Posted 2010-January-25, 23:05
If I try to explain it in my own words, I think what happened is the following.
People on low incomes were given mortgages through agencies such as Freddie Mac and Fannie May.
Goldman Sachs bought "bundled mortgages" from Freddie and Fannie and onsold them to investors, advertising them as, say, AAA, returning, let us say, 10% per annum.
The investors who bought these products lost a lot of their money when the people who took out the mortgages (the mortgagers) couldn't make their repayments, house prices collapsed, and the houses, if they could be sold, fetched only say 60% of their original price.
At the same time, Goldman Sachs bought insurance policies (called Credit Default Swaps), against the possiblity that the mortgagers would default on their loan repayments. These CDS's operated on the "final fool" principle: they circulated through investment banks and hedge funds, with the financiers skimming off their percentages.
Goldman Sachs was a major beneficiary when the sizeable CDS's it had taken out with AIG were stumped up by the US taxpayer. The "final fool" was the US taxpayer.
In summary: The system of bundled mortgages, that Goldman Sachs was instrumental in setting up, collapsed, but Goldman Sachs emerged all the richer because (1) it had onsold its bundled mortgages to investors; and (2) it took out bets with AIG that the whole system would collapse, and when AIG lost the bets but couldn't pay up, the US taxpayer paid up instead.
This gave Goldman Sachs a $16 billion windfall to distribute amongst its executives.
Peter . . . . AKQ . . . . K = 3 points = 1 trick
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