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May 18, 2009

They Distributed Loss Reserves As Bonuses, So We Pay The Losses As Bailouts

-- by Dave Johnson

I'm starting to get it, about how these bailouts work.

In the 90s and 2000s Wall Street made billions and billions of "profits" and the people working there made millions and hundreds of millions each, placing bets with "credit default swaps." The upside was all in the sale of these -- the downside happens if mortgages and loans go bad.

So the money from selling these credit default swaps was supposed to be set aside as reserves to cover potentinal losses, but was instead handed out as profits and bonuses.

So when the mortgages and loans did go bad, instead of those people paying up from the billions the companies made and the hundreds of million that individuals made, instead you and I taxpayers are paying off on these bets.

They get to keep the money that they called "profits" back then, even though they were not profits, but were supposed to be set aside to cover the losses that might happen later. When the losses did happen later, we pay it off for them and they keep the private jets, mansions and yachts.

And the reason this is happening is because the Wall Street types put some of the money into paying off people in Washington, and "lobbying" and into right-wing think tanks, etc. The people with the power to make us pay off those losses are being paid or otherwise influenced by the money that was called "profits" in previous years, but which really should have been used to cover these losses.

Is that about right?

Posted by Dave Johnson at May 18, 2009 11:38 AM


Comments

Add to the mix the fact that these banks, now also in the insurance/gambling business, became labeled "too big to fail" but not "too essential to be nationalized", and the noxious cocktail smells about right.

It's interesting how (responsible) insurance companies don't seem to be run this way. Why is that? Is it a difference in corporate culture? Or is my premise wrong?

Posted by: Dan [TypeKey Profile Page] at May 18, 2009 6:44 PM

So do you really get it? Close, but not quite. What makes all this chicanery possible is the existence of a lender of last resort. You are starting to learn the meaning of the term Moral Hazard.

End the Fed.

David

Posted by: dvdburns [TypeKey Profile Page] at May 19, 2009 3:14 AM

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