Heidi is the proprietor of a bar in Detroit. In order to increase sales, she decides to allow her loyal customers — most of whom are unemployed alcoholics — to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).
Word gets around about Heidi’s drink-now-pay-later marketing strategy, and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit. By providing her customers freedom from immediate payment, Heidi gets no resistance when she substantially increases her prices for beer, the most-consumed beverage. Her sales volume increases massively.
A young and dynamic vice-president at the local bank (a branch of a multinational bank, of course) recognizes these customer debts as valuable future assets and increases Heidi’s borrowing limit. He sees no reason for undue concern, since he has the debts of the customers as collateral.
At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then traded on markets world-wide.
The investors don’t know that what is being sold to them as AAA-secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and they become the top-selling items for some of the nation’s leading brokerage houses, who collect enormous fees on their sales, pay extravagant bonuses to their sales force, and who in turn purchase multimillion dollar real estate and other toys.
One day, although the bond prices are still climbing, a risk manager at the bank (subsequently fired due his “negativity”), decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar.
Heidi is thus forced to demand payment from her patrons. Being unemployed and drunk, they cannot pay back their bar debts. Therefore, Heidi cannot fulfill her loan obligations. She files for bankruptcy.
DRINKBOND and ALKIBOND drop in price by 90%. PUKEBOND performs better, stabilizing in price after dropping by 80 %. The decreased bond asset value destroys the bank’s liquidity and prevents it from issuing new loans.
The suppliers of Heidi’s bar, having granted her generous payment extensions and having invested in the securities, are faced with writing off her debt and losing over 80% on her bonds.
Thus, her wine supplier claims bankruptcy and her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 50 workers.
Good news! The bank and brokerage houses are saved by the Treasury Secretary, who used to run Heidi’s bar, still owns a lot of stock and stands to lose his shirt if the bar goes under. He arranges a bailout because Heidi’s bar is “too big to fail” — the funds for this come from new taxes on employed, sober, middle-class men and women who spend their days working for a living.
Isn’t our government wonderful?
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From New York magazine:
“Goldman Sachs was AIG’s biggest client, having bought $20 billion in credit-default swaps from the insurer back in 2005. The swaps were meant to offset some real-estate investments Goldman had made, specifically, a bunch of mortgage bonds it had on the books.
“The idea was simple. If the value of the mortgage bonds went down, the value of Goldman’s AIG swaps went up, assuring that Goldman was safe from all-out losses on what it feared was an upcoming collapse in real estate. By that weekend, Goldman had collected $75 billion from its AIG credit-default swaps but had an additional $13 billion at risk — money AIG could no longer pay. In an age in which we’ve become numb to such astronomical figures, it’s easy to forget that $13 billion was a loss that could have destroyed Goldman at that moment.
“(Then-Treasury Sec.) Hank Paulson and then-New York Fed chief Tim Geithner (the current Treasury Sec.) called an emergency meeting for the following Monday morning at the Federal Reserve Bank, ostensibly to discuss whether a private banking syndicate could be established to save AIG — one in which Goldman and JPMorgan Chase, two of the ailing insurance giant’s clients, would play prominent roles.
“At the meeting it was hard to discern where concerns over AIG’s collapse ended and concern for Goldman began. The Goldman domination of the meeting might not have raised eyebrows if a private solution had been forthcoming. But on Tuesday, Paulson reversed course and announced that the government would step in and save AIG, spending $85 billion in government money to buy a majority stake. The argument was that AIG was not only too big to fail but too interconnected. Of the $52 billion paid to counter-parties, Goldman was the biggest recipient; $13 billion, the entire balance of its claims.
“Over time, it would appear to many that Goldman had received a backdoor bailout from a Treasury Dept. run by the firm’s former CEO. Why did Paulson bail out the banks that did business with AIG, critics have demanded ever since, and not Lehman Bros?”
“The appearance of a government of Goldman enablers didn’t improve when Stephen Friedman, serving as both a board member at Goldman and Chairman of the Federal Reserve Bank of New York, bought 52,600 shares of Goldman stock while he was supposed to be responsible for the firm’s oversight. Friedman had a temporary waiver saying that he could still act as a Goldman board member, but it was hard to shake the impression that Friedman had sidestepped the rules, particularly since the subsequent rise in Goldman’s share price made him $3 million richer. In May, he resigned from the Fed over the alleged conflict of interest.” — End of New York article. (Note that Friedman
resigned from the Fed, not from Goldman.— WJM)
I sent this article to an influential Washington friend. Here is his response: “Bill, giving one or two men the power to play God and decide who shall live (financially) and who shall die is evil. Once given the power, why wouldn’t they use it to protect their friends? The appointments of Paulson — an authoritarian — and Geithner — a man who believes he should be able to take his children’s summer camp expenses as a tax deduction — is just stupid and reflects the ignorance of the people who appointed them.”
