Tactical Financial Nuclear Bombs

Investment Research Dynamics

Pigs are greedy – hogs get slaughtered (famous Wall St adage) – Our entire financial is one giant hog farm – Dave Kranzler, 2015

“Hope and Change.”  Remember that campaign slogan?  Boy, we sure hope something like the 2008 financial collapse doesn’t happen again.  But alas, Obama didn’t changeanything.  In fact, the financial fraud and risky leverage embedded in the system is worse now than back then.

Among Wall Street’s improvised electronic devices, aka roadside financial bombs, that blew up our financial in 2008 were Collateralized Debt Obligations (CDOs) which had credit default swaps “wrapped” around them.  This was the financial tactical nuke the blew AIG and Goldman.  These securities were cesspools of subprime mortgages thrown into a security that was “sliced up” into various tranches with varying degrees of risk.  Goldman would sell these primarily to hedge funds and insurance companies. Goldman would then underwrite credit default swaps which offered other hedge funds and insurance companies the ability to bet on the CDO blowing up and, conversely, allowing investors who bought into the CDO “insurance” against the CDO blowing up.

Goldman itself would retain a piece of the action.   The rest is history, as Goldman found itself fatally exposed to AIG’s inability to fund the side of the credit swap in which it guaranteed that the CDO’s wouldn’t blow up.  That’s how counterparty default risk operates.  In this case, it blew up our financial system, cost the taxpayers directly about $1 trillion in direct funding to bail out Goldman, AIG, et al.   The cost of the $4 trillion printed by the Fed has yet to be felt all of us, but rest assured it will be…

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