.

Though markets and the economy are improving, efforts to provide a firm foundation for recovery will require increases to the U.S. Treasury’s conventional bonds going forward, as well as debt securities that are indexed to inflation.

However, this expansion may take place in an environment where investors consider leaving the safe-haven Treasury market for riskier assets, and debt issuance is likely to level off mid next year, said Treasury Acting Assistant Secretary for Financial Markets Karthik Ramanathan.

“In fiscal year 2009, which ends next week, Treasury will have issued $7 trillion in gross issuance — that’s in a 12-month period,” Ramanathan told a financial markets conference in New York.

“This issuance was necessary to meet nearly $1.7 trillion in net marketable borrowing needs, nearly $1 trillion more than what we raised last year,” he added.

DEMAND TO WANE

The heavily-indebted U.S. government has seen tremendous demand for Treasury debt securities this year due to a flight-to-quality into the safe haven assets.

However, Ramanathan said some of this demand would begin to taper off and investors were likely to favor other sectors as the financial markets recovery continues.

“Rather than being discouraged by this move to more risky assets we should actually be encouraged,” he said. “It is the natural progression from the state we were in last year.”

The collapse of Lehman Brothers investment bank in September 2008 sparked the massive migration toward safe-haven assets, though the stock market has been in a remarkable rally since the spring.

Investors have also returned in numbers to the corporate debt market, which suffered during last year’s turmoil.

There is still a long way to go toward market and economic stabilization but good progress is taking place, Ramanathan said, adding that officials were no longer focused “on LIBOR/OIS spreads on a daily or hourly basis.”

“We still have a long way to go and…there are going to be bumps along the way, but at least we’re seeing the signs of traction,” he added.

The LIBOR/OIS spread is a market measure that reflects the difference between the cost of so-called risk-free borrowing, such as that done by the U.S. Treasury, and lending to the private sector, which is normally considered less safe.

LONGER MATURITIES?

When asked whether the Treasury would consider offering a longer maturity bond in the future, Ramanathan said, “We are content with our current suite of securities.”

The Treasury’s longest maturity is the 30-year bond.

However, issuance will increase in the near term, as has been the case all year.

“Going forward we expect to increase both nominal and inflation indexed coupon issuance incrementally and gradually over the next nine months to extend the average maturity of the debt,” he said.

Due to structural changes in the budget deficit, Ramanathan said he expected the average maturity of the debt to stabilize at six to seven years, exceeding historic averages of five years.

However, he said he expected coupon debt securities, or the bonds Treasury issues, to stabilize next summer and potentially go down toward the end of next year.

Click here for the full report from Yahoo! News