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When people talk about bonds and CDOs and throw in all of these new fangled financial terms, many, including myself, begin getting confused and have a hard time figuring out what exactly is going on. I think that many involved kind of like it that way. The more confusion, the easier it is to take advantage of the system.
So watch Dylan Ratigan's video above that explains the whole Goldman Sachs scam is terms that even a Caveman can understand. If you don't have time to watch the video, here is the summary of the scam.
Instead of bonds, let's say that Goldman Sachs built a car. They build nice high powered Ferraris. But they got help from Henry Paulson, a hedge fund manager for another division of Goldman Sachs, in messing around with the engine parts of the Ferrari so that it was pretty much guaranteed that these cars would crash.
Goldman Sachs gets a rating agency to give these faulty cars a triple A rating and then goes out an sells these faulty cars to state pensions funds who are desparate for higher yields. These pension funds are for teachers, policemen, judges and other state workers. Goldman makes a nice profit for selling these cars.
But wait, there's more. Henry Paulson, the hedge fund manager for Goldman Sachs who helped create these cars and knows that they will probably crash, goes out and buys insurance on these faulty cars. Unlike regular insurance where you need to have an insurable interest in the car, in the world of finance, you can place bets (buy insurance) on just about anything.
Guess who they buy insurance from? None other than AIG.
When all of the cars crash, just as planned, AIG finds that it can't pay all of the insurance bets that companies like Goldman Sachs placed with them.
No worries. You just get the Treasury Secretary of the United States, Tim Geithner, to use taxpayer funds to bail out AIG. You get him to force AIG to pay off all their insurance bets at 100 cents on the dollar.
So your bet makes you around 12 billion dollars. Just for good measure, you get all your Goldman Sachs partners to collectively give Barack Obama close to a million dollars in campaign contributions. You probably hedge your bets too and give money to John McCain also and all of the other Congressmen who can help set the rules in your favor.
The partners of Goldman Sachs get billions in bonuses while the pensions of teachers and policemen are ruined.
Now the last step in the process will be to get some nice sounding bill passed that will supposedly regulate these companies better. People will read the title and feel good but the details will be written by the financial lobbyiests and will probably end up setting up a new racket to be taken advantage of. That's just my opinion.
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