to make them whole. And by AIG, that would be us. And by banks that would be Wall Street houses that were making cheap and rigged bets like and for hedge funds. The banks served as pass throughs for hedge funds siphoning from AIG. One particular hedge fund, Paulson & Co. made a killing that year and brought its CEO a paycheck around $4 billion. Hedge fund, Paulson & Co., made out ridiculously well on one bet
according to one person briefed on the trade, invested $22 million in a credit default swap that eventually paid $1 billion when the federal government opted not to rescue Lehman Brothers. That amounts to a staggering $45.45 for each dollar invested.
$22M for $1B. 2.2% That is what these default swaps were worth to their bearer's bottom line. Pennies on the dollar.
Did some hedge funds pay more than 2.2% for their default swaps? Perhaps.
Do they deserve to get at least what they paid for their swaps? Perhaps.
Do they deserve 4500% of what they paid, particularly when they conspired to bring about the crash, and successfully fought any attempts to prevent it from occurring? It seems much like treating green stamps like bearer bonds.
When Bear Stearns, the first big domino, fell in 2008, it was not due to a lack of self preservation efforts. They attempted to preserve their mortgage backed securities by purchasing the underlying bad loans so that they could be modified.
These actions would have kept people in their homes.
These actions would have saved us billions in exposure on Bear Stearns alone.
If Bear Stearns actions had been allowed to proceed, and been replicated by the likes of Lehman Bros., this crash may not, and most likely would not have been so severe. The instituions would have taken losses, but not catastrophic losses. The brinksmanship that killed cash flow to Lehman's would likely not have occurred.
But, John Paulson would not have made his $4 billion. Or the $11 billion for his elite hedge fund clients.
So, he did whatever he had to do to prevent people from being helped and crippled bonds from being salvaged. He made a bet those bonds were going to burn, and they damned well were going to burn.
PAULSON'S PREROGATIVE
But as his gains piled up, Mr. Paulson fretted that his trades might yet go bad. Based on accounts of barroom talk and other chatter by a Bear Stearns trader, he became convinced that Bear Stearns and some other firms planned to try to prop the market for mortgage-backed securities by buying individual mortgages.
Adding to his suspicions, he heard that Bear Stearns had asked an industry group to codify the right of an underwriter to modify or buy out a faltering pool of loans on which a mortgage security was based. Mr. Paulson claimed this would "give cover to market manipulation." He hired former Securities and Exchange Commission Chairman Harvey Pitt to spread the word about this alleged threat.
Threat? Interesting language use. Threat to whom and to what?
BLOCKED
Bear Stearns made its proposal after Paulson asked London- based Markit Group Ltd. in December to change the rules it recommends to investors. Markit administers indexes used to create benchmark credit-default swaps.
``We proposed a clarification,'' in response to Paulson's proposal, which would have restricted the ability to rework loans and limit foreclosures, Marano said.
Rework loans and limit foreclosures. That's exactly what the U.S. Government has failed to do the past two years, and here a Wall Street bank was willing to do all along.
Paulson was guilty of not only blocking what most would consider a reasonable and just solution to a problem, he was at the heart of the problem's creation. A better analogy may be, he not only blocked the roads so the fire trucks couldn't get to a fire, but he was there throwing gas on it.
The fire was not burning as fast as he wanted so, he teamed with Goldman Sachs and Duetsche Bank to pump out more toxic CDOs so that he could bet against them. Bear Stearns would have none of it.
TRACKING THE BEAR
They met with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other firms to ask if they would create securities—packages of mortgages called collateralized debt obligations, or CDOs—that Paulson & Co. could wager against...
At Bear Stearns, however, Scott Eichel, a senior trader, and others met with Mr. Paulson and later turned him down. Mr. Eichel said he felt it would look improper for his firm. "On the one hand, we'd be selling the deals" to investors, without telling them that a bearish hedge fund was the impetus for the transaction, Mr. Eichel told a colleague; on the other hand, Bear Stearns would be helping Mr. Paulson wager against the deals.