Investors love a sure bet. Who doesn't? Default Insurance fraud is another story.
This story.
I've always found it a curious coincidence that credit default swaps expire in 3-5 years and liar loans were created to blow up, excuse me, reset to unmanageable levels in 3-5 years.
Perhaps, I'm naive, but when a bank serves as wholesale lender and sets standards for mortgages, and further as security bundler and seller, and cashes in as a multiplecredit default(insurance)swap beneficiary; there might be a conflict of interest. Particularly, when they're tag-teaming with the Credit Rater (Moody's) as a consultant to structure the securities.
For example - Goldman Sachs - was the largest financial backer to sub-prime machine New Century Mortgages.
So Goldman's was pumping billions into New Century(and other subprime lenders) without knowing what's going on? Seriously? Why so careless? They knew. They bet on their horse coming in last and won.
Goldman-Sachs and Lord Blankfein knew exactly what was going on? From their 3rd qtr of 2007 where third-quarter profit rose 79% on mortgage trading -
Goldman said in its earnings commentary that "significant losses" on subprime loans and securities were more than offset by gains on short mortgage positions....or bets that the value of mortgages would fall.
Sure bet, eh Blanky. Pumping all that money into crap mortgages then coming out ahead as you bet they would fail. How prescient.
Best quote from the story -
Fox-Pitt Kelton analyst David Trone summed up the results, saying, "Goldman has clearly demonstrated to us its ability to benefit from difficulties of other market participants."
Let me saddle a horse with John Daly and John Goodman at the Preakness, and then let me bet for that horse to finish last, and I'd do pretty well.
Oh and who was holding those bets? AIG. Bond insurance companies. Who's paying for it? We are. When communities are facing default on muni bonds because their bond insurance companies ratings downgrade is causing their ratings to slide triggering higher and earlier payments, we're paying for it.
Oh, and who's "betting" on those muni bonds to fail? Goldman Sachs.