Category: political capitalism

Martin Van Buren on government bailouts

Those who look to the action of this government for specific aid to the citizen to relieve embarrassments arising from losses by revulsions in commerce and credit, lose sight of the ends for which it was created, and the powers with which it is clothed. It was established to give security to us all. … It was not intended to confer special favors on individuals. The less government interferes with private pursuits, the better for the general prosperity.
~ Martin Van Buren, 8th President of the United States, 1837

My comment: Mr. Paulson, you’re no Martin Van Buren.

Paulson’s gift to the bears

It’s official: The U.S. economy is headed for its worst recession in three decades. Henry Paulson’s scheme to keep Fannie Mae and Freddie Mac on government life support and bail out its creditors (i.e. Wall Street, Big Banks, and Bill Gross at PIMCO) removes any doubt. The only question remaining: Will this downturn rival the Big Kahuna of the 1930s?

Paulson was interviewed today on Bloomberg. Here is the money quote:

“No one likes to put the taxpayer into situations like this. No one does; I certainly don’t. Government intervention is not something I came down here wanting to espouse, but it sure is better than the alternative.”

The alternative, of course, is that Paulson’s friends are actually forced to take huge losses on their reckless, ill-fated loans to Fannie and Freddie. Unthinkable! Paulson assures the naïve interviewer that the taxpayer will come before the shareholder, forgetting to mention the shareholder has already been wiped out, putting the taxpayer last in line behind the creditors. Under Hanky Pank’s scheme, the taxpayer is simply the bagholder of last resort. Paulson was obviously a quick study under former Goldman Sachs CEO and Treasury Secretary, “Mr. Bailout” himself, Robert Rubin.

The initial reaction of the stock market was to celebrate with a 300 point rally in the DJIA. Our guess is the euphoria will fade quickly as investors realize bailout money does not grow on trees, and the cash will either be taxed, borrowed or printed. The only question: How much will the final tab run?

The more pressing concern, however, is the economy. This economy needs to break its addiction to cheap credit, remove the waste of the previous credit binge, shed its political parasites (e.g., friends of Hank), and rebuild on a solid foundation. Every intervention prolongs the process and deepens the malaise. A wholesale government takeover of the mortgage market virtually guarantees the economy will be mired in deep recession for years.

The only winners (besides whiners like Bill Gross)? Those who are short the market.

Note to self: Move those inflation hedges from the attic to the front hall closet.

Were friends of the Fed tipped off?

According to an article on Bloomberg today, a phone call from none other than Robert Rubin to Ben Bernanke in early August set in motion a series of private sector conversations that culminated in the surprise discount rate cut on August 17:

The Federal Reserve’s Aug. 7 decision to keep interest rates unchanged set off a chain of high-level discussions with Wall Street executives, money managers and cabinet officials that culminated in Chairman Ben S. Bernanke’s public about-face 10 days later, according to records of his schedule.

Starting with a phone call from former Treasury Secretary Robert Rubin the day after the August rate meeting, Bernanke’s appointments included Lewis Ranieri, founder of Hyperion Capital Management Inc., and Raymond Dalio, president of Bridgewater Associates.

Of course, Bernanke also consulted with Hank Paulson:

Bernanke was also in frequent contact with Treasury Secretary Henry Paulson, who said in an interview last month that he meets the chairman regularly.

Hmmmm. Let’s establish a time line here, keeping in mind Rubin and Paulson are ex-Goldman Sachs CEOs in direct communication with the head of the Fed…

Aug. 7 – The Fed stands firm, keeping rates unchanged.

Aug. 8 – Rubin calls Bernanke.

Aug. 9 – Bernanke calls some Wall Street bigwigs including Ray Dalio at Bridgewater Associates, the 4th largest U.S. hedge fund with $32 billion under management (Dalio is personally worth $4.0 billion according to latest Forbes 400). The WSJ reports, “the Fed twice entered the market today to pump a total of about $24 billion of liquidity into the system, more than its typical daily open-market activities.”

Aug. 10 – A Goldman Sachs “quant” hedge fund, Global Equity Opportunities, suffers a brutal week, losing about 28% of its value to $3.6 billion. Its North American Equity Opportunities fund and Goldman’s flagship, Global Alpha, are also taking significant losses.

Aug. 13 – Goldman Sachs injects $2.0 billion into its Global Equity Opportunities fund. The company is joined by a group of big-name investors, including AIG’s Hank Greenberg and Eli Broad, who pony up $1 billion. (Greenberg, 82, is worth $2.8 billion; Broad, 74, is worth $7.0 billion.) Goldman reportedly cuts its fees to entice investors.

Aug. 16 – In a wild day, the Dow rallies back to unchanged in the final hour to 12,846 after being down nearly 400 points intraday.

Aug. 17 – Before the market opens, the Fed drops the discount rate by 0.50% to 5.75%, timed on an option expiration Friday for maximum bullish effect. The Dow rallies 233 points to 13,079. Global Equity Opportunities rises 12% for the week.

Aug. 31 – Global Alpha loses 22.5% in August, its worst month ever. Year-to-date, the fund has lost a third of its value. According to Bloomberg, “Investors last month notified… Goldman, the most profitable securities firm, that they plan to withdraw $1.6 billion, or almost a fifth of the fund’s assets as of July 31… Global Alpha will have to return 80 percent before the managers can resume collecting 20 percent of investment profits from clients who were in the fund at the beginning of last year.” Global Equity Opportunities finishes the month down 23%.

Sep. 14 – Global Equity Opportunities is reportedly down 1.9% so far for the month. Global Alpha is down 2.8% (and off 46% from its March 2006 peak). “People aren’t going to keep suffering losses,” said Brett Barth, a partner at New York-based BBR Partners, which invests in hedge funds. “These funds are supposed to do well with risk management. Something has gone badly awry.”

Sep. 18 – The Fed surprises the market with 0.50% cuts in both the fed funds and discount rates. The Dow rockets 336 points, its best day in 5 years, to 13,739.

Sep. 20 – Goldman reports much better than expected 3rd quarter results. Trading and principal investments revenue was $7.6 billion, up 21% from the 2nd quarter and up 73% from a year earlier. “The numbers are great,” Glenn Schorr, an analyst at UBS AG in New York, wrote in a note to investors today. The earnings demonstrate Goldman’s “ability to not only navigate choppy waters, but make a ton of money doing so,” he said.

Oct. 3 – Goldman Sachs stock hits an intraday high of 230.63, up 46% from its mid-August lows and within 2% of its all-time high.

It is no secret that Goldman Sachs has plenty of friends in high places. It is no secret that the company, as well as the rest of Wall Street, was on the ropes in August. In mid-August, politically-connected Hank Greenberg wrote a big check and a week later he was 12% in the black. By the end of August, the firm reported its second best trading results ever. All along, those friends seemed to be doing everything in their power to rescue them.

Is it a stretch to imagine this is more than mere coincidence? Was Goldman and some of its cronies privy to what is essentially inside information? Where is the outrage?

Lew Rockwell is right: politics – especially when applied to finance – is a rich man’s game.

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