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Message: Richard Russell
| Richard Russell disucess the Goldman Sachs and John Paulsen fiasco and gold |
Russell Comment -- Now it can be told. It started with billionaire fund manager John Paulsen. He had an idea that the wild speculation in homes was putting the price of homes into the bubbly stratosphere, and that the whole home-structure was due to collapse. Paulsen went to a few firms including Goldman and asked them to structure mortgage packages that would include some of the poorest quality mortgages. Paulsen's plan -- bet against these vehicles and these items and hope that he would be correct -- that the housing boom would go into free-fall. This is exactly what happened, and Paulsen and his investors pocketed billions in profits. Bear Sterns turned down a deal with Paulsen. But Goldman and Deutsche Bank went along with Paulsen. Goldman, knowing the mortgage packages they had created were toxic, sold these deals to investors without telling them about Paulsen and his thesis that these mortgage packages were created to fail. What's worse, Goldman even sold these toxic packages short. Goldman sold the product to their customers and at the same time shorted the products. But what about the agencies that were supposed to grade these packages? They were as asleep as was the SEC on the Madoff case. The toxic packages got a AAA classification from the rating agencies. All in all, a disgusting case of collusion and incompetence by Wall Street and the rating agencies and stupidity on the part of the buyers of these toxic packages. The fact is that Paulsen had been searching for bubbles in the economy, and he correctly zeroed in on real estate and specifically home mortgages. But Paulsen never sold his toxic packages to investors, Goldman did. Which is why the SEC has focused its fraud accusations on Goldman and left Paulsen alone. Paulsen & Co. earned $15 billion betting against the housing market in 2007. Paulsen, 54 years old, personally made nearly $4 billion that year. Today Paulsen's hedge fund has $32 billion in assets, making it one the world's largest hedge funds. Of interest is that Paulsen's most recent big investment is in gold and gold stocks and exchange traded funds tied to gold. Russell Comment -- I ask myself, what is Paulsen thinking as he takes a large position in gold and gold shares? Paulsen must be thinking that the dollar is in a bubble. Furthermore the ultimate "safe bet" against the dollar is gold. Normally, the bet against the dollar would be to load up on the euro, but the Greek fiasco eliminates a big bet on the euro. The smartest people I know or read about don't have definite opinions regarding whether we are heading into inflation or deflation. My own guess (and it's just a guess) is that the US is heading into deflation. Today, the pressure is on to cut back on bailouts and stimuli, both of which are adding to the nation's debt. Bernanke is facing his ultimate problem, should he continue to finance all the administration's spending or should he publicly call a halt? I've said before that the main force or world-trend is deflation. This is the trend that the Fed and most of the world's central banks are battling against. All the spending has simply HELD OFF a worse situation, possibly a world depression. Bernanke is at the crossroads. He'd like the Fed to get its finances in order, but that would entail a pull-back and getting rid of some of the Fed's monster debt. Where to Goldman? Suddenly, everyone is pouncing on Goldman. But what about those investors who bought the toxic Goldman mortgage packages? Think law suits, thousands of them that will be coming up. Goldman will never be the same -- but they will survive. In the meantime, everything about Wall Street will be investigated. The Obama administration will see to that. The Obama crowd will present itself as "the new gallant defenders of the people" against "evil Wall Street and its bankster thieves." Nobody on Wall Street will be safe. The nation may have to go back to making honest money (I think they called it making things that people want). |
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