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April 18, 2010

Republicans say Hell with the Tea Party and Side with Wall Street Banksters

By Eric Nelson

Republican kick the Tea Partiers to the curb and side with Wall Street. Same game new name, in the past it was death-spiral financing and naked short selling and now it is packaging toxic CDOs and then betting against their success


It is now only a matter of time before all the Tea Partiers realize they have been sold down the river by the Republican Party. On Friday, in what was one of the cruelest ironies of fate to befall the Republican party, it was revealed that the Republican Party had decided to stand against any Wall Street reform and side with the Wall Street Banksters and an announcement was made that the SEC had leveled massive fraud charges against Goldman Sachs, one of the taxpayer bailout recipients. Goldman's alleged scheme as described by the SEC was that they created risky mortgage-backed securities with the help of hedge fund manager John A. Paulson and then sold them as Triple-A rated mortgages to investors and at the same time bet against the stability of these mortgage-backed securities which resulted in billions of dollars of profits for Goldman Sach and about 1 billion dollars in losses for Goldman Sach investors. Hedge fund manager Paulson netted about $5.7 billion between 2007 and 2008 during much of the country's financial collapse.

These two almost simultaneous announcements occurred only days after both Republican minority leaders John Cornyn and Mitch McConnell were caught meeting in secret with 25 multi-billionaire Wall Street executives and hedge fund managers.

Later as if on cue, the strings of Republican Senator Mitch McConnell were pulled by his Wall Street puppet masters and produced a televised press conference warning about the dangers of regulating Wall Street. After that the Republican Party as a whole announced its intention to vote as a bloc to stop any reform of Wall Street currently being proposed. Even though much of the current legislation has been proposed and written by Republicans.

If even after all of this and everything that has occurred over the past few decades the Tea Partiers still believe the Republican Party has the back of the average hard working Americans and does not really work 27/7/365 days of the year on behalf of the fat cat bankers and hedge fund managers of Wall Street they are either delusional or live on a planet where the sky is not in fact blue.

One has to believe that Republican Senator Mitch McConnell did not know about the pending SEC announcement of fraud against Goldman Sachs. I can't think of a worse possible time to say that you are for the "Wall Street Banksters" and against mainstreet America. This at the same time that the SEC files a suit that targets Goldman Sachs' collateralized debt obligations (CDOs), which the SEC claims were created to fail, then sold to unwitting dupes without informing them of the risk, and in the end Goldman and Paulson's hedge fund made bets against the initial mortgage instruments it helped create and package in the first place. Of course Goldman Sachs made boatloads of money every step of the way during this scheme.

Jay Bookman, a writer for the the Atlanta Journal Constitution, gives one of the better explanations:

"According to the SEC complaint:

As the narrative reads, Paulson goes to Goldman Sachs and asks the investment bank to create mortgage-backed bonds that he could short. Goldman Sachs agrees, taking a $15 million payment from Paulson for doing so. But Goldman goes a step farther by allowing Paulson to pick the mortgages that would be bundled into bonds -- the mortgages that Paulson thought would be most likely to fail. Goldman then sold those tainted, Triple A-rated bonds to unwitting Goldman clients, collecting another hefty fee in the process. Like Paulson, it too placed secret bets that the bonds it had sold to trusting clients would fail.

In effect, Paulson and Goldman had inside information that the CDOs they were creating would more than likely fail, because they had designed those instruments to do exactly that (within a year of their creation, 99 percent of bonds in question had indeed been downgraded). But Goldman's clients that bought those CDOs were not privy to that knowledge."

Jill Schlesinger of CBS Moneywatch described the scheme this way:

"Think of it like this: Goldman Sachs is asked by Paulson to sell a house that he knows is a fire hazard. Goldman markets the house to its clients and at the same time, Paulson purchases an insurance policy on the house in case it burns down. When the house does in fact burn down, Paulson collects a bunch of money (approximately $3.7B in 2007). And did I mention that Goldman ALSO bought some of that insurance too?"

With the revelations that are coming out about Goldman Sachs making billions of dollars by essentially pushing investors of mortgage-backed securities over the edge of the cliff is it not surprising that this type of toxic financing and bundling of all kinds of unregulated exotic financial instruments has probably been going on for decades. Is the tip of the iceberg finally being revealed to all?

During the high-flying tech years in the 90's many young technology companies seemingly rose to bubble like levels and then just as quickly fell back to the earth. In the process 1000's of small companies were destroyed, millions of people lost their jobs, millions of investors lost billions of dollars and at the time it was all simply attributed to "irrational exuberance" by Fed chairman Alan Greenspan. But it is also interesting to note that at the same time as the bubble was bursting the Goldman Sachs' of the world and many hedge fund managers in the midst of all the chaos were making billions of dollars in profits. Concerns over exotic financing and manipulation schemes, things like naked short selling and death spiral financing and PIPEs, started bubbling to the surface.

