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International: A bank you could learn to hate
Commentary by Jeff Burgar
for South Peace News
You may or may not agree we just came through the worst financial crisis since the Great Depression.
The impact continues. Hotels and motels are empty. There aren’t many jobs. Business, except maybe for collection agencies, is slow. Loans are harder to get.
All these issues began with the housing market bubble collapsing in the United States and most of Europe. When the bubble was expanding, many of us thought the party would go on forever. We usually think that way in every bubble. It’s interesting to now see those businesses called investment banks and hedge funds were among the first to be thinking real estate was due for a fall.
Also interesting, they were thinking this even while they were among those making the most money from the latest boom and all the deals flowing from that boom.
One such company was Goldman Sachs. Goldman is now the subject of a billion dollar fraud suit filed by the U.S. federal government. Here’s how their deal worked:
Let’s assume Goldman is a salesman for one of Canada’s big banks. He has a deal for you. His deal is going to pay interest of 10 per cent, a whole lot better than the measly three per cent you are barely getting in your deposit account.
The deal looks good. It involves insuring Canada’s drivers. All you have to do is look at the number of accidents in a year, look at the amount of the payouts over a year, tack on administration costs, tack on an amount that will pay the 10 per cent profit, or more, and it’s a done deal. Best of all, the deal is offered by a big bank. What’s not to like?
So, you sign up, sending several thousands to the bank. The first year, you get your 10 per cent. The next year, you get your 10 per cent. The third year, the bank calls and says your money is all gone.
“How can this be?” you demand to know.
“Well,” says a friendly voice at the other end of the line, “it happened like this.”
The explanation is, while you thought you were buying a whole bunch of average drivers across Canada, what you actually got was a whole bunch of 17-18-year-old and slightly older males. You got the worst drivers, the highest risk group, the guys who in total have more accidents than most other drivers put together.
“Holy schmucks,” you say. Why didn’t the bank tell me this was the crap they were selling?
The answer is simple. Despite the fact it was a bank selling it, if the salesman had told you what he was really selling, you wouldn’t have bought any. And of course, lots of accidents happened, and your money went to pay for them.
The difference between Goldman and this deal is, Goldman was betting on the real estate market collapsing. They sold their deals to people who thought it would go on forever. In hindsight, it looks like a no-brainer. In fact, one could argue it was firms like Goldman which sold products that actually drove the boom even higher making the fall even harder.
It’s for judges to decide if Goldman was crooked. What do you think?
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