Elizabeth Warren vs Scott Brown: Brown Donors Conspired to Profit from Mortgage Meltdown
Both Senator Scott Brown and Elizabeth Warren ran uncontested in Thursday’s Massachusetts primary, and their November showdown has been a mere formality since Warren declared herself a candidate in September 2011. With two months remaining until the general election, the Brown-Warren matchup is the costliest congressional race in the country and will likely remain so. Republicans are holding onto the seat for dear life, as Democrats try to wrest it back from Brown, who shocked state Attorney General Martha Coakley in a January 2010 special election to fill the seat left vacant by the late Ted Kennedy. That Brown managed to win that election was an embarrassment of titanic proportions for Democrats in one of the most liberal states in the nation, and one that had not had a Republican senator since 1979 after Edward Brooke lost to Democrat Paul Tsongas.
Brown managed to defeat the inept and out-of-touch Coakley campaign by portraying himself as—and here’s a shocker—a regular guy with an old truck and an even older jacket.
While Scott Brown is a "regular guy" in many respects, he is beholden to the Too Big to Fail banks that helped crash the global economy -- the same ones that Elizabeth Warren wants to rein in.
These are Brown's top 20 contributors since 2007. The vast bulk of these contributions have come since Brown first ran for U.S. Senate:
Brown's donor list reads like a who's who of securities and investment firms, which together have been the biggest donors to Brown's campaign committee by contributing some $2 million. Two of Scott Brown’s biggest donors are investment banking giant Goldman Sachs and Paulson & Co., both of which managed to profit from the 2008 mortgage meltdown. That’s profit from, not despite, the mortgage meltdown.
In late 2006, Paulson rightly suspected that real estate prices were far too high and were due to correct. He also knew that many of the mortgages that had been issued in the preceding years had gone to subprime borrowers—people with an elevated risk of default. Many banks had relaxed lending standards because they knew they could easily sell the mortgages on the secondary market, thereby washing their hands of the loans. The reason why there was such a demand for mortgages is because more and more, banks were bundling them up into instruments called mortgage-backed securities (MBS). Often these securities would be sold to other banks and pension funds as safe investments with good rates of return. And as long as the borrowers continued to make their mortgage payments, these investments would be. But like the banks that had been bundling these junk mortgages, Paulson knew these subprime loans were bad news.
But he had a problem. Unlike shares of stock, commodities, government bonds, or currencies, Paulson lacked the means to short the subprime housing market. That is to say, he had no way of betting that these subprime mortgage-backed securities would decline in value, which he was sure would happen. So Paulson approached the financial wizards at Goldman Sachs to see if they could help him. Help him they could. Goldman knew that a German bank, IKB, would be willing to buy some exposure to securities derived from subprime mortgages. Paulson, along with a third-party bond insurer, selected the very securities that Paulson himself planned to bet against.
Thus was created a synthetic collateralized debt obligation (CDO). Under this arrangement, dubbed ABACUS 2007-AC1, Paulson took a short position, while IKB and a Dutch bank -- ABN Amro -- took long positions. It should be noted that the CDOin this case did not contain any actual mortgages (hence it being “synthetic”), but was simply compiled using preexisting mortgage-backed securities on which the ABACUS “bet” would be based. As long as there was no credit event, such as a mass default on the underlying mortgages, Paulson would have to make payments to IKB and ABN Amro through Goldman. If there was, Paulson would then receive payments from IKB and ABN Amro through Goldman.
We all know what happened after that. The housing bubble popped, borrowers defaulted en masse, and John Paulson ended up making about $1 billion on ABACUS alone, and about $15 billion total in 2007. As an added twist, according to Greg Zuckerman in “The Greatest Trade Ever,” Paulson actually lobbied to prevent many mortgages from being swapped out of securities. This would have made it easier for borrowers to refinance. That of course, would have been bad for Paulson because he was betting that droves of people would lose their homes. As far as he was concerned, any effort to keep people in their homes needed to be stopped. Otherwise, his big payoff might not happen.
Meanwhile Goldman Sachs, for committing fraud and misleading investors in the ABACUS deal, ended up paying $550 million as part of a settlement with the Securities and Exchange Commission. Although it seems like a lot, Goldman actually ended up making lots of money off the subprime crisis. In many instances, Goldman knowingly peddled junk mortgage-backed securities to unwitting investors such as other banks and pension funds as sound investments, only to bet that those securities would fail after selling them. This was done by using credit-default swaps—essentially insurance policies—which would pay off if the investments turned sour. It would be like planting a time bomb in your house, selling your house, then taking out comprehensive disaster insurance on that house, and then collecting the insurance money after it blows up, even though you don't even own it anymore.
The financial sector will continue pouring money into Scott Brown's coffers, as the prospect of a Senator Elizabeth Warren is completely unacceptable to them. This is a big reason why: