In this video, Ellen Brown describes the disaster lottery (around minute 6:00) as explained by The Geronimo Manifesto, in September 2008. Highlighted in orange.

The paramount reason for today's cancerous credit crisis is seldom even hinted and never explained.

First, a simple definition. A credit default swap is a form of insurance. A variant of mortgage insurance required of many home purchasers. An insurance policy that requires a company with financial strength to step up to the plate and pay the mortgage if for some reason the home buyer defaults.

A credit default swap is similar: If default occurs, an insurance company pays the income stream of the mortgage.

With one extremely important difference: Payments are made to the owner of the policy, not to the financial institution that stands to suffer a loss.

Financial institutions are allowed, through total lack of regulation, to buy and sell credit default swaps, or insurance they will be paid in event of default, on financial instruments in which they have no financial interest.
Start with a simple example. Assume I know the young son of the couple next door likes to crawl into closets and play with matches. I therefore see a reasonably good shot at "winning the disaster lottery" so to speak, by buying fire insurance on their $200,000 house.

In simple terms, I now have a financial interest is seeing that disaster occurs. If the house, for whatever mysterious reason, burns down an insurance company will pay me the insured value of the house - even though I suffered no loss, financial or otherwise. My neighbor's misfortune is thus magically transformed into my good fortune. A polite way of saying I was paid $200,000, the insured value of my next-door neighbor's house, after I paid the $400 insurance premium.

Being bright and suitably equipped with an MBA from a prestigious eastern university, I well and fully understand the desirable objective of maximizing my return on investment. I can accomplish this in one or both of two ways - increasing the return or decreasing the investment.

I can increase the return by artificially increasing the value of the house - say from $200,000 to $400,000. This will allow me to collect twice as much for suffering no personal loss. The easiest way to accomplish this would be to hire one of my buddies, who happens to be a real estate appraiser, to "document" the higher value.

I could also decrease my investment - meaning the premium I paid for the insurance, say from $400 to $200. The easiest way to do this would be to hire a widely acclaimed "fire risk rating agency" to send out an inspector who will look around (or perhaps only drive by without stopping) and then solemnly declare: "This house is fireproof".

Poors and Standard Fire Rating Company and Doomys Fire Rating Agency would be excellent choices, based on their prior experience.

In the real world, meaning Main Street as opposed to Wall Street, this would be illegal. Against the public interest, because it encourages houses to mysteriously burn down. The insurance policies owned by people without a financial stake in the fire would be declared null and void because they are contrary to public policy, which sees minimizing the number of mysterious house fires as a good thing.

Rather than a bad thing, as now occurs under America's predatory capitalist system.

Now change an assumption. Assume I tell 99 of my poker-playing gambler friends about the boy's strange and dangerous interest. Starting with my appraiser buddy, who's predatory income as a result of a mysterious fire will double, as a direct result of his appraisal.

Now assume the $400,000 house burns to the ground. One hundred or so insurance companies will collectively pay $40 million in claims on the loss of a single $400,000 house. The benefits of a $400,000 disaster are magically multiplied by a factor of 100 and transformed into a $40 million disaster - with one family suffering a loss and 100 families experiencing a gain. The losses of the insurance companies don't count, because, in America's capitalist society, they are in the business of writing insurance - and paying claims for losses.

But in today's society, fire is not the only disaster that can be insured against. Of particular interest, default on a home mortgage can be insured against. And possession of an interest in the mortgage or actual risk of financial loss as a result of default is not required in order to purchase the insurance.

In this case also, I can increase my return with an inflated appraisal and decrease my investment by declaring the risk to be minuscule - meaning rated AAA by widely acclaimed rating agencies.

We can now change another assumption. Assume the playing with matches problem is removed and a new problem is substituted. A problem like the husband and wife both having low-paying jobs and no health insurance, coupled with knowledge that many employers refuse to accept illness as a legitimate reason for missing work and have iron-clad policies that require ill workers be fired for failing to report to work.

Or assume both husband and wife have no seniority and work at jobs that may not exist tomorrow because they were shipped overseas last night.

If I knew one or both of them were developing health problems or that one or both were at risk of being laid off, I would see a reasonably good shot at "winning the disaster lottery" so to speak, by buying mortgage default insurance, also known as a credit default swap, on their $400,000 house.

Then I could sit back, relax and wait for the hoped-for and expected misfortune, which will be my good fortune. As could 99 of my gambling buddies.

Back to the neighbor's home that mysteriously burned to the ground. This tragic event is a great deal for me and my 99 gambling buddies. Our biggest risk is that, having paid the insurance premiums, the home stubbornly refuses to burn to the ground.

Being capitalists, we desire to increase the odds that a disastrous fire will occur. My friends and I with fire insurance policies on my neighbor's house have two options for increasing the odds. One, teach the young child the joys and wonders of paying with matches in closets. Two, hire a professional arsonist.

Holders of credit default swaps have similar but more numerous and less risky opportunities to increase their odds of "winning the disaster lottery".

