o Credit Default Swaps were unregulated, and AIG didn’t need to put any money aside for potential losses. Instead, AIG paid employees huge bonuses
as soon as contracts were signed. This was another giant ticking time bomb
o Joseph Cassano, CEO of AIG personally made $315 million
o In 2007, auditors alerted AIG executives that there was going to be an issue. One of these auditors, Joseph St Denis, resigned in protest after
Cassano repeatedly blocked him from investigating the situation with Credit Default Swaps
o In 2005, Raghuram Rajan, then the Chief Economist for the International Monetary Fund (IMF), delivered a paper at the annual Jackson Hole symposium,
the most elite banking conference in the world
§ Central bankers of the world were present – Alan Greenspan, Ben Bernanke, Larry Summers, Tim Geithner
§ Title of the paper was “Has Financial Development Made the World Riskier”, and the conclusion was that it most definitely had
§ The paper focused on incentive structures that generated huge cash bonuses based on short-term profits (the Credit Default Swaps, predatory
lending, etc.), but which imposed no penalties for later losses
§ Rajan stated in his paper that these incentives could bring down these banking firms, or even the entire global system
§ Larry Summers shut down Rajan’s proposed conclusions and was obviously determined to silence these conclusions out of fear of new regulations on
the financial industry
o Lehman Brothers had 4 private jets, including 767s, and an additional helicopter
o One group that purchased these (now worthless) securities, was the Public Employees’ Retirement System of Mississippi, which provides monthly
benefits to over 80,000 retirees. They lost millions of dollars and are now suing Goldman Sachs
§ Average Annual Retirement Benefits for a Mississippi Public Employee: $18,750
§ Hank Paulson’s Compensation in 2005: $31,000,000
o By late 2006, Goldman was not only selling these toxic CDOs, but was also actively betting against them, while pressing customers to buy more of
them, proclaiming they were “high-quality investments”
o Goldman bought around $22 billion worth of credit default swaps from AIG
o It was so much, Goldman realized AIG might go bankrupt
o Goldman spends $150 million insuring themselves against AIG’s potential collapse
o In 2007, Goldman goes further by selling CDOs specifically designed so that the more money their customers lost, the more money Goldman Sachs
o Senator Carl Levin (D-MI), Chairman of the Governmental Affairs Subcommittee in 2008 is interviewing Goldman Sachs executives about “Timberwolf
Securities” Goldman had sold to investors:
§ Levin: “$600 million dollars of Timberwolf Securities is what you sold. Before you sold them, this is what your sales team was telling to each
other… ‘Boy, that Timberwolf was one #ty Deal”
§ Daniel Sparks, Former Mortgages Department had of Goldman Sachs (2006-2008) responds: “This was an email to me in late June, after the
§ Levin: “No, no. You sold Timberwold after as well.”
§ Sparks: “We did trades after that. Yeah. Okay.
§ Levin: The next e-mail – take a look. July 1, ’07 -- tells the sales force, ‘The top priority is Timberwolf’. Your top priority to sell is
that ‘#ty deal’. If you have an adverse interest to your client, do you have the duty to disclose it? To tell that client of your adverse
§ Daniel Sparks claims he is “trying to understand the question”, but is avoiding answering
· Senator Susan Collins (R-ME), Ranking Member of Homeland Security & Governmental Affairs Committee also interviews Goldman Members
o Collins: “Do you believe you have a duty to act in your clients’ best interest?
o Fabrice Tourre, Executive Director of Structured Products Group Trading of Goldman responds: “Senator, I will repeat, we have a duty to serve our
clients by showing prices on transactions that they ask us to show prices for.” (another dodgy answer, who would’ve guessed)
· Senator Levin again: “What do you think about selling securities which your own people think are crap? Does that bother you”
· Lloyd Blankfein, Chairman & CEO of Goldman Sachs: “I think they would… is that a hypothetical?”
· Levin: “No, this is real. We heard it today.”
· Blankfein: “I heard nothing today that makes me think anything went wrong.”
· Levin: “Is there not a conflict when you sell something to somebody, and then are determined to bet against that same security, and you don’t
disclose that to the person you’re selling to? Do you not see a problem?”
· Blankfein: “In the context of market making, that is not a conflict.”
· Repeatedly, Goldman’s executives dodge questions, deny accountability, and “see nothing morally wrong” with these dealings that contributed
to the 2008 financial crisis, with statements like “I think it’s very unfortunate to have that on email.”, yet deny actually “feeling” that
it was wrong in any way.
· Hedge fund manager John Paulson made $12 billion betting against the mortgage market.
· When Paulson ran out of Mortgage Securities to bet against, he worked with Goldman Sachs and Deutsche Bank to create more.
· A year later, Morgan Stanley made hundreds of millions of dollars, while the investors had lost almost all of their money
· Hedge funds Tricadia and Magnetar also made billions betting against CDOs they had designed with Merrill Lynch, JP Morgan, and Lehman Brothers.
· The CDOs were sold to customers as “safe” investments
· Ratings agencies like Moody’s, Standard & Poor and Fitch rated these securities as triple-A
· These ratings agencies also made billions of dollars giving high ratings to these risky securities
· Moody’s (largest ratings agency) quadrupled it’s profits between 2000 and 2007
· These agencies were based on the ratings they would give securities – higher ratings meant a better quarterly performance
· Hundreds of billions of securities were being rated every year
Some of the individuals involved in the documentary, "Inside Job"
· Larry Summers (en.wikipedia.org...
) Harvard Economics Professor
· Robert Gnaizda (en.wikipedia.org...
) –former director of Greenlining Institute
· Willem Buiter (en.wikipedia.org...
) – Chief Economist, Citigroup
· Andrew Lo (en.wikipedia.org...
) – professor & director, MIT Laboratory for Financial Engineering
· Michael Greenberger(www.marketswiki.com...
) – former Deputy Director (1997-2000), Commodity Futures Trading
· Satyajit Das – Derivatives Consultant, Author of “Traders, Guns & Money”
· Frank Partnoy – professor of Law & Finance, University of California, San Diego
If you want to learn more, here are some important terms that will help paint the image a little clearer:
· Sub-prime mortgage backed securities
· Credit default swap
· Collateralized debt obligation (CDO)
· Synthetic CDO
· Starting in 2015, “Bespoke Tranche Opportunity” came back (way after this '08 crisis), basically they are CDOs...
· International Swaps & Derivatives Association (one would need at least $1.5 Billion for ISDA agreement)
· American Securitization Forum
edit on 17-9-2017 by FamCore because: (no reason given)