The Wall Street Triple-Penetration

The Young Turks have ran a number of stories on how major investment banks have gamed the US and global economic systems. In the video presented below, they discuss how major investment bankers (e.g., Goldman Sachs) have effectively triple penetrated their investors and the global oil market, which affects all of us by driving up the price of the gas that gets us around town, to work, and gets the products and services that we buy to us.

Here’s a brief summary of how the scam works:

Step 1: Investment bank buys up lots of stock in oil. In finance lingo, this is called taking the long position (i.e., betting that the value of the stock will go up).

Step 2: Investment bank insures the stocks it purchased with a type of derivative called a “credit default swap”. The way a credit default swap (CDS) works is that if the value of the insured stock or financial instrument decreases by a certain pre-determined amount within a pre-determined time frame, the insurer (i.e., the person/organization who sold the credit default swap to the investment bank) pays out a large pre-determined sum of money to the holder of the CDS. This is comparable to buying home insurance and then receiving a payout from the insurer if your house burns down. Buying a CDS is a type of short position, in finance lingo; when one takes a short position, they are betting that the value of the tracked commodity/stock will drop.

Step 3: Investment bank encourages its clients, who could be individuals or groups of individuals (e.g., a pension fund) of varying degrees of wealth, to buy stock in oil, telling them that the market is set to boom. This increased demand and excitement over oil increases the value of the stock that the bank previously purchased. The investment bank also receives transaction fees for processing the oil stock acquisitions.

Step 4: SELL, SELL, SELL! The investment bank sells off its stocks in the oil market, making a killing because of the increased price/demand for oil stocks that it had been fomenting.

Step 5: By selling off its oil stocks, the value of the stocks takes a hit. The investment bank then builds on this by spreading word of an ensuing drop in oil price. In short order, the trading price of oil drops below the set-point for redemption of the credit default swap, entitling the investment bank to a major insurance payoff.

To recap, the investment bank has profited at 3 points: 1. The receipt of transaction fees for processing oil stock acquisitions for its trusting customers; 2. Selling the inflated oil stocks that it had ginned up excitement and prices over; and 3. Redeeming its stock insurance policy when the oil stock price drop it had orchestrated had come to fruition. That’s three serious money shots into the wallets of the investment bank. Meanwhile, their investors and the consumers in the global oil markets are left feeling used, confused and economically bruised.

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