timberwolf, synthetic cdo squared. executive called it a shitty transaction, but the sales force was still as a priority item for months. goldman sachs sold timber will securities while at the same time holding a short position, and other words betting against it. a cdo went to junk status in about seven month tenure investors lost big-time, but goldman one on the deal, profited on the deal. in the $500 million long beach deal, goldman shorted it at the same time it was selling it to clients. securities defaulted in a few years with a 65% delinquency rate. the bad news in your own words was your client lose money, but the good news is goldman sachs made money on that deal. $700 million on the fremont deal, and rmbs of mortgage loans, a notoriously bad a lender. one of your clients talked to your sales force about it and your sales force, among themselves call democrat loans and go out and sell them anyway. at the same -- call them crack loans and go and sell them anyway. at the same time, they are selling items and sho

you mentioned cdo collateralized debt obligations. >> yes >> junk bonds. where did all this stuff come from? i mean, why are we talking about that and not talking about profits and econ 101. where does econ 101 fit in all this? >> well, that's a good question. the cdos are these packages of weird things that became part of the public consciousness when the financial crisis happened in 2008. but were really constructed back in the late 80s most michael milliken the junk bond king and drexel, and the wall street guys with the bigger banks, the more speculative banks do or in their speculative components of the big banks is they say, all right, what can we stuff into and re-engineer and rejiger and everything into new packages whatever we call them, cdos and it's just a name and they make money slicing and dicing them and marketing them to little pension funds in iowa to little towns in iceland. and basically take money up front, throw the risk out to the world and not care about what happens to it. they are risk transfer products. they always were. and there

the synthetic cdo's did not represent anything but gambling. there were not real mortgages in there. it was just, take a bet, it just like you would on a football game. i understand the some people are trying to create a derivative market now on how movies are going to do. is there anything you would not create a market for it? >> years are not involved in that. i am is sure there is -- i am not involved in that. i am assured there is. if somebody would be able to do their business better if they were able to hedge or eliminate a financial risk, and they came to us and asked us to eliminate that risk and it was legitimate, honest, proper, and understood, they would come to us and asked to do it. >> thoug do you thdo you think n wanted to make money because he thought the market was going to tank? he was making a bet. >> he was a speculator. there are people who speculate in corn and other commodities that allow the potential users of those markets to complete their hedges. that is a socially acceptable -- >> mr. blankfein, there is a big differ

they could not buy or sell mortgage-backed securities, cdo's and so forth. meant that financial institutions could not sell a substantial portion of their assets and they became largely illiquid. in fact, they had to write down some of their assets because of the roles for accounting at the time these institutions look like they're unstable or perhaps illiquid and it was important, as you pointed out. the regulation of banks and investment banks simply could not cope with that. this is the disappearance of a major asset class. it was no longer there. there was no market for it anymore. i would like to have your reaction to that as a person who is familiar with market. >> there is no doubt there was real liquidity problems. that makes it hard to evaluate assets. i know your view on mark to market accounting. i know there are a number of powerful people that blatant mark to market accounting. , fair value accounting. i am not one of them. i believe it would have been worse without it. i believe it more financial institutions had marked to market accounting, th

that is, good buy or sell mortgage-backed securities, cdos and so forth.cally mortgage-backed security. and his men, it seems to me, that financial institutions couldn't sell a substantial portion of their assets and they became largely illiquid. and exactly how to write down some of their assets because of the rules for accounting at the time. so for that reason these institutions look like they were unstable, or perhaps insulted. they were serving illiquid, and then it's very important, as you pointed out. so the regulation of banks and investment banks simply couldn't cope with that. this is the disappearance of a major asset class, just was no longer there. there was no market for it anymore. and i would like to have your reaction to that as a person whose line with market. >> there is no doubt there was real liquidity problems, huge liquidity problems, and that makes it hard to value assets. and i know your view on mark to market accounting, and another in number of thoughtful people that blame mark to market accounting. fair value accounting. i'm not

and in doing the cdo squares and then taking those and creating synthetic ceos.his will generation of products. >> i thought i said that. >> and by the way that was on my time. >> mr. cox? >> yes, i think i understand your question and you are asking in part about private placement as well as public offerings of securities. >> absolutely. >> i think the short answer is these securities were issued both ways. so it's not really the characteristics of the security that it operates under exception. it's rather a means, question of the way that it sold so that there are some statutory exceptions that would override everything, commercial paper for example in a securities and what have you. so it depends on how people are structuring them. but the fact that some of these were large placements or otherwise is really much more an incident of how that particular transaction was structured than the issuance of securities themselves. the largest issuer of the kind of securities was of course the gse and they were very active in the public markets so there was a lot of requ

