They Get the Joke

Two weeks ago, I summarized the legal corporate murder racket thusly:

You can put any financial business into bankruptcy by denying them credit.  And you can deny any company credit by buying enough protection in the CDS market.

Today, as I  checked out my favorite places to cruise for business news/gossip, I caught a post on the unofficial biggest thorn in Wall Street’s side, Zero hedge.  In it, pseudonymous Tyler Durden let fly with the musical question:  Did Paulson have a $2 billion Bear Stearns CDS short in late 2006?

Of course he did, along with CDS shorts on every other member of the subprime mortgage supply chain.

Is it murder if somebody dies after you lock them in an old refrigerator?  What if there was no law against it?  Is it still murder?

In Paulson’s case, it was even more delicious.  He worked for years at Bear Stearns.  He had large credit lines there, and a large (and growing) account.  In March of 2008, I got a call from my Goldman salesman on Tuesday of Bear’s last week on the planet, telling me that Paulson and others were pulling their cash out of the prime brokerage operation.

“The Bear,” as some called them, had tens of billions of liquidity at the beginning of that week.  By the end of the week, they had none.

For anyone who owned assets like theirs, the death spiral of markdowns followed by  liquidations followed by more markdowns was feeding on itself.  Not just Bear, but everyone (except the shorts) were in danger of insolvency.  Even they could be in trouble if any major counterparties to their CDS contracts went down.

It was so much more than a liquidity crisis.

Eventually, every homeowner and every saver was going to pay the price as this massive transfer of wealth continued rolling down the debt mountain like a super-sized avalanche.

I called my description of this process “The Great De-Levering” in my manuscript, and I’m thinking about whether to put that chapter up on the blog to join “The Blame Game“, “Roots of the Meltdown” and “Invisible Leverage.”  Comments and/or feedback via the blowback page will help me decide.

When I was writing Mortgage Market Mayhem, this process was just getting going, and it took another six months before the investment banking business (as a stand-alone financial business) was gone.  So was the equity in millions of innocent American’s houses, even if they didn’t take out “liar loans” and did pay 20% down payments.



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