Today, after the government-backed bailout of the financial industry and the ruination of the world economy

pls don't try below at home...lol

Let's say you're a bank. You loaned out money to people buying homes. You loaned out money to developers who were building homes. But now you worry that your creditors won't be able to pay you back. What do you do?

One thing you can do is create a "collateralize debt obligation."(CDO)
First, you create a new corporation.
Second, sell all your mortgage loans to this new corporation. This frees you (the bank) from all the risk. How does the new corporation purchase these mortgages? Well, (third), it issues new bonds.
The proceeds from these bonds allows the new corporation to buy the old mortgages. The new bonds will pay interest (and eventually pay back principal) based on the interest generated by the original mortgages.
Now, the new bonds come with different risk categorizations. Some are "equity securities," which means that the bond is essentially purchasing (very risky) ownership in the new corporation. Some are "junior securities," which means they are a bond but a bond which is risky. Some are "senior securities," which means they are a bond but a bond which holds less risk.

Now, the funny thing is, the bonds you just sold are classified by risk. But that risk doesn't have to have anything to do with the riskiness of the mortgages backing the bonds.bleak!!

Essentially, the new corporation is saying, "I've got junk over here...ultra super-duper shockingly-high mortgages which are all likely to go bust. But I wave my magic wand, say the magic word, and ABRACADABRA! I now can ignore all that super-duper risk. The bonds I'm issuing are risky, some risk, and low risk."

The law permits this, you know. Why? Because the new corporation can classify the risk of its products any way it wants to. It justifies the ultra-riskiness of its equity bonds by saying, "If the mortgages go bad, you take the hit first."
Thus, the classification of high risk. It justifies the mid-level riskiness of the junior bonds by saying, "All the equity bonds take the hit first. You take a hit second." It justifies the low-level riskiness of the senior bonds by saying, "The equity bonds and junior bonds take the hits first. You come last."

Now, remember: You are the original bank. You can help the new corporation sell these bonds. In fact, you can earn a commission on the sale of these bonds. So not only have you unloaded the bonds onto a new company, but you've sold off your ownership interest in the new company by issuing equity bonds. And now you're making money off the new company by selling its bonds on commission!

Sweeeeeeeet!!right

It can get even sweeter. Let's say you don't want to sell your mortgages to the new corporation. That's cool: Just engage in a credit swap. That is, promise to give the new corporation a percentage of the interest on the mortgages (say, 75 percent). In return, if the mortgage goes into default, it's the new corporation which has to pay you (the bank) for the cost of this mortgage. Essentially, you are trading away most of the profits (the interest) on the mortgage in return for someone else taking the mortgage off your hands when it goes bad.

When you don't actually sell your mortgage, this is called a "synthetic collateralized debt obligation" (synthetic CDO).


Now,

let's say that you (the bank) are a sneaky shit-eating bastard. (I know, it's redundant to call banks sneaky shit-eating bastards. But let's continue with our hypothetical...)

Let's say that you purposefully make loans which you KNOW will crater. And then you create a synthetic CDO which sells off the profits in these mortgages to this purposefully doomed new company. You still get some profit so long as the mortgages perform, but you incur none of the risk. Once the mortgages default, the hapless new company has to take them off your hands -- ensuring that the new company will go bankrupt.

You (the bank) are no longer hedging your bets. Now you are purposefully playing the market, betting against your customer's own best interests. You are purposefully setting up dummy corporations to pay you money, take your bad debts off your hands, and leave unsuspecting creditors holding the bag.

As one securities dealer put it, "You are buying fire insurance on someone else's house and then committing arson."

All legally.

According to the New York Times on December 22, 2009, that's exactly what Goldman Sachs and other Wall Street firms did exactly this from 2005 to 2007.

The market for CDOs in 2004 was $157.4 billion. But that market increase by a whopping 60 percent (to $251.3 billion) in 2005,
and then doubled again in 2006 to a gigantic $520.6 billion.

It receded slightly in 2007 to $481.6 billion as portions of the housing market began to collapse. (The actual numbers are much, much higher because synthetic CDOs are unregulated and trading in them is not reported to any financial regulator, exchange, or market.)

After ruining the country, the CDO market collapsed to just $61.9 billion in 2008, and a paltry $4.2 billion in 2009.

Goldman Sachs and others say they weren't intentionally ruining anyone (f**k yeah). There was just a really big demand for CDOs, they said, so they began packing all the mortgages they had into CDOs -- which meant all the really crappy stuff, too.

But they are lying.

In 2006, two companies -- CDS Indexco and Markit -- created an index stock called the ABX. Investing in this stock allowed traders to bet on CDOs. Holders of CDOs could join the ABX (for a hefty fee) and offer shares in their CDOs. Buyers of the index could trade the shares like any stock.

This included buying and selling options ("puts," which predict the shares will fall and allow the purchaser to buy the stock at some future date at a price at the predicted low price; and "calls," which predict the stock will rise and which allow the purchaser to buy the stock at some future date below the predicted high price).


Goldman Sachs began playing the ABX. Goldman Sachs knew full well the housing market was collapsing.
So not only did it sell off its bad debts in the form of synthetic CDOs, it began trading in ABX "puts" -- ensuring that it could buy stock now at high prices and force others to take the stock off its hand at that high price once the price of the ABX stock had collapsed to worthlessness.

Goldman began doing this in December 2006, although it never informed anyone about the worsening risks involved in the mortgages it continued to make or the CDOs it continued to sell.

So not only was Goldman Sachs making money by dumping its CDOs... Not only was Goldman Sachs making money by marketing CDOs... Not only was Goldman Sachs making money by purposefully creating shitty CDOs... It was also playing the market to make money once those CDOs collapsed.

Then, years later, once those assets -- the actual homes, businesses, and buildings -- were being sold off for pennis to satisfy the debts? Goldman Sachs snatched them up at fire-sale prices.


Today, two years after the government-backed bailout of the financial industry and the ruination of the world economy, the Justice Department and Securities and Exchange Commission filed a lawsuit accusing Goldman Sachs of committing fraud by issuing these CDOs.

Thanks to Tim (Princeton), Credit to people in XXX unit (you know who you are) and Steve,(hubby).