Hedge Fund manager John Paulson helped to design the Abacus fund for Goldman Sachs and filled it with a bunch of garbage. This fund was then peddled to unwary investors while Paulson shorted it. As a result, when the garbage in the fund went south, the investors lost $1 billion and Paulson's gamble netted him $3.7 billion. But that isn't even the worst of it. Taxpayers who bailed out the system actually paid Paulson the $3.7 billion - as if he needed it. Timothy Geithner's insistence that taxpayers bail out all of Wall Streets gambling casino bets netted Paulson the full amount of his bet, not a penny less. Now don't you think that the taxpayers could have been saved a few billion dollars if Paulson was just given back the amount of money he originally paid to make his bet? He would have been made whole. He would have been as well off as he was before he made the bet. How would that have brought down the system? But using taxpayer money to pay him off under the pretext that not doing so would bring down the system has netted taxpayers a lot of debt.
Now recently when someone fat fingered a trade and the market lost 1000 points in a few minutes the DOW decided to nullify all trades within a certain period. So those that gained big from this hyper frequency program trading and those who lost big were denied in the first case excessive profits and in the latter case excessive losses. Don't you think that the same thing could have been done in the recent financial crisis? But no, with the tax payers on the hook, every bet was paid under dire threat that not doing so would bring down the system. AIG was bailed out in order to pay off Goldman Sachs and John Paulson. The people that engineered this whole debacle should have just been given the money back that was used to place the bet as essentially Wall Street did when the DOW hit a snag.
It seems next to impossible to figure out how much Paulson paid for the credit default swaps (CDOs) he bought from AIG that placed his bet against the Abacus fund. He did give Goldman Sachs some money to set up the fund, and then he gave AIG some money to place his bet. But he basically paid little and did little netting himself huge profits.
So what was in the Abacus fund? CDOs or collateralized debt obligations. This is where mortgages are sliced and diced, mixed up and put back togather in various combinations. It's as if you ordered a pizza with a plain cheese pizza being equivalent to a plain 30 year mortgage. But instead of ordering a plain cheese pizza, you ordered a slice of pepperoni, a slice of sausage and mushroom, two slices of the works and three slices of Hawaiian. Then you told the pizza maker to throw all these pieces of pizza in a box and shake the box vigorously. The jumble inside would then be equivalent to a CDO. Then having done this and having sold off the box of pizza to a variety of customers, you went to a bookie and placed a bet about how many of the pizza consumers would get sick as a result of eating the pizza.
But it gets even worse. If you can control the ingredients in the pizza, you tell the pizza maker to use pepperoni that has been sitting around outside the refrigerator for three days, pineapple that has been sitting in an opened can for a week, olives from a third rate producer and so on. Then you place a bet on how many of the consumers of the pizza would get sick. When you control the ingredients in a product as Paulson did, you have insider knowledge as to how well that product will perform in the marketplace or, in the pizza metaphor, how many people will get sick. And then when your bet pays off and you go to the bookie to collect - in this case AIG - they tell you that they don't have the money to pay you but, not to worry, they will get the money from the government i.e. the taxpayers, because, if the government doesn't pay up, the whole system will melt down.
However, I think that what the government should have done is just to have given back the original amount of the bets. No one would have gained and no one would have lost. Everyone would have been made whole. It's just that some wouldn't have reaped huge profits as John Paulson did at taxpayer expense.
