Made is a blog

Today I was reading the Wall Street Journal about the recent exposure of potential wrong-doing at Goldman Sachs concerning the Paulson mortgage securities. I have watched the “main street – wall street” tension like all of you have since the beginning of the recession. For me, reading the article about Fabrice Tourre’s dealmaking was the proverbial straw that broke my back. If you haven’t read about the US charges on Goldman Sachs, here is my interpretation. Paulson puts together a bunch of bad mortgage securities and makes a “package”. He knows that the package he put together will probably decline in value. Goldman Sachs uses a third party agent (called ACA) to design the investment vehicle (called a CDO). Goldman Sachs sells this investment, thus making it something that can be bought & sold. Paulson then buys credit-default swaps betting that the VERY PACKAGE he put together would decline in value. It does, he makes $1 billion in profits. Goldman Sachs makes $$ on fees on the buy/sell from all that participate.

Ok, here is my translation. Let’s suppose there is a guy names Fred. Fred has a bunch of apples that are turning brown. He figures that at some point these apples will spoil, so he wraps them up in nice boxes. He approaches a store to sell these apples. The store then sells the apple boxes across town. Now down the street, there is a bookie. The bookie takes all kind of bets. One kind of bet that people can make is if apples will stay good or go bad before customers open the box. Fred approaches the bookie, takes a huge bet that the apples will go bad (he got good odds). They do go bad and he makes money not only on the original apple boxes but makes a whole bunch more on his bet. Our financial markets must be regulated and simplified so that credible investments are understood. If innovation is the engine of our economy, financing is the lubricant. To insure that the engine works, the lubricant must be sound. When you buy a box of apples, you should have the assurance that they are good to eat.

-Charley