Understanding Fraud At Goldman Sachs

In the last few days, the newspapers have been trying to tell the story of the criminal fraud done by the executives at financial giant Goldman Sachs (one of the companies bailed out by the American taxpayers). Basically, the company created a toxic product that they knew had to fail, and then bet their own money on its failure while selling the product to unsuspecting buyers.

The problem with the stories in the mainstream media is that their stories are not truly understood by many ordinary Americans. They hear terms like "collateralized debt obligations", "hedge funds" and "credit default swaps", and their eyes glaze over and their heads begin spinning. It is hard to understand by anyone not familiar with the intricacies of the financial industry.

That's why I loved this explanation of what went on at Goldman Sachs done on the blog of the Unrepentant Old Hippie. UOH puts the criminal behavior in plain English and uses an analogy that anyone can understand. Here is how UOH describes it:

"Imagine a building contractor who builds a beautiful new home in which he’s purposely installed faulty wiring, and for insulation he’s used some explosively flammable substance like shredded cedar. He then takes out fire insurance on it — facilitated by the insurance company’s home inspector, who knows the house doesn’t make the cut but gets a few bucks from the contractor to give it a passing grade anyway.

Then the house is sold to some unsuspecting home buyer. After the inevitable fire, the insurance company pays out the contractor’s claim — so he’s been paid twice, once when he sold the house and once from the insurance. The poor suckers who bought the house? They die in the blaze.

Goldman Sachs is the building contractor, AIG is the insurance company, and the pension funds of millions of ordinary people are the home buyers who perished in the inferno. Goldman Sachs was betting on the collapse of properties it sold as good investments — “shorting”, which is a perfectly legitimate trading practice, unless you’re the one who’s engineered the collapse. In that case I’m pretty sure it’s a crime.

It’s worth remembering that Goldman Sachs isn’t some scammy little fly-by-night online trading company — they were supposedly the “gold standard” for investment banks."