These two almost simultaneous announcements occurred only days after both Republican minority leaders John Cornyn and Mitch McConnell were caught meeting in secret with 25 multi-billionaire Wall Street executives and hedge fund managers.
Later as if on cue, the strings of Republican Senator Mitch McConnell were pulled by his Wall Street puppet masters and produced a televised press conference warning about the dangers of regulating Wall Street. After that the Republican Party as a whole announced its intention to vote as a bloc to stop any reform of Wall Street currently being proposed. Even though much of the current legislation has been proposed and written by Republicans.
If even after all of this and everything that has occurred over the past few decades the Tea Partiers still believe the Republican Party has the back of the average hard working Americans and does not really work 27/7/365 days of the year on behalf of the fat cat bankers and hedge fund managers of Wall Street they are either delusional or live on a planet where the sky is not in fact blue.
Jay Bookman, a writer for the the Atlanta Journal Constitution, gives one of the better explanations:
"According to the SEC complaint:
As the narrative reads, Paulson goes to Goldman Sachs and asks the investment bank to create mortgage-backed bonds that he could short. Goldman Sachs agrees, taking a $15 million payment from Paulson for doing so. But Goldman goes a step farther by allowing Paulson to pick the mortgages that would be bundled into bonds -- the mortgages that Paulson thought would be most likely to fail. Goldman then sold those tainted, Triple A-rated bonds to unwitting Goldman clients, collecting another hefty fee in the process. Like Paulson, it too placed secret bets that the bonds it had sold to trusting clients would fail.
In effect, Paulson and Goldman had inside information that the CDOs they were creating would more than likely fail, because they had designed those instruments to do exactly that (within a year of their creation, 99 percent of bonds in question had indeed been downgraded). But Goldman's clients that bought those CDOs were not privy to that knowledge."
Jill Schlesinger of CBS Moneywatch described the scheme this way:
"Think of it like this: Goldman Sachs is asked by Paulson to sell a house that he knows is a fire hazard. Goldman markets the house to its clients and at the same time, Paulson purchases an insurance policy on the house in case it burns down. When the house does in fact burn down, Paulson collects a bunch of money (approximately $3.7B in 2007). And did I mention that Goldman ALSO bought some of that insurance too?"
With the revelations that are coming out about Goldman Sachs making billions of dollars by essentially pushing investors of mortgage-backed securities over the edge of the cliff is it not surprising that this type of toxic financing and bundling of all kinds of unregulated exotic financial instruments has probably been going on for decades. Is the tip of the iceberg finally being revealed to all?
During the high-flying tech years in the 90's many young technology companies seemingly rose to bubble like levels and then just as quickly fell back to the earth. In the process 1000's of small companies were destroyed, millions of people lost their jobs, millions of investors lost billions of dollars and at the time it was all simply attributed to "irrational exuberance" by Fed chairman Alan Greenspan. But it is also interesting to note that at the same time as the bubble was bursting the Goldman Sachs' of the world and many hedge fund managers in the midst of all the chaos were making billions of dollars in profits. Concerns over exotic financing and manipulation schemes, things like naked short selling and death spiral financing and PIPEs, started bubbling to the surface.
Granted many of these companies had terrible business plans, aka eToys Inc. But one still has to wonder how even companies like eToys seemed to get millions and millions in financing from Wall Street Banks so easily ". especially when so many experts were questioning their viability and business plans. And let me be clear I am not necessarily against the basic market mechanism to short a stock as long as it can be done on a level playing field, it is tightly regulated, and the companies providing the financing cannot at the same time bet against the company that they are supposedly claiming to help.
In hindsight it appears that some of the initial financing deals for many of the high-tech and biotech microcap stocks were written off from the start and the real money was to be made by shorting the company's stock through any means possible including facilitating negative press against the company. These hedge funds and Wall Street banks may have made far more money from the failure and destruction of the company's stock then they ever would have made had the company succeeded. Some of these young companies probably never had a chance after the Wall Street financing deal was signed.
Complicated financing, that was in many ways pegged to a young company's stock price, quickly became very toxic to the very existence of the company. On the surface many of these types of financing seemed to look very appealing and a great way for a young company to raise the much needed capital to grow. And if the young company did well the stock price should in theory go up and everyone would win. Baked into the financing was a seemingly small hedge that if things did not go as expected the number of outstanding shares of stock would grow and be owned by the financier. This was supposedly the insurance policy or hedge to help protect the financier from a complete loss. But as the number of outstanding shares of a company grew the value of everyone else's ownership was diluted and thus the individual share price went down irrespective of other external factors. This of course by itself put a downward pressure on the stock price, which in turn allowed the financier the option to be given even more stock and with any kind of additional push or negative event the downward spiral just accelerated from there. Hence the name "death-spiral" financing.
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