It is perhaps beyond the ability of an innocent public to believe this, but there is a growing body of evidence that a few mad scientists might have engineered the near-destruction of the American financial system. Except they weren’t scientists, per se – they were unscrupulous, market manipulating hedge fund managers, and we can almost hear them cackling with glee as they haul their ill-gotten billions to the bank.
In a civil suit filed Friday, the Securities and Exchange Commission charged Goldman Sachs with fraud for helping hedge fund manager John Paulson create collateralized debt obligations that he had secretly designed to self destruct. That is, Goldman Sachs, at the direction of Paulson, hand-picked mortgages that were certain to go bad, and stuffed the mortgages (or rather, “synthetic” derivatives of the mortgages) into collateralized debt obligations that temporarily masked the true value of the loans.
Goldman did this for only one reason: to create instruments against which Paulson and other hedge fund clients could bet with virtually no risk. Meanwhile, Goldman cheerfully sold the CDOs to unwitting customers, knowing full well that those customers would be wiped out when the reference loans inevitably defaulted. Goldman and its hedge fund clients also surely knew that the losses on these synthetic CDOs would crash the overall market for CDOs, hobble competing investment banks that had CDOs on their books, and do serious damage to the financial system.
Goldman isn’t the only bank that created these CDOs. Deutsche Bank, UBS, and smaller outfits, such as Tricadia Inc., perpetrated similar scams. All told, well over $250 billion worth of these “synthetic” CDOs were sold into the market in the two years leading up to the financial crisis of 2008. Indeed, there is a distinct possibility that a majority of all the CDOs sold during those two years were deliberately designed to implode by hedge fund managers who were betting against both the CDOs and the financial system as a whole.
For more than three years, the media has swallowed the hedge fund party line that our economic troubles were solely caused by mortgage companies lending too much money to undeserving home buyers. No doubt, there was over exuberance and fraud in the world of subprime lending, but that is not the full story. It is now clear that the so-called “real estate bubble” was fueled by an expanding market for CDOs. And the market for CDOs was driven, in turn, by fraudulent deals similar to the ones that Goldman did for Paulson. In short, we witnessed a classic pump-and-dump scheme, only this time it was writ large, on the scale of the U.S. financial system.
I predict that as the details of this doomsday machine come to light, we will see that the hedge funds that profited from it all know each other well. I predict further that it will become apparent that what ties these hedge funds to each other is a common acquaintance with associates of Michael Milken, the famous financial criminal who pioneered the market for CDOs, and whose criminal debt machine nearly brought the economy to ruins in the 1980s.
John Paulson, who launched his career with the assistance of a host of Milken cronies, including Jerome Kohlberg and Leon Levy, is one of the hedge fund managers in this network. He has been described as a genius by the media, and perhaps that is what he is, but we now know that he abides by the Milken code, which has it that there is virtue in a clever con well-orchestrated. And never in history has there been a more profitable con than Paulson’s. His bets against the CDO market – the market that he helped set up to collapse — earned him more than $3 billion over the course of just a few months in 2007....
Originally Posted by fj1200
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