Sunday, April 18, 2010

Goldman Sachs Fraudulent Business Model Explained

I find it difficult to understand that the specialists (the guys trained to dissect and approve complicated financial instruments), also called in the essay below "the building inspector" had the audacity to rate the Goldman Sachs instruments with AAA+ ratings for a couple of years. Families, pension funds and other investors were severely affected because of the rubber stamping of these fraudulent offers. If they could not see the fraudulent nature, what is in any case the point of having a Standard and Poor, Moody's and Fitch?
Apparently (read here and here) they rate according to the commission they get.

Still trust the financial world? Think again. How cynical has this system become?

It is time to buy gold and silver.

A Modern Tale of Financial Loss


A developer (Goldman) built houses that looking good, but were firetraps, using plans provided by an architect (Paulson). They were sold as being to code with certain characteristics represented and endorsed by the building inspectors (Ratings Agencies).

After the sale, the developer and the architect bought huge amounts of fire insurance on the homes from a friendly insurance agent (AIG London) who was eager to collect the commissions. The amounts that were insured were sometimes well in excess of what a home might actually even be worth. They even insured homes nearby that they had not built or sold.

The developer had also encouraged the city government to allow the firetrucks and safety equiptment to fall into disrepair. So when the houses inevitably burned, the fires were so bad that they destroyed whole neighborhoods and threatened entire sections of the city. The fire department was unable to respond.

The sums they collected were so huge that the insurance company for which the agent worked was itself facing bankruptcy, which would have harmed the holders of its other policiies in completely unrelated areas such as life and auto insurance, and retirement annuities.

So the developer had government people, whom he had helped to elect, provide government backing for the insurance agent for the good of the public. The people who had lost their homes and those who were forced to help to pay the developer were very upset.

But the developer was a big advertiser in the local newpaper, so it ignored the compaints, and reported on the story from every perspective but what had really happened. It blamed the people who had lost their homes for being stupid and not inspecting the homes more closely themselves, and trusting the developer, the housing inspectors, and the fire departments.

And anyone who complained too loudly was at first ignored, then ridiculed, and finally threatened with arrest. After all, the developer was one of the most important and influential people in the city, and had many powerful friends. Any suggestion that they had done anything wrong was simply unbelievable.

After all, no upstanding person would ever do anything like that.

The End (for now)

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