How A Few Bankers Fucked Romania

The other day, my wife and I watched The Big Short about the collapse of the American economy in 2007-2008 (known in Romanian as the criza financiara). She was having trouble following the plot, and so she fell asleep. I’d already read the book (it’s fantastic) and so I managed to stay awake.

But afterwards, it got me to thinking. I doubt very few Romanians understand just how badly that criza hurt their country. I realize it’s a complicated topic, one of the reasons why only a few truly weird Americans ever predicted it (read the book), but the ramifications are being felt even today.

First, Let’s Rewind to Romania in 2007

2007 was a banner year for Romania. After a lot of hoop jumping Romania narrowly gained approval at the last minute to become a full-fledged member of the European Union.

The “Slick Willy” of Romanian politics, Calin Popescu-Tariceanu, was prime minister, and Basescu was still riding high on his first term in office, eventually successfully bucking off a referendum to impeach him. The Romanian economy was on fire, with growth around 8-9% and EU money was raining down from heaven (Brussels). Life, in short, was good.

The permanent trident of Romanian politics (leftist, centrist, and rightist) were almost perfectly balanced, so the Prime Minister (centrist) decided to make a bold move and win popularity for his government by promising to increase (double) teachers’ salaries.

At first, this went over just fine, but then a series of complications arose and soon every other sector of bugetari (government employees) wanted the same, to say nothing of pensioners. Eventually, everyone got promised an increase.

Then, to literally everyone’s surprise (including the IMF and the American embassy), the economy went from positive growth to negative virtually overnight, a complete inversion. Now there was no money for anything, and damn sure none for honoring all these promises of increases in salaries and pensions.

Tariceanu and his allies got badly trounced in the 2008 parliamentary elections, and he was gone by Christmas. After an unbelievably tedious amount of inside baseball, Emil Boc was chosen as the new prime minister, inheriting all of these problems.

But by then, it was simply too late. Despite a desperate series of rearguard maneuvers and canceling promises (tons of detail on that here), the new byword was “austerity” and the government started slashing everything in sight combined with trying to sell off as many of Romania’s resources as possible (including its gold).

The meltdown of the Romanian economy can be read in more detail in my post here, but the long and short of it was that Boc’s government became incredibly unpopular.

Boc resigned in shame, protests were widespread, and ultimately the slimeball Victor Ponta took over (after being tapped by the Shadowy Powers), leading to even more chaos, corruption and endemic poverty.

Romanians by the hundreds of thousands, some construction workers and fruit pickers but a hell of a lot of doctors, engineers, and other educated people fled to greener pastures in the European Union and beyond.

Eventually, a colossal clusterfuck led to the disaster of the Colectiv fire in 2015. Protests were quashed with empty promises, as an unelected “technocratic” government was installed that let TVR collapse in bankruptcy, maced innocent shepherds and somehow managed to piss off nearly every Romanian-speaking individual in the Republic of Moldova.

And thus, Romania rapidly went from a “red hot” growing economy with tons of hope in early 2007 to a deeply corrupt sinkhole of depression in the glorious year 2016, overrun by thousands of foreign troops. The only last glimmer of hope is the DNA, an agency which is as hollow and mendacious as the very men and women it is tasked to prosecute.

How in the world did this happen?

Commercial Banks

Although I and 99% of my readers live in “capitalist” countries, very few of us truly understand what capitalism is and how it works. No time to get into that here (but my brief history of this weird creation can be found here), but I thought it would be a good idea to start off with some definitions.

Note: for the sake of simplification, a LOT of details have been left out.

A “commercial” bank is the one where you keep your money and the place that gives you your credit/debit cards. They might also give you or your business a loan. And they often are involved in mortgages, a very important kind of loan.


Traditionally, a mortgage (RO: hipoteca) was one of the “safest” loans that banks created. It’s the loaning of money to a person (or persons) to buy a house, usually structured so that you pay interest (RO: dobanda) over 20 or 30 years. Since the person living in the house has a lot of incentive to pay the loan (so they have a place to live), they usually pay the bank, and the bank makes a good profit.