Granted many of these companies had terrible business plans, aka eToys Inc. But one still has to wonder how even companies like eToys seemed to get millions and millions in financing from Wall Street Banks so easily ". especially when so many experts were questioning their viability and business plans. And let me be clear I am not necessarily against the basic market mechanism to short a stock as long as it can be done on a level playing field, it is tightly regulated, and the companies providing the financing cannot at the same time bet against the company that they are supposedly claiming to help.

In hindsight it appears that some of the initial financing deals for many of the high-tech and biotech microcap stocks were written off from the start and the real money was to be made by shorting the company's stock through any means possible including facilitating negative press against the company. These hedge funds and Wall Street banks may have made far more money from the failure and destruction of the company's stock then they ever would have made had the company succeeded. Some of these young companies probably never had a chance after the Wall Street financing deal was signed.

Complicated financing, that was in many ways pegged to a young company's stock price, quickly became very toxic to the very existence of the company. On the surface many of these types of financing seemed to look very appealing and a great way for a young company to raise the much needed capital to grow. And if the young company did well the stock price should in theory go up and everyone would win. Baked into the financing was a seemingly small hedge that if things did not go as expected the number of outstanding shares of stock would grow and be owned by the financier. This was supposedly the insurance policy or hedge to help protect the financier from a complete loss. But as the number of outstanding shares of a company grew the value of everyone else's ownership was diluted and thus the individual share price went down irrespective of other external factors. This of course by itself put a downward pressure on the stock price, which in turn allowed the financier the option to be given even more stock and with any kind of additional push or negative event the downward spiral just accelerated from there. Hence the name "death-spiral" financing.

Only a few were able to survive the onslaught. for example was one of them and their controversial CEO, Patrick Byrnes, has made it almost a crusade to take down the practice of naked short selling which he believes nearly destroyed his company. Not withstanding his far right-wing stance on a number of other issues and a number of financial restatements that Overstock has had to make in recent years, Mr. Byrnes did force a lot of much needed attention on this practice. Companies like Biovail, Biolase, Netflix, and Taser have also had their share of concerns expressed that naked shorting of their stocks was occurring. But mostly this pratice and other suspected manipulations occurred in much smaller stocks, ones whose eventually demise stayed almost entirely off the radar screen.

Claims have been made that up to 6000 small companies were destroyed by naked short selling and unfortunately those claims will likely never be verified or disproven. There have been a number of documented cases where stocks outstanding and tabulated by transfer agents for shareholder voting purposes exceeded the number of actual stock issued by the company ... hence the complaint by many investors that naked short selling is nothing more than the counterfeiting of stock certificates.

After a lot of bluster through the early 2000's all that Congress and the SEC was able to muster was the SHO rule, Regulation SHO (17 CFR 242), which was nothing more than a public list showing which stocks had numbers of shares that did not really add up. So instead of actually trying to stop the manipulation and naked short selling they essentially just created a list of stocks that were by all practical purposes "marked for death".

Two separate lawsuits, filed in 2006 and 2007 by NovaStar Financial, Inc. shareholders and, named as the defendants ten Wall Street prime brokers. They claimed a scheme to manipulate the companies' stock by allowing naked short selling. A motion to dismiss the Overstock suit was denied in July 2007 and the suit appears to still be pending.

In March 2007, Goldman Sachs was fined $2 million by the SEC for allowing customers to illegally sell shares short prior to secondary public offerings.

Up until recently anyone who complained about naked shorting in a company was immediately labeled a kook or conspiracy theorist. But after what we are finding out about Goldman Sachs in this most recent revelation brought out in the open by the SEC one really has to wonder about all the other schemes that were once called crazy conspiracies that occurred during the late 90's and early 2000's.

Interestingly, during the technology-stock bubble of the late 1990s, Mr. Paulson and his hedge fund took a negative stance on high-flying shares and profited handsomely for himself and his clients. Many of the hedge funds at the time had overseas operations and subsidiaries that appeared to operate independently and with no oversight by the SEC. They probably still do.

So while President Obama and the rest of the Democrats are finally getting up some courage to demand more transparency in the buying and selling of credit-default swaps and their derivatives, in the face of almost universal support and urging by the American public the Republicans are making a suicide pact, at the behest of Wall Street, by trying to limit that disclosure and stop Wall Street reform.

Submitters Bio:
Eric Nelson is freelance writer, an editor at OpEdNews, and a spiritual progressive from Minnesota who has become more politically active. The reasons for this should be obvious to most; rising poverty, a broken health care system, and a growing global environmental crisis. Eric's writings are as "fair and balanced" as those of FOX news. Eric is also a web informatics expert, former intelligence analyst, and biathlon olympian.