not capitalized for and they were essentially spreading their aaa ratings like holy water over the cdo is that did deserved to be great in that way and another 60 million sold to the paper, wood, so you took these fundamentally forecasters securitized products and concentrated risk eckert we as taxpayers have to bail out, city dee dee to a citibank which took $25 billion liquidity put on the cdos off of their balance sheet which was essentially one-third of the capitol which nobody seems to have noticed anything about and i guess all of this goes to sit at -- say that it seems to me we need to have people prepare to recognize the emperor had no clothes their need to be people who saw the possibility of this collapse of these securities was much higher than anybody gave them credit for and i wonder if you can speak to that. >> i agree with much of what you said and i think you are right that modest losses would been deeply into those kysa torch ron gist you describe to -- you have to emphasize it wasn't just in those complex structures -- lacrosse the system and countrywide was an examp

15% in 2005, subprime mortgages are growing like weeds, jim grant estimates that aaa traunches of cdo's indicate that prices owar to fal 10%, investors fretted aaa- would lose their investment. the amount of mortgage debt doubled. americans borrowed more in mortgages in that six-year. and all 225-year history of this country. as late as 2007, you have a dozen subprime lenders who have suspended business. what did you not see? did you not see the red and yellow warning lights and what did you do, responsible for fixed income, to build a fortress of protection? >> first of all, i want to make a distinction between being in the mortgage securities business and having a bed on housing prices. -- bet on housing prices. bear stearns was in the business of originating or acquiring loans, secured testing them and selling them in the marketplace. we ran a book that had both long and short positions. we did our best to manage our exposure as more information came out in the marketplace on a continuous basis over the years. we tried to help our clients by giving them the best possible analysis we

from 2004 and to 2006 when you were the ceo goldman, they issued about $8.40 billion in subprime cdo's. let me first? q -- what is your sense of any rigid let me first ask you, what is your sense of the value, if any, of the value of synthetic cdos' and the system? do they provide benefits for capital? or, are they really a device for bedding? >> mr. chairman, a number of times i have said that i believe we had excessive complexity in the financial products. and that, as i think about it, it is very hard to regulate against innovation. one of the things i have recommended for a number of years now is that when we look at some of these complex derivative products, the regulators make sure that we have a real substantial capital charges against these products, now in terms of the deal is your talking about, i do not remember the particulars. >> the believe they provide real benefit to the financial system and the real economy as a whole? or are they side bets? >> to get at market-making -- there has been a lot of discussion about market-making. one of the things i saw, and i have not bee

. >> i began by questioning you about some documents provided to us by goldman sachs regarding cdo's. there is a page compiled by our own staff from other government documents. if you could bear with me. when paul revere some of the lantern and jumped on his horse -- i referred earlier to the dilemma you might have faced. is my question. why is it that in 2007, no one from the public financial sector jumped on their horses like paul revere and warned about the crisis? >> i think a lot of people sought excesses' -- saw excesses, but we have had the nine markets for a long time. why is it that in almost any bubble, it becomes obvious after the fact? they all have certain things in common when you look at them. they use the nine markets -- benign market. there is almost always excessive risk-taking, too much debt and not enough transparency. but here, i think many people , and iere were excesses think there were few of us who sups reject -- who saw something of the magnitude of what we experienced. >> were you worried about shaking the market? >> in late 2007, we knew the markets were fr

becoming even more unstable so yes goldman sachs and the other counterparties to those rmbs and to the cdo'sot paid, but it was part of a broader effort to stabilize this company so they could honor everybody's contracts and pull. they weren't the only parties whose contracts were honored in full. everybody's in september 2008 have had their contracts honored by aig. >> mr. mcwatters? >> i understand. now and then. >> mr. silvers? >> i wasn't planning to assess but i feel compelled to do so. i notice mr. waters didn't bring up goldman sachs or jpmorgan so obviously it is on treasury's mind. is it not the case that in the week of september 15, hat the cash calls that the company could not meet were in the two lines of business in two lines of business only and but for the cash calls none of this would have been necessary and those two lines of business, and it depends, believe it or not but you can argue against the insurance state regulators. they certainly were they-- in may have been the securities lending and but for those two enterprises, none of this would have occurred. >> not so. >> a

