Here is a win-win scenario:
- BP hires Goldman Sachs (GS)
- Goldman borrows $20B from the US Federal Reserve @ 0%
- BP sets up a Special Purpose Entity (SPE) and transfers some of its US based real estate from BP US to the SPE
- The SPE uses the real estate as collateral to borrow $20B from GS
- The land doesn't have to be worth $20B because Goldman does not have to comply with "mark to market" accounting so you use "mark to model" accounting because there is the "potential" for mineral rights on this real estate.
- $20B bond is floated.
- But buying a BP bond may be bad PR so...
- GS splits the bond issuance up and rolls it into CDOs (Collateralized Debt Obligations) to blur the source.
- The CDOs are bought by already underwater public pension funds (government workers, teachers unions, etc.) and GS reaps the underwriting fees and commissions
- AIG, a company controlled by the USG due to previous bailouts, is then directed to issue Credit Default Swaps as insurance against the CDOs in the event the BP SPE defaults. Goldman buys all the CDSs at a discount.
- $20B in cash transfers from the BP SPE to the USG for the victims fund.
- Later the BP SPE is determined to be under capitalized (ie. the land really isn't worth $20B) and the SPE defaults on the bond.
- The pension funds that bought the CDOs get a financial haircut causing them to go more deeply underwater increasing the pressure for a USG bailout of public sector pension funds.
- GS cashes in on the CDSs used as insurance so it has the $20B to return to the federal reserve.
- AIG is receiving government bailout money (TARP) so it gets $20B from the USG to cover the loss on the CDSs that it had to make good on to Goldman Sachs.
Bottom line:
- A $20B fund was set up with money printed out of thin air and put in control of the USG to be doled out to "deserving" victims of the oil spill.
- GS is paid for handling the financial transaction with money they never had to put at risk in the first place plus they got some land.
- Public Pension funds go deeper underwater setting up the "next crisis" that government must solve.
- BP had to give up some land.
- US Taxpayer bails out AIG for $20B effectively paying for the "victims fund".
- USG looks like it "got tough" with BP
That's a lot of alphabet soup in this fictitious story. And that is why it will work. There is no way the media could ever explain to the "man on the street" how he ended up paying for BP victims fund because it is too complicated.