In the unfortunate case of a person unable (or unwilling) to pay back the mortgage, the bank has the option of seizing the house and then selling it to get their money back. In almost every case, the bank makes money.


Bonds are a special kind of paper (literally) that are essentially “promises” to pay someone back for having loaned them money. They’re usually restricted to cities and countries, but not always.

So city X wants to spend 100 million on upgrading its water system. It issues bonds. Someone buys these bonds. The bonds have an interest rate and a fixed term, meaning that after 10 years you’ll get your money back plus the interest.

For much of banking’s history, bonds were literally the most boring form of banking.

Bond Traders

When City X decides to issue a bond, it will contact a dealer in order to sell them. The seller will do a number of things, including contact his (rarely her) network of investors, talk up the nature of the bond, etc., and eventually make the sale.

Bond traders get paid a commission, usually a percentage of the total amount of bonds sold. So if a bond trader gets a 2% commission and sells 100 million dollars’ worth of bonds, that’s a 2 million dollar payday.

Originally, strict laws in the United States prevented commercial banks from being involved in this business. So bond traders and their firms were separate institutions from commercial banks. This, however, was largely repealed in 1999.

Investment Banks

Although some token efforts (called the “Chinese Wall” in Wall Street lingo) existed to separate the sellers of bonds from commercial banks, what eventually happened was that banks became involved in both aspects of a number of important trades.

In some cases, the commercial side of Bank X would issue a mortgage to an individual while the investment side would then buy it and sell it to someone else. The bond trading sides of the bank became known as investment banks. If a bank could make money on a mortgage twice, first by issuing it and then by selling (flipping) it to someone else, obviously they were going to do it.

What no one suspected in 1999 was just how much money could be made once this was allowed to happen.


Technically, anyone with a spare 100 bucks can be an “investor”. The term refers to someone who has “extra” money who wants to do something with it to preserve its value over a given amount of time.

If your grandpa hands you a sack of cash that contains a million dollars, you could, of course, hide it under your bed. But thanks to inflation, after a few years you’d still have a million dollars but its purchasing power (what it can buy) will be reduced. Therefore cash (even if it’s in a safer location than under your bed) is always losing its value and so a better option is necessary in order both to preserve its value as well as make a little more as well.

A few rich Saudis and other individuals need to invest their money to protect it. But the really big investors are always known collectively as “funds”. Sometimes it might be the retirement money from a large company or union. Sometimes it might be large sums of money from a state or city government. Sometimes it might be a group of rich people who pool their money together. These funds are always looking for a “good” investment, a thing to buy that will hopefully protect the value while also making a profit.

Buying bonds is one way that these funds invest their money. If City X is selling 10 million dollars in bonds and these will pay off in 10 years with an interest rate of 10%, then investors might buy them, but only if they believe that they’re guaranteed to get their money back (plus interest).

Rating Agencies

But how does an investor know the quality of a bond (or other similar things called securities)? That’s where rating agencies come in. While there are actually a couple dozen agencies, only three big ones dominate this industry: Standard and Poor’s, Moody’s, and Fitch.

When City X wants to issue bonds, it’ll contact an investment bank, who will then send the information to a rating agency. Each agency uses their own codes but they’re much like school grades: they start at A and go down from there.

Not all bonds get the highest rating, but that’s okay. Some investors are willing to take a little risk if it means they might make some more money. But a large percentage of institutional investors are required to only buy the top-rated bonds. Therefore, any investment bank that wants to make truly huge sales will have to find products that carry this super safe gold-plated A plus rating.

Rating agencies are theoretically independent (for-profit) companies, but they make their money by receiving a fee for every bond that they rate.


Now we’re ready to discuss the evil wizardry that a few New York traders crafted in the early 2000s that led directly to the meltdown of capitalism as we thought we knew it.

The commercial side (arm) of a bank was issuing mortgages and the investment side (arm) was selling them on to investors, but there was a limited amount of mortgages out there that could be sold. And once they were sold, there were no more commissions, and therefore no profits.