cdo?he price, saying that they could add $115 billion more. -- cdo looks at the price, saying -- cbo looks at the price, saying that they could add $115 billion more. that is in "the post." russ from washington, d.c. caller: i can go back to when ronald reagan cut taxes. we had a depression, he raised taxes and then we had an economic -- hello? we had economic growth. clinton came in. bob dole said that we would destroy the industry. my question to you is, what programs are you prepared to cut? social security, defense spending, medicare? my next question to you is, what would have happened if we had let gm and chrysler go under? a lot of people would have gone unemployed, including the suppliers. host: there are several folks on twitter who want to hear some specificity from you on those cuts. guest: house republicans have started an effort called youcut. we are going to go to america to help us identify the waste in government. we often talk about waste in government, but it is always di

caller: what is your opinion of the cdo? host: the congressional budget office? caller: yes, what did you think about the cbo? guest: certainly, they have a good reputation. they tried their best to tell it like it is. sometimes, the question is put in such a restrictive way, the answer may not be a way to address the problem. that is usually because of the way the question is addressed. caller: let me say a few things about the cbo? . it is a political institution that was designed by politicians. that math and that they use is skewed. it starts with artificial perimeters and baselines. it has to function within that context. it deals with a set of the variable. at best, and mathematics, it is an uncertainty. it makes a series of reductions in those variables. so you have these guesses being made from uncertainty. anyone who can predict what the unemployment rate will be like in 10 years is a nut. guest: he makes two good points. that is what i was saying when i said that the question are skewed to get the right answer. and this comes from politicians, you are r

1999, we attempted to regulate what are called synthetic cbo's which were completely unregulated -- cdo'shich were completely unregulated. the $600 trillion value worldwide, 10 times the world in gdp and there is no meaningful regulation. these derivatives. these are the things raided by the credit agencies. the senate legislation will control this if it passes by bringing them into the light, having regulators look at them. one woman -- alan greenspan, larry summers, many of the congressman were unsympathetic to what she was doing. her views have seen the light of day. there are others like sheila bear in the treasury department' and mary schapiro ad gary gensler and -- back in the clinton administration was dubious about regulating these instruments. he has come back and has been one of the most particulates advocates within the administration for the kind of legislation working its way through congress. host: there is talk about one approaching chairman greenspan and been rejected. there is a piece yes today that i read talking about that she came up with concepts for regulating the de

part to securitizations, the rise of the shadow banking system and the acronyms they spun off like cdos, sivs and others. in that environment, aggressive procyclicalality defined the mentality. very smart people defined and measured risk in ways that made traditional time sets appear primitive. the markets convinced themselves that risk was actually declining. shareholders came to expect their companies to generate the high returns they saw other companies churning out. consolidation became synonymous with strategic success. and size mattered more than ever. market players even assured themselves that there were certainly new financial engineering that could transform illiquid assets into liquid form. and all the while, we were assured that this time is different. and david weinstein talked about this. this is a phrase that the world has heard and heeded all too easily. not only since the second world war but all through the 1800s and 1900s and each time on the eve of a major upheaval in the markets. citi rapidly grew both its balance sheet and off-balance sheet assets to historic highs

caller: what is your opinion of the cdo? host: the congressional budget office?aller: yes, what did you think about the cbo? guest: certainly, they have a good reputation. they tried their best to tell it like it is. sometimes, the question is put in such a restrictive way, the answer may not be a way to address the problem. that is usually because of the way the question is addressed. caller: let me say a few things about the cbo? . it is a political institution that was designed by politicians. that math and that they use is skewed. it starts with artificial perimeters and baselines. it has to function within that context. it deals with a set of the variable. at best, and mathematics, it is an uncertainty. it makes a series of reductions in those variables. so you have these guesses being made from uncertainty. anyone who can predict what the unemployment rate will be like in 10 years is a nut. guest: he makes two good points. that is what i was saying when i said that the question are skewed to get the right answer. and this comes from politicians, you are rig

i do not know exactly and i want to analyze how cdo came to that conclusion. -- cdbo came to that conclusion. >> we would be happy to work with you to make sure that it is assigned in a way to give us reassurance that it does not carry that risk. >> thank you, mr. chairman. to follow up on my question, mr. secretary, there is a concern from people that will be testifying subsequent to you that it clearly could be an effect. although it applies to only 1% of the institutions, they hold a disproportionate amount of the assets. if the fdic insures deposits, they may try for those deposits as a way to avoid that tax liability. that is going to come into play for competition for those deposits. that could affect the banks. there could be a potential spillover, not to mention the fact that the overall impact on the economy, there's no way to excess that at that point. isn't that true? it could aggravate the lending supply and the credits applied to small businesses. although it is 1%, it is a true impact because of the size of these institutions that hold a considerable amount of the assets in thi

