Well, I, Joseph Cassano single-handedly destroyed western civilization as you know it. And when I was at AIG I paid myself over $280 million dollars to do it, to boot! I am the wizard of the Wall Street derivatives. You, mere peons, can find me "exposed" (what a joke) by Matt Taibbi over at the Rolling Stone.
Tabbai claims you are all "royally fucked", and maybe you are, but all I can see is how the DOW is up over 400 points today, thanks to my friend Tim Geithner. Tim is about to spend trillions on my friends and buds over at Wall Street. God, they're happy. Me too. Yea, I'm doing just fine -- life is a big bowl of cherries.
Don't worry, though, the goof-ball, Paul Krugman, has good news for you peons today:
All is not lost: the public wants Mr. Obama to succeed, which means that he can still rescue his bank rescue plan.
What a hoot that Krugman is! The rest of his rag is real "doom and gloom" stuff, but I'm fix'in to get richer and richer off all you saps.
Wanta see how? Go to the flip.
What happened, see, is I hammered down on the collateralized-debt obligation, known as the CDO to you dunderheads. The CDO is anything I say it is -- it could be a mortgage, a corporate loan, an aircraft loan, credit-card loan, even another CDO. I just stick all those debts all together in the same big box, and sell the whole box off to my banker buddies, like Goldman Sachs.
See, even if one of those mortgages doesn't get paid because the guy loses his job on the GM factory line, no big deal. The other debts still draw in the cash and make the CDO purr like a Ferrari. Since somebody's always left paying on some of the debts in the big box -- let's call the box a "tranche," okay? -- I was able to get my financial rating buddies to rate the whole thing "AAA." Which means, dear weedhopper, that everything's "a-okay" and any bank in the world can buy my tranche. Look'it how that Taibbi guy puts it:
Say Bank A writes a million-dollar mortgage to the Pope for a town house in the West Village. Bank A wants to hedge its mortgage risk in case the Pope can't make his monthly payments, so it buys CDS protection from Bank B, wherein it agrees to pay Bank B a premium of $1,000 a month for five years. In return, Bank B agrees to pay Bank A the full million-dollar value of the Pope's mortgage if he defaults. In theory, Bank A is covered if the Pope goes on a meth binge and loses his job.
I love the "Pope on a meth binge" part. Charming.
But this is all baby-talk. That's not why I got paid over $280 -- you ever make $280 million? Nah, here's what makes me the father of financial meltdown, the big bazooka, the chit, the bomb. See, what I did was take advantage of the gambling laws and the financial laws simultaneously (that means at the same time, dipshit), and I pulled out of my ass the "credit default swap." Man, is the CDS ever just so much gravy:
In a "naked" CDS, neither party actually holds the underlying loan. In other words, Bank B not only sells CDS protection to Bank A for its mortgage on the Pope — it turns around and sells protection to Bank C for the very same mortgage. This could go on ad nauseam: You could have Banks D through Z also betting on Bank A's mortgage. Unlike traditional insurance, Cassano was offering investors an opportunity to bet that someone else's house would burn down, or take out a term life policy on the guy with AIDS down the street. It was no different from gambling, the Wall Street version of a bunch of frat brothers betting on Jay Feely to make a field goal. Cassano was taking book for every bank that bet short on the housing market, but he didn't have the cash to pay off if the kick went wide.
The beauty of this whole deal is the IT'S STILL GOING ON! Right now. As I type. See, me and my buddies have chumed up not just with the Republicans. Hell, no! You think we're stupid, or what? We've got the Democrats on board, too. Have for years and years.
I notice you poverty stricken clowns love to talk about that great American, Phil Gramm (without even mentioning me). You like to rag on "us" gutting Glass-Steagall, and all that crap. But you hate to talk about how your own, Bill Clinton, signed the bill into law. Ole Bill got on the Wall Street paywagon back in '73 after we whispered about how much more we could pony up in contributions compared to what those jokester unions can pay. It wasn't just my friend Bill, either. The Glass-Steagall repeal passed 90-8 in the Senate, with the support of 38 Democrats, including some of your best pals like Joe Biden, John Kerry, Tom Daschle, Dick Durbin, even that "man of the people", John Edwards. Jeez, you middle class dudes are the biggest suckers in the whole wide world. I know. I live in London.
Yea, the DOW's up today. Cha-ching comin' down the line. Gotta get mine by takin' all of yours. Did I mention that AIG paid me a cool million a month up through September just to have me give "advice"? God, I'm smart. I'm busy right now thinkin' up what I want the next civilization to be like. I'm thinkin' I'd like a nice police state with you bozos safe in the clink. Real Pinochet-like!
Anyway, have a nice day, saps. See ya at the bank. Toodle-lou.
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It was fun, but now let's get serious. Why in the name of god are CDO and CDS still going on? Does our government have rocks in its collective head? Still unregulated, still rolling on?
I subscribe to the "just cancel the derivatives legal force" group of people, like Jerome a Paris. Cancel the damn things and move on. Otherwise, we'll get naked capitalism:
Say I am SAC Capital. I get to be one of the bidders on bank assets covered by the program
Citi holds $100mm of face-value securities, carried at $80mm.
The market bid on these securities is $30mm. Say with perfect foresight the value of all cash flows is $50mm.
I bid Citi $75mm. I put up $2.25mm or 3%, Treasury funds the rest.
I then buy $10mm in CDS directly from Citi [or another participant (BOA, GS, etc)] on the bonds for a premium of $1mm.
In the fullness of time, we get the final outcome, the bonds are worth $50mm
SAC loses $2.25mm of principal, but gets $9mm net in CDS proceeds, so recovers $6.75mm on a $2.25mm investment. Profit is $4.5mm
Citi writes down $5mm from the initial sale of the securities, and a $9mm CDS loss. Total loss, $14mm (against a potential $30mm loss without the program)
U.S. Treasury loses $22.75mm
Great program.
It's just a scheme to transfer losses from the bank to the taxpayer with an egregious payout to a middleman (SAC) to effectively money launder the transaction.
You've also transmuted a $30mm economic loss into a $36.75mm economic loss because of the laundering. So its incredibly inefficient.
How did fraud and money laundering become the national economic policy of the US?
One would have to be a criminal to participate in this.
Thus does the snake devour its tail.
Are we really going to pretend we can finance the derivative liability black hole that is greater than the world's domestic gross product? I sure hope Paul Krugman has it wrong. I hope Tim Geithner, former Goldman Sachs brainchild, can undo the monster he, his company, AIG, and Joseph Cassano created.
May you live in interesting times.