The “solution” was to find a way to create more mortgages. But how? If you go down to a bank today and apply for a mortgage, you know that they will assess your income, do some research, and figure out if you’re able to pay them back. After all, if you can’t pay them back, they’ll lose money.

The way to get around this “problem” is very devious but not too complicated to understand.

The first step was to create something called adjustable rate mortgages (which still exist). Often called “subprime”, this was a mortgage that started off very affordable with a low rate of interest but switched to becoming more expensive later on as the interest rate went much higher.

People could qualify to make the initial cheap payments so they got a mortgage, which could then be sold by the investment bank. Of course, six months or a year later, the person wouldn’t be able to keep making payments, ostensibly a huge problem.

The second step was to create something called a CDO.

Starting in the 1970s, bond traders would package together hundreds (or thousands) of mortgages together and sell them as a complete unit. Investors would see mortgages loaned to credible people and so this was a good investment.

But how do you sell “bad” mortgages (sub-prime), especially to investors who will only buy high-rated bonds? The answer was to mix a huge group of mortgages together, some good ones, some mediocre, and some really bad. This was called a collateralized debt obligation (CDO).

With no one ever having gone to jail, or suffering a loss of prestige or income, there is no way of understanding the next part. These mixed mortgages packaged together as CDOs were sent to the rating agencies, who somehow determined that they qualified for an A+ rating.

With a perfect rating, CDOs could then be sold to the best investors, earning investment banks huge profits.

But the banks soon began to run out of mortgages to package into CDOs to sell. Where to get some more mortgages?


A number of non-banking financial institutions sprung up like mushrooms after the rain. They began issuing mortgages for literally anyone with a pulse, even people with no income, people who couldn’t speak English, and occasionally even a few pets.

Anyone could get a mortgage in 2005-2007, even part-time janitors. But how could all these private firms like Countrywide risk loaning money to poor people who had no chance of paying it back?

The answer was simple: investment banks would buy mortgages as fast as these companies could create them, mix them together as CDOs, and then sell them to investors.

The FBI issued a mild warning that this wasn’t a good idea, but nobody listened. Everyone in the entire financial sector, including the former Federal Reserve Chairman (American Central Bank) Alan Greenspan thought it was great.

After all, everyone was making money, the mortgage firms like Countrywide, the investment banks, the construction industry (who couldn’t make houses fast enough), and the “flippers” (people who would buy houses only to sell them for a profit a short term later). And millions of Americans had a really amazing house to live in. What could be wrong with that?

Synthetic CDOs

But these enormous profits were still not enough for the investment banks. So they created the synthetic CDO, often referred to as a CDO squared. They would take several CDOs and combine them (keeping in mind that they’re each a big mix of mortgages already) to sell them to investors who all trusted the A+ ratings.

It was then possible to sell an individual mortgage several times, first to the investment bank, then to the first investor (who bought a CDO), and then as a synthetic CDO, like a series of wagers all lined up like dominos.

  1. Countrywide wagers 100,000 that a person will pay back their mortgage
  2. Bear Sterns (an investment bank) then transforms that mortgage into $1 million worth of value by combining it into a CDO
  3. The CDO is then blended with other CDOs (synthetic CDO), doubling the value to $10 million
  4. A new synthetic CDO is then built from the first batch of synthetic CDOs, making the mortgage now worth $100 million

In case you think this is the most ridiculous thing you’ve ever heard, I assure you that this was all considered supremely sane by the best economists and financial wizards in the world.


Ever since the first stock market was invented in Antwerp (and later Amsterdam), traders liked to have an option besides being “right”. If you buy a stock (or bond or anything else) and it makes you money, great. But if you think the stock will go down, you can buy something called a “short”, a sort of special wager.

With all of these investors (and investment banks) now holding what amounted to billions of dollars’ worth of CDOs, there had to be some kind of “hedge” or protection on the “very rare chance” that they would lose value.

The solution was something called a CDS (credit default swap). Originally created by investment banks for another purpose altogether (to “hedge” against insurance payments), investment bankers realized they could make some more money by selling CDS too.