The best way would be use of fine-print, non-understandable escalator clauses that increase the hard-working couple's monthly payments by a factor of two or three. With rampant inflation, confined to core goods that officially "don't count" in Washington, such as $4.00 gasoline, $5.00 milk and $3.00 bread. With rampant if covert support of immigrant labor, legal or otherwise, who are willing to work for less, without any benefits at all, let alone health insurance, thereby increasing the risk of job loss.

We could destroy OSHA, making on-the-job causes of illness and injury more likely. We could buy legislation that benefits pharmaceutical companies while making both medicine and health insurance unaffordable. We could destroy the economy of Main Street, making job loss more likely. The list is extensive, collectively making early default all but inevitable.

That issue addressed, our biggest worry becomes the solvency of the insurance companies. That problem can best be solved by requiring substitution of a "bigger and better" insurance company with deeper pockets.

Purchasing legislation and regulations (or the lack thereof) is the preferred method.

The poor investors were defrauded in a sense by this MERS problem, but as Ellen points out, many of the these same poor investors were paid MANY TIMES OVER via Credit Default Swaps -- which are by the way an enormous scam as The Geronimo Manifesto explains.

So are we going to worry about the investors? Were they really defrauded if they in the meantime managed to recover their losses many times over via CDOs, which are against the public interest because they encouraged the mortgage default crisis?

We think the American People should worry about the American People, their fellow WORKING AMERICANS, who pay the taxes in this God-forsaken land ruled by a CRIMINAL BANKING ELITE. So far the American People have not recovered diddly shit.

Read the rest. He wrote this two years ago. It was already clear then, but now it is CRYSTAL CLEAR.

This IS exactly what happened.

Some people made a lot of money off the destruction of this country, the destruction of the middle class.


with malice aforethought.

image from waycooljnr

Who could have imagined?

A site to check out: www.walkawayok.com.


Saladin said...

I do not consider the system we have capitalist, it is as Fascist as it could possibly be! Capitalism means an investment of capitol, whether it be monetary or labor, in hopes of a return. The Farmers Market is a good example of this. But when the state becomes involved, acting like protection thugs for the corporate criminals, that is when you get Fascism. In a true free market the consumers are the regulators and this kind of bullshit would never fly. The only reason they get away with it now is because Big Govt. is in bed with the mega Corporations in a symbiotic relationship that has no concern for anything other than keeping itself alive, regardless of the cost to society. The main problem with that system is the failure to see that it is a parasite feeding off a host that will eventually die, taking the parasite with it. They have always been short sighted that way and always go down because of it. It's just a matter of time now.

Anon said...

Very well explained!

It looks intentional.

- Aangirfan

chuckyman said...

That pretty much shows to the world the ugly face of modern financial profit making. Once the true vile face of this Nosferatu is glimpsed it can never be forgotten. They profit (in huge amounts) from our slavery and misery.

The normal human reaction is one involving bulging veins, high blood pressure and copious amounts of vulgar language. That is the reaction of the impotent and powerless.

Where I come from we have a saying - “long runs the fox”. It basically means that we are in a long game. I find cold fury much healthier. It allows for the use of the intellect to react to a threat but it also provides a constant source of motivation.

The clock is ticking and their time is shorter than they realise.

A. Peasant said...

"goodness is helpless without wits."

everyone needs to keep their wits about them at this time, to your point Chuck.

Saladin, absolutely right. this is where the right gets manipulated -- thinking they support capitalism by supporting these fascist criminals.

Aan -- i agree. Geronimo makes excellent use of analogies.

Dublin Mick said...


To quote Geronimo.....there are many medicine men...some have the power and some just talk.

Stand back and watch the collapse and try not to get dirt on you.

I love you guys

Switters said...

Bought my first house in 05, lost some income and had property taxes go up...now paying 1/2 net pay for the mortgage...Wish I knew then what I know now.

I keep hearing about this "Show me the Note" movement...but it just seems very risky...and now understanding the incentive that certain entities have to foreclose...Question...Would Bank of America be one of those CDS purchasers? Would they be the ones to profit massively if I foreclosed?

UGH. Decisions, decisions.

nobody said...

Nice one AP, thanks for that. My favourite expression is - with malice aforethought. It makes the other words look a bit soft.

A. Peasant said...

nobs, far be it from me to ever go soft on these bastards... i added your favorite expression in there.

switters -- hear you. we bought in 04 and are in a similar situation. i don't know the details of what the particular banks, like BOA, have going on. normally this finance stuff makes my eyes glaze over in about 5 seconds flat and that's why i enjoy when people like Geronimo write using analogies with concrete things that i can understand. but if you seriously want to know i would say check out Zero Hedge for starters (http://www.zerohedge.com/)...?

dubs -- back at you. :D

A. Peasant said...

Switter, i just saw this:


check it out.

malcontent said...

With an eye toward the future, I pay attention to this guy on economic matters.


It aint pretty. It's us versus them.


The reckoning is close.


legal mumbo jumbo

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