Bucking Bar

Impressed that you get that part of the puzzle. Just to continue the conversation I reply, "Did it? Really? Or did a chosen few get very rich with no basis in law (or common sense) for what happened?

Would the world have sank if Goldman Sachs only made a 200% profit on reselling CDO coverage it got from AIG for $0.0004 per dollar instead of whatever the rate of return is going from $0.0002 to $1? Micheal Lewis (author of the Big Short) figured it out after he wrote his book. Let me try to explain it here.

From 2004 to 2007 mostly Wall Street players underwrote several trillion of sub-prime loans. To peddle this garbage off they made it look better by underwriting it with insurance against default. The insurance was priced at about two basis points per dollar. Later, rates were increased to 4 basis points, then as high as seven. Goldman Sachs and other big investment banks positioned themselves as brokers of this "insurance" marking it up 400% to its customers.

Insurance is 100%-total-profit, when you sell it, ** IF ** you do not have a loss. Yes, there are administrative expenses and reinsurance costs if you peddle the risk off to someone else (like say some rich prince in the Saudia Arabia (who will never f'n pay you)). If you multiply 450 billion of yearly coverage by $0.0004 that's $180 million for the sixteen or so managers of AIG FP (Financial Products) and $720 million for the Goldman boys. They were doing this on an annual basis and it grew from that $450bn snapshot.

In the Big Short people observed this absurdly underpriced insurance and began to place bets on having a loss. The amazing deal was on the retail level, Goldman was pricing this stuff at about 16 basis points, but the loss paid out $1. You can't get that kind of payoff in Vegas.

Buying an insurance policy usually requires an "insurable interest." For example, I could not buy insurance on your mother's life because it does not affect me if something were to happen to her; I have no skin in the game. As a matter of public policy, we do not want insurance companies to be gambling houses. However, both political parties have gone along with deregulation in the name of profits.

Typically when this kind of thing happens the Insurer (underwriter) declares bankruptcy and offers something like ten cents on the dollar of coverage. Those who had placed their bets would have still received a $0.10 return for every $0.0016 invested, which is huge. Anyone with any sense wonders why not let Goldman Sachs, Deutsche Bank and Goldman handle this like any other bankruptcy with investors taking haircuts, as they damn well should? Maybe we should look at the resumes of those involved in engineering the bail out starting with the chief architect of the thing:

Hank Paulson: CEO of Goldman. Wiki notes "Before becoming Treasury Secretary, he was required to liquidate all of his stock holdings in Goldman Sachs, valued at over $600 million in 2006, in order to comply with conflict-of-interest regulations.[17] Because of a tax provision passed under President George H.W. Bush, Paulson was not subject to capital gains tax. This saved him between $36 and $50 million in taxes.[18]"

So yeah, there's that. Love Mr. Lewis. He got closer than most writers to figuring this mess out.

Further reading https://haraldhau.com/The_Man_Who_Crashed_the_World.pdf