Jim Flaherty, Goldman Sachs and "The Swoop and Squat"

The way that Goldman Sachs set up the American people, and eventually Canadians, was both clever and sinister. Matt Taibbi likened the scheme to the popular insurance scam known as the "swoop and squat". This is where there is a "mark" driver cut off by one perpetrator, while a second crashes into him. Then both of them collect on the insurance.

By now, most people who have followed the financial crisis know that the bailout of AIG was actually a bailout of AIG's "counterparties" — the big banks like Goldman to whom the insurance giant owed billions when it went belly up. What is less understood is that the bailout of AIG counter-parties like Goldman and Société Générale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wreck of AIG in what was, ironically, something very like the old insurance scam known as "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the mark in the game being the target's insurance company — in this case, the government. (1)

At the height of the housing boom, Goldman Sachs was selling billions in bundled mortgage-backed securities, while also betting against those same securities. In other words they were going to have their cake and eat it too. Cashing in on one end and cashing out on the another, under a deregulation gold mine called the credit default swap.

The video below explains them better than I could, but basically what they were doing was buying insurance on your car and then hoping that you had an accident.

Goldman often "insured" some of this garbage with AIG, using a virtually unregulated form of pseudo-insurance called credit-default swaps. Thanks in large part to deregulation pushed by Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn't required to actually have the capital to pay off the deals. As a result, banks like Goldman bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that the taxpayer ended up having to eat. Thus, when the housing bubble went crazy, Goldman made money coming and going. They made money selling the crap mortgages, and they made money by collecting on the bogus insurance from AIG when the crap mortgages flopped. (1)

But Goldman and others were losing patience. There just weren't enough accidents, so they needed to find a way to accelerate the demise of the unsuspecting victims of a head on crash. Enter John Paulson:

Paulson had been looking for an opportunity to bet that the housing bubble would burst. There was enough information around about the shoddy nature of many of the subprime mortgage deals—with clients who had little in the way of assets, income, or employment—that a number of close observers realized a lot of homeowners" would soon be in dire straits, unable to meet their monthly payments. In the betting parlours of Wall Street, this represented a chance to make some serious money.The best vehicle for betting against the housing market,as Paulson and a few other Wall Streeters had figured out, was to take out "insurance" on packages of mortgages that had been bundled together and sold as a stock.

.... This "insurance"—known as a credit default swap (CDS)—was simply a bet. One frustration for Paulson was that there just weren't enough of these stocks, known as collateral debt obligations (CDO), to bet against. So he decided to become proactive. He approached a number of investment banks with the request that they create more CDOs to sell to clients, so that he could then take out insurance betting these would fail. The arrangement Paulson had in mind was rife with potential conflicts of interest. He clearly wanted to help pick the mortgages that would make up the new CDOs. And he would obviously favour particularly risky subprime mortgages, thereby increasing the likelihood that the CDOs would become worthless and he would be able to collect on the "insurance" he had taken out.

Bear Stearns, the giant investment bank where Paulson had once served as managing director, said no to his scheme. But Goldman Sachs agreed to the arrangement, providing Paulson with his dream opportunity: a chance to bet on toxic CDOs worth about $5 billion. (2)

In other words, Paulson was driving one of the perp cars, while Goldman Sachs steered the other into the path of the victim vehicle, AIG. You can see it coming, can't you?

So what does this have to do with us?

Well when they were trying to create a tidy bundle of toxic paper, they came knocking on our door, and we were ripe for the picking. Jim Flaherty was now our minister of finance and his deputy minister was Goldman Sachs employee, Mark Carney.

In the first half of this year [2008], as the sub-prime mortgage crisis was exploding in the United States, a contagion of U.S.-style lending practices quietly crossed the border and infected Canada's previously prudent mortgage regime. New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time ....

The doors had been opened wide two years before, when on May 1, 2006, AIG registered as a lobbyist and:

On May 2, 2006, in his first budget, Mr. Flaherty announced that not only would Ottawa guarantee the business of U.S. insurers, it was doubling the guarantee to $200-billion.

$200 billion dollars ripe for the picking and backed by the Canadian taxpayer. And not long after, Jim Flaherty allowed derivatives (credit default swaps) to infiltrate our sound financial system, starting with our Canada Pension Plan.

... the announcement this week that the CPP Investment Board, the team that manages Canadian Pension Plan investments, has been freed from restrictions that limited its use of derivatives gives us pause. The rule that has been repealed required that the board use derivatives only for purposes of hedging risk and that it hold other assets to back any derivative investment.

Warren Buffet, whose remarkable record as an investor made him the world's second-richest man and earned him the moniker Oracle of Omaha, once described derivatives as time bombs and "financial weapons of mass destruction."

"Ticking time bombs" and "financial weapons of mass destruction".

Can you see it coming? The Canadian taxpayer driving merrily along, with Mark Carney and Goldman Sachs in the car behind, and Jim Flaherty with AIG ready to cut us off?

This is the third in a series of how Jim Flaherty and Goldman Sachs have all but destroyed our banking system. Only taxpayer funded advertising is keeping Canadians in the dark, as they are led to believe that this government has had a steady hand on the wheel.

What they don't tell you is that the hand is on the wheel of the car about to crash into us.

Stay tuned and fasten your seat belts.

Previous:

1. It's Time to Have a Serious Conversation About Jim Flaherty and Goldman Sachs

2. Jim Flaherty, Goldman Sachs and the Foxes in the Henhouse

Sources:

1. Wall Street's Bailout Hustle, By Matt Taibbi, Rolling Stone, February 17, 2010

2. The Trouble With Billionaires, By Linda McQuaig and Neil Brooks, Viking Canada, 2010, ISBN: 978-670-06419-9, Pg. 93-99

3. Special investigation: How high-risk mortgages crept north, By Jacquie McNish and Greg MacArthur, Globe and Mail, December 12, 2008