Therefore, a brief history of the most outrageous 18 months of con artistry this country has ever seen:
CON #1 THE SWOOP AND SQUAT
By now, most people who have followed the financial crisis know that the bailout of AIG was actually a bailout of insurance giant AIG's "counterparties," namely the big banks like Goldman to whom the insurance giant owed billions when it went belly up.
What is less understood is that the bailout of AIG counter-parties like Goldman and Socià ©tà © Gà ©nà ©rale, a French bank, actually began before the collapse of AIG, before the Federal Reserve paid them so much as a dollar. Nor is it understood that these counterparties actually accelerated the wrecking of AIG in what was, ironically, something very like the old insurance scam known as "Swoop and Squat," in which a target car is trapped between two perpetrator vehicles and wrecked, with the "mark" or sucker/victim in the game being the target's insurance company -- in this case, our government.
This may sound far-fetched, but the financial crisis of 2008 was very much caused by a perverse series of legal incentives that often made failed investments worth more than thriving ones. Our economy was like a town where everyone has juicy insurance policies on their neighbors' cars and houses. In such a town, the driving will be suspiciously bad, and there will be a lot of fires.
AIG was the ultimate example of this dynamic. At the height of the housing boom, Goldman was selling billions in bundled mortgage-backed securities (for the most part toxic crap of the no-money-down, no-identification-needed variety of home loan) to various institutional suckers like pensions and insurance companies, who, because of the triple-A ratings on these securities, frequently thought they were buying investment-grade financial instruments. However, at the same time, in a glaring example of the perverse incentives that existed and still exist, Goldman was also betting against those same sorts of securities -- a practice that one government investigator compared to "selling a car with faulty brakes and then buying an insurance policy on the buyer of those cars."
Goldman often "insured" some of this garbage with AIG, using a virtually unregulated form of pseudo-insurance called credit-default swaps. But thanks in large part to deregulation pushed by Bob Rubin, former chairman of Goldman, and Treasury secretary under Bill Clinton, AIG wasn't required to actually have the capital to pay off on the deals if they were to go bad. As a result, banks like Goldman bought more than $440 billion worth of this bogus insurance from AIG, a huge blind bet that the taxpayer ended up having to eat (i.e. pay for).
Thus, when the housing bubble went crazy, Goldman made money both coming and going. They made money selling the crap mortgages, and they made money by collecting on the bogus insurance from AIG when the crap mortgages flopped.
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