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Was California's downfall pre-engineered by a financial wizard or were California's elected officials incompetent?

California is in dire straights. The democrat legislators along with a complicit RINO (Republican In Name Only) governor for years attempted to paper-over California’s mounting deficit with financial legerdemain and borrowing. Primarily by shifting (stealing) internal funds and using the Wall Street Wizards to arrange financing. With nary a thought of what happened to Orange County when they declared bankruptcy in 1994.

The same Wall Street Wizards that finagled the conversion of restricted funds raised by bond issues into unrestricted funds which could be used for favored political projects without having to go to the public for funding.

The scheme was simple. The state and various municipalities purchased assets with the designated bond funds. They turned to the Wall Street Wizards to arrange for the assets to be sold to private investors in return for unrestricted funds. To complete the illusion of propriety the grand poobahs leased back the assets and placed them in public service. All while assuring the investors would receive a high-yield pay-back back with tax revenues, and sweetening the pot by insuring the revenue stream was guaranteed by collateral default swaps from companies like AIG.

Playing both sides of the trade – anything to earn a commission and a hefty executive bonus …

To add insult to injury, we are now finding that the same Wall Street wizards who were selling California bonds to investors, we also advising their clients to bet against California by purchasing collateral default swaps.

ProPublica is reporting …

“Earn Like Goldman Sachs, a ProPublica How-To”

“Goldman Sachs has proved once again that it knows how to make money. Wednesday’s announcement of a record quarterly profit of $3.44 billion  has spurred debate  over how the bank did it.”

“In addition to making money via its own trades, Goldman profits by advising clients about deals. Some of that advice has proved quite savvy.”

“As we reported last year, one of Goldman’s money-making strategies was to encourage some clients to bet on declines of the creditworthiness of a range of states — including California, New Jersey, New York and Florida. Goldman advised hedge funds to take the bets by buying credit default swaps, the insurance-like financial instruments that have been blamed for contributing to the financial meltdown last fall.”

The strategy angered California Treasurer Bill Lockyer because his state was paying Goldman millions to help market the same bonds that Goldman was advising other clients to bet against.”

This week’s announcement of huge profits — and the likelihood of near-record bonuses — at Goldman led us to wonder how much investors could have earned by following Goldman’s controversial advice.”

“Basically, if you had bought swaps against $10 million in California bonds in July 2008, it would have cost just under $80,000. Today, you could theoretically sell those swaps for $350,000 — making a 338 percent profit.”

But fundamentally, it looks as if Goldman was right to advise clients that betting against states was a good way to make money. California didn’t like it because, as Lockyer’s spokesman said at the time, drumming up bets against California bonds could further undermine confidence in the state’s ability to repay its debts. That, in turn, could force the state to pay higher interest rates to borrow money, and cost taxpayers tens of millions at a time when the state is facing one of the worst budget crises in its history.”

Let’s see: higher yields, more money, more commissions – it does appear that California’s finance experts were played by the Wall Street wizards.

“So who are the people who’ve promised to pay up if California, or other states, cities and municipal entities, default? There’s no way to know, because the swaps are still unregulated — though Congress is debating if and how to change that.”

How convenient? Where was the Securities and Exchange Commission and the Commodities Futures Protection Commission?  Unfortunately, it seems that AIG’s first act with the taxpayer’s bailout funds was to upstream a $13 BILLION  payment to Goldman Sachs at 100 cents on the dollar – imagine that! Especially when valuations have fallen and other players were paying off at 60-cents on the dollar.

“For the record, it doesn’t look as if many people followed Goldman’s advice, which the company said it stopped giving around October. Fewer than 200 contracts for swaps on California bonds are out, with a net value of just under $760 million, according to the Depository Trust and Clearing Corp. For Florida, there are 133 and for New York, there are 95.”

But can you really trust these numbers? And who is investigating which politicians and bureaucrats may have received campaign financing and other courtesies in return for being selected to assist California in selling its bonds?

There is something rotten in California politics and finance …

It’s not so much that I am concerned about Goldman Sach’s behavior, they simply did what comes natural to traders. It is the contempt I feel for our politicians whose free-spending ways and costly, unethical cover-ups that bothers me. We need to purge the professional politicians and ideologues that have ruined our state. The governor, the legislature on both sides of the aisle and all of the other elected officials. We lose nothing of value and have everything to gain.

I am especially miffed at California’s Treasurer, Bill Lockyer, who has filed to run for another term as Treasurer and is still rumored to be considering running for a position as California’s Governor. Considering his long service as a California finance official, during some of the roughest times imaginable, we should consider sending this professional democrat politician packing.

-- steve

Capture2-16-2009-6.02.35 PM


OneCitizenSpeaking: Saying out loud what you may be thinking …

Reference Links …

Earn Like Goldman Sachs, a ProPublica How-To - ProPublica

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