As odd as it sounds now, literally no one beyond an autistic medical doctor, two kids in a California basement, and a dozen other people realized that there was a real chance that these CDS would one day be needed. Most of the time, investors and re-insurers (particularly AIG) bought them just because they always make hedges against everything they do.

Theoretically, the CDS was supposed to protect everyone in case something went wrong. If a CDO ended up losing value (which again, amazingly, nobody expected) then the CDS “insurance” would mean that the investor would only lose a little money.

The Dominos All Fall Down

What eventually happened in the second half of 2007 and spilling into 2008 is that too many of those bad mortgages started to fail. When they did, the entire chain of dominos crashed with it, as each one had been sold multiple times over as a CDO.

The heroes of the book (The Big Short) made a lot of money, not by “cashing in” their CDS by the issuers but by selling them to investment banks desperate to try and stop losing all of their money.

Two investment banks failed (Lehman Brothers and Bears Stern), the insurance giant AIG was about to, and the rest of the investment banks were in line to collapse as well, all within the space of a few weeks.

The American government then stepped in and implemented a “bail out”, a term that originally referred to a boat that was full of water and about to sink. Instead of prosecuting bankers, regulators, or anyone else in the financial industry, the huge amounts of debt that came crashing down were “purchased” by the American people (government) because it was deemed that the investment banks were “too big to fail” (TBTF) and that if they did fail, the entire economy would collapse and America would be engulfed with lawless chaos within months.

Going by a number of different acronyms, starting with TARP and what is known as QE (Quantitative Easing) today, the American central bank (Federal Reserve) and others (European Central Bank etc) are still spending tremendous amounts of money in order to clean up the mess from the crash of 2007-2008.

Fallout Boy

The investment banks that caused this mess suffered no consequences whatsoever. Indeed, they were making record profits within less than a year.

But everybody else suffered. As many as 6 million Americans lost their homes. Pension funds were wiped out. Government budgets went to paying off the bankers, leading to “austerity” everywhere else, with salaries cut, services cut, and the economies all contracting, never to regain that forward momentum that they had in 2007.

When the investment banks and insurance giants were not allowed to “fail”, the wave of misery spread outward, swamping entire countries (like Iceland and Greece) and badly destabilizing many more (Portugal, Italy, and Spain). Countries less affected due to a reliance on resources (India, China, and Russia) became more ascendent.

And little old Romania was nearly blown to pieces. As I write these words, approximately 10% of the population now lives beyond its borders. Corruption is endemic to the point where investors are largely avoiding the country. An unelected government is in place to replace a venal and dictatorial one. EU regulations are crushing small farmers.

Young and educated people are fleeing as fast as they can, leaving behind a toxic mix of Gypsies, pensioners, children without parents, and a bloated government with more than 45,000 politicians and millions of stupid and inept bureaucrats.

And the only solution that the so-called leaders of Romania have is to trust the bankers yet again.


3 Comments Add yours

  1. xyz says:

    Great Piece!
    Regarding the toxicity of Credit Default Swaps, it might be worth noting that while they originated as a type of insurance used by investors to limit potential losses, anybody could buy them- in essence placing a bet on the future performance of an investment. As a result, investment “banksters” would often times buy CDSs on the very investment instruments they were peddling, in essence betting against them (because they knew very well they were trash).
    It was also the main reason the giant insurance company AIG had to be bailed out by taxpayers- they were holding a ton of CDSs and they did not have the cash to pay on them once the investments tanked.


    1. Thanks for elucidating on this! It’s quite a story


  2. xyz says:

    Two quick points (sorry if they’re rather technical in nature).
    1. The term subprime does not refer to ARM (adjustable rate mortgages) exclusively- in fact it refers to the “quality” of the borrower regardless of the type of mortgage loan (adjustable, fixed, hybrid, etc.)
    2. Banks do not give out “mortgages”- they give out loans in exchange for a promissory note to repay that loan. The “mortgage” is in fact given by the borrower to the lender as security for the note. This becomes clear if you remember that the borrower is also called the “mortgagor” (the giver) and the lender is called the “mortgagee” (the receiver).


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