John Paulson’s “Greatest Trade Ever” — Something of a Scam

[Joanne98]

By now, everybody knows that the market for collateralized debt obligations was riddled with fraud in the lead-up to the financial crisis. What is less known is the fact that hedge fund managers helped create and inflate the market for these toxic securities specifically so that they could bet against them and profit from the inevitable collapse.

An example of a particularly sordid scheme, orchestrated by hedge fund billionaire John Paulson, was discovered some time ago by David Fiderer, a blogger for the Huffington Post. The information in Fiderer’s blog is rather incriminating, and, of course, the mainstream media is not on the case, so I think it bears repeating.

In a close reading of Wall Street Journal Gregory Zuckerman’s book, “The Greatest Trade Ever”, an otherwise starry-eyed account of Paulson’s bets against the mortgage market, Fiderer discovered this nugget:

“Paulson and were eager to find ways to expand their wager against risky mortgages. Accumulating it in the market sometimes proved to be a slow process. So they made appointments with bankers at Bear Stearns, Deutsche Bank, Goldman Sachs, and other banks to ask if they would create CDOs that Paulson & Co. could essentially bet against.”

As Fiderer explains, Paulson asked the banks to create those CDOs “so that they could be sold to some suckers at close to par. That way, Paulson’s hedge fund could approach some other sucker who would sell an insurance policy, or credit default swap, on the newly minted CDOs. Bear, Deutsche and Goldman knew perfectly well what Paulson’s motivation was. He made no secret of his belief that the CDOs subordinate claims on the mortgage collateral were close to worthless. By the time others have figured out the fatal flaws in these securities which had been ignored by the rating agencies, Paulson could collect up to $5 billion.

“Paulson not only initiated these transactions, he also specified the terms he wanted, identifying which mortgages would be stuffed into the CDOs, and how the CDOs should be structured. Within the overall framework set by Paulson’s team, banks and investors were allowed to do some minor tweaking.”

It is not clear which banks ultimately participated in Paulson’s scam, but Fiderer quotes Bear Stearns trader Scott Eichel as saying that his bank refused. “It didn’t pass the ethics standards;” Eichel said, “it was a reputation issue and it didn’t pass our moral compass. We didn’t think we could sell deals that someone was shorting on the other side.” Bear Stearns’ moral compass was usually pointed towards the darker regions, but perhaps this is why Paulson subsequently became one of the more eager short sellers of Bear Stearns’ stock.

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http://www.deepcapture.com/john-paulson-and-the-greatest-pump-and-short-fraud-ever/

[truedelphi]

1. And even as we consider the cause of the carnage, the Big Players are

Out there doing the Same Work, figuring how they can play off each others' creations.

There is twenty three trillion in Giveaways and guarantees offered by Bernanke, and surely they will figure out a way to get most of it.