Understanding Fraud Through Analogies

A complicated story is better understood with a rightly constructed analogy. Goldman’s selling CDOs and shorting them at the same time might be too complicated for some. If you are one of them, just follow these two great analogies. Mystery solved!

First Dylan Ratigan’s car manufacturer analogy:

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Second, Jesse’s “the developer who destroyed the city” analogy:

18 April 2010

A Modern Tale of Financial Loss

A developer (Goldman) built houses that looking good, but were firetraps, using plans provided by an architect (Paulson). They were sold as being to code with certain characteristics represented and endorsed by the building inspectors (Ratings Agencies).

After the sale, the developer and the architect bought huge amounts of fire insurance on the homes from a friendly insurance agent (AIG London) who was eager to collect the commissions. The amounts that were insured were sometimes well in excess of what a home might actually even be worth. They even insured homes nearby that they had not built or sold.

The developer had also encouraged the city government to allow the firetrucks and safety equiptment to fall into disrepair. So when the houses inevitably burned, the fires were so bad that they destroyed whole neighborhoods and threatened entire sections of the city. The fire department was unable to respond.

The sums they collected were so huge that the insurance company for which the agent worked was itself facing bankruptcy, which would have harmed the holders of its other policiies in completely unrelated areas such as life and auto insurance, and retirement annuities.

So the developer had government people, whom he had helped to elect, provide government backing for the insurance agent for the good of the public. The people who had lost their homes and those who were forced to help to pay the developer were very upset.

But the developer was a big advertiser in the local newpaper, so it ignored the compaints, and reported on the story from every perspective but what had really happened. It blamed the people who had lost their homes for being stupid and not inspecting the homes more closely themselves, and trusting the developer, the housing inspectors, and the fire departments.

And anyone who complained too loudly was at first ignored, then ridiculed, and finally threatened with arrest. After all, the developer was one of the most important and influential people in the city, and had many powerful friends. Any suggestion that they had done anything wrong was simply unbelievable.

After all, no upstanding person would ever do anything like that.

The End (for now)

Posted by Jesse at 2:59 PM

Not only the AG of CT is after Goldman, many more (including British Government) are after Goldman’s blood. AP reports: Goldman case likely to unleash torrent of lawsuits.

It looks like Goldman is cooked.