1999, we attempted to regulate what are called synthetic cbo's which were completely unregulated -- cdo's, which were completely unregulated. the $600 trillion value worldwide, 10 times the world in gdp and there is no meaningful regulation. these derivatives. these are the things raided by the credit agencies. the senate legislation will control this if it passes by bringing them into the light, having regulators look at them. one woman -- alan greenspan, larry summers, many of the congressman were unsympathetic to what she was doing. her views have seen the light of day. there are others like sheila bear in the treasury department' and mary schapiro ad gary gensler and -- back in the clinton administration was dubious about regulating these instruments. he has come back and has been one of the most particulates advocates within the administration for the kind of legislation working its way through congress. host: there is talk about one approaching chairman greenspan and been rejected. there is a piece yes today that i read talking about that she came up with concepts for regulating the

1999, we attempted to regulate what are called synthetic cbo's which were completely unregulated -- cdo's, which were completely unregulated. the $600 trillion value worldwide, 10 times the world in gdp and there is no meaningful regulation. these derivatives. these are the things raided by the credit agencies. the senate legislation will control this if it passes by bringing them into the light, having regulators look at them. one woman -- alan greenspan, larry summers, many of the congressman were unsympathetic to what she was doing. her views have seen the light of day. there are others like sheila bear in the treasury department' and mary schapiro ad gary gensler and -- back in the clinton administration was dubious about regulating these instruments. he has come back and has been one of the most particulates advocates within the administration for the kind of legislation working its way through congress. host: there is talk about one approaching chairman greenspan and been rejected. there is a piece yes today that i read talking about that she came up with concepts for regulating the

becoming even more unstable so yes goldman sachs and the other counterparties to those rmbs and to the cdo'sot paid, but it was part of a broader effort to stabilize this company so they cod honor everybody's contracts and pull. they weren't the only parties whose contract were honored in full. everybody's in september 2008 have had their contracts honored by aig. >> mr. mcwatters? >> i understand. now and then. >> mr. silvers? >> i wasn't planning to assess but i feel compelled to do so. i notice mr. waters didn't bring up goldman sachs or jpmorgan so obviously it is on treasury's mind. is it not the case that in the week of september 15, that the cash calls that the company could not meet were in the two lines of business in two lines of business only and but for those cash calls none of this would have been necessary and those two lines of business, and it depends, believe it or not but you can argue against the insurance ate regulators. they certainly were they-- in may have been the securities lending and but for those two enterprises, none of this would have occurred. >> not so. >> are

i have had the opportunity to look at the cdo information over the course of time. -- cbo information over the course of time. i think that their population, which is based on their analysis -- their calculation, which is based on their analysis and their opportunity to look of the whole situation, is accurate -- to look at the whole situation, is accurate. i cannot talk about what you just read to me, because i have no idea what he has looked at to change those assumptions. yes, sir. >> i have two quick questions. how many seniors will begin in rebate checks? -- be getting rebate checks? >> 8000 at the first mailing. we think there will be about -- i am getting my help year -- little over 4 million seniors will get the checks. -- getting my help here -- all little bit over 4 million seniors will get the checks. i will ask her to tell you what kind -- over what time they will go out. >> the checks will begin in early june and will occur every 30 days until the end of the year. depending on the seniors expenses, they will hit the doughnut hole at a different time throughout the year. w

part to securitizations, the rise of the shadow banking system and the acronyms they spun off like cdos, sivs and others. in that environment aggressive procyclicalty defined the mentality. very smart people defined and measured risks in ways that made traditional concepts appear primitive. the markets convinced themselves that risk was actually declining, shareholders came to expect their companies to generate the high returns they saw other companies churning out. consolidation became synonymous with strategic success, and size mattered more than ever. market players even assured themselves that there was suddenly new financial engineering that could transform illiquid assets into liquid form, and all the while we were assured that this time it's different. and david weinstein talked about this. this is a phrase that the world has heard and heeded all too easily not only since the second world war, but all through the 1800s and 1900s and each time on the eve of a major upheaval in the markets. citi rapidly grew both its balance sheet and off-balance sheet assets to historic highs in b