Why is Bernie Madoff the only Wall Street criminal to face jail time?

[jmowreader]

28. A little bit of reading for you

Start with:

http://en.wikipedia.org/wiki/Synthetic_CDO

In it you will find:

Investors in synthetic CDOs included
“funded” long investors, who paid cash to purchase actual securities issued by the CDO. These investors received interest if the reference securities performed, but they could lose all of their investment if the reference securities defaulted.
“unfunded” long investors, who entered into swaps with the CDO, making money if the reference securities performed. These investors were highest in the payment "waterfall"—receiving premium-like payments from the CDO as long as the reference securities performed—but they would have to pay if the reference securities deteriorated beyond a certain point and the CDO did not have sufficient funds to pay the short investors.
“short” investors, who bought credit default swaps on the reference securities, making money if the securities failed. These investors were often hedge funds. They bought the credit default swaps from the CDOs and paid premiums unfunded investors received.[15]

Now try this on...

http://nationalmortgageprofessional.com/news17098/sec-charges-goldman-sachs-fraud-tied-sub-prime-mortgages

The SEC's complaint alleges that after participating in the portfolio selection, Paulson & Company effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (CDS) with Goldman Sachs to buy protection on specific layers of the ABACUS capital structure. Given that financial short interest, Paulson & Company had an economic incentive to select RMBS that it expected to experience credit events in the near future. Goldman Sachs did not disclose Paulson & Company's short position or its role in the collateral selection process in the term sheet, flip book, offering memorandum, or other marketing materials provided to investors.

And finally read this:

http://www.math.nyu.edu/faculty/avellane/ABACUS.pdf

This is the prospectus. Read pages 6 thru 9 and they will scare the shit out of you, because it's all there in 9-point Helvetica: if you put your money into this you will lose it all and you can't get back out of this thing.

I believe the SEC to be filled with really smart people, but this statement proves why radical reform of the derivatives market is needed: Credit default swaps are not "protection on specific layers of the ABACUS capital structure," THEY ARE THE ENTIRE ABACUS CREDIT STRUCTURE!!! The whole thing is a fucking fraud, people! Synthetic CDOs are expertly crafted weapons of mass destruction designed to take all your money, and they're designed so no one can figure out what's going on in them. (Fabrice Tourre, who was the GS vice president in charge of this particular scam, bragged in an e-mail that the great thing about synthetic CDOs was that no one understood them.) 2007-AC1 (the one in question) was the forty-seventh synthetic CDO Goldman offered. The first 46 of them took all their longs' money. With a perfect track record like that, does it matter whether the guy who set up the synthetic CDO's structure was John Paulson, John Dillinger, or a can of Hopping John?

Pretend Goldman Sachs synthetic CDOs are a cage with three full-grown tigers in it, and there are 47 people lined up in front of it to try to pet them. You're at the end of the line. The SEC requires you publish the performance of anything you sell, and all 46 of the prior Abacus CDOs took 100 percent of their longs' money - in our tiger example, attempting to pet the tigers resulted in utter disaster. If you're standing there watching the first 46 people get their hands eaten, when it's your turn would you think "they like eating hands, so I shouldn't do this" or "it's okay, they've GOT to be full by now!"