Best of the Week
Most Popular
1.Scottish Independence YES Vote Panic - Scotland Committing Suicide and Terminating the UK? - Nadeem_Walayat
2.Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - Nadeem_Walayat
3.Bank of England Panic! Scottish Independence Bank Run Already Underway! - Nadeem_Walayat
4.Gold and Silver Price Ready To Go BOOM - Austin_Galt
5.Gold and Silver Potential Price Meltdown Scenario - Rambus_Chartology
6.Scottish Independence UK Catastrophe - The Balkanisation of Britain - Video - Nadeem_Walayat
7.The Price Of Gold And The Art Of War Part I - Darryl_R_Schoon
8.Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - Nadeem_Walayat
9.Heavy Gold and Silver Shorting is Bullish - Zeal_LLC
10.10 Year U.S. Treasury Short Best Place to be Remainder of 2014 - EconMatters
Last 5 days
The Truth Behind the Dangerous "Helicopter Money" Delusion - 16th Sept 14
Central Bank Balance Bullying: Investor Implications - 16th Sept 14
U.S. Dollar and Gold Elliott Wave Projection - 16th Sept 14
The Origins and Implications of the Scottish Referendum - 16th Sept 14
The Collapse Of U.S. Silver Stocks As Public Debt Skyrockets - 16th Sept 14
Emerging Markets Are Set Up for a Crisis, What’s on Your Radar Screen? - 16th Sept 14
Scottish Independence Bank Run Already Underway - Video - 16th Sept 14
The Emergence of the US Petro-Dollar - 16th Sept 14
Economic GDP Drives Stock Prices Inestment Myth - 16th Sept 14
Don't Miss This Gold Buying Opportunity - 16th Sept 14
Why ECB QE Is Bearish For Gold Prices - 15th Sept 14
Property Rights and Property Taxes—and Countries That Don’t Have Them - 15th Sept 14
Junior Miners Breaking Out Higher Forecasting Gold and Silver Price Bottom? - 15th Sept 14
Stock Market Patiently Waiting for Mean Reversion - 15th Sept 14
A Closer Look at the US Dollar - 15th Sept 14
The Silver Price Sentiment Cycle - 15th Sept 14
Stock Market Correction Underway - 15th Sept 14
Marc Faber - “I Want To Be Diversified, I Want To Own Some Gold” - 15th Sept 14
The Myth of Nuclear Weapons - 15th Sept 14
US Dollar Forecast to Go Much Higher - 15th Sept 14
Analysis And Price Projection Of The Uranium Market - 15th Sept 14
Bank of England Panic! Scottish Independence Bank Run Already Underway! - 15th Sept 14
The Ethics of Entrepreneurship and Profit - 14th Sept 14
The Big Investor Opportunity in the Orbital Space Junkyard - 14th Sept 14
Kohl's and The Rest of The Retailers are in Deep Doo Doo - 14th Sept 14
Independent Scotland Will Disintegrate as Unionist Regions Demand Referendum's to Rejoin UK - 14th Sept 14
Stock Market Pullback Continues - 13th Sept 14
SNP Fanatics Warn of Day of Reckoning for Scottish Independence No Campaigners - 13th Sept 14
Scottish Independence Would Shake Up the Global System - 13th Sept 14
The World Order Becomes Disorder - 13th Sept 14
Is Geothermal Power About to Become The Next Great Battleground Over Fracking? - 12th Sept 14
Heavy Gold and Silver Shorting is Bullish - 12th Sept 14
Strong U.S. Dollar Undermines Gold and Silver - 12th Sept 14
Debt And The Decline Of Money - 12th Sept 14
Panic On The Streets Of London ... Can Scotland Ever Be The Same Again? - 12th Sept 14
Will The Real Silver Commercials Stand Up? - 12th Sept 14
If You Own Only One Investment, Make Sure This Is It - 12th Sept 14
Main Reason Why Scotland Will Vote NO to Independence, 70% Probability - 12th Sept 14
Better Days Ahead For U.S. Stock And Housing Market - 12th Sept 14
U.S. Meddling Dims Prospects for Ukraine Peace - 12th Sept 14
Is the Fed Preparing to Asset-Strip Local Governments? - 12th Sept 14
China Holds “Gold Congress” - Positioning Itself As Global Gold Hub - 11th Sept 14
Fire Ice Could be Energy's Magic Bullet or a Planet-killing Catastrophe - 11th Sept 14
The Mass Psychosis Of 9 /11 Will Never Be Healed - 11th Sept 14
Radical Islam's Crisis of Competing Caliphates - 11th Sept 14
Ukraine Crisis And Self-Determination - 11th Sept 14
Cameron and Miliband Desperately Attempt to Prevent Scotland Committing Suicide - 11th Sept 14
A Supply Crunch Points to Higher Uranium Prices - 11th Sept 14
The Myanmar Shadow - 11th Sept 14
Europe Takes the QE Baton - 11th Sept 14
Full Frontal Inflation - 11th Sept 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Huge Stocks Bear Market

Is Crony Capitalism Wrong?

Politics / Credit Crisis Bailouts Dec 03, 2011 - 01:34 PM GMT

By: Janet_Tavakoli

Politics

n November 29, 2011, Bloomberg Magazine’s Richard Teitelbaum published an article revealing a secret meeting on July 21, 2008, with then Secretary of the Treasury and former Goldman Sachs CEO Hank Paulson and around a dozen hedge-fund managers and Wall Street executives. 

Five of the hedge fund managers were former Goldman Sachs employees.  The meeting was held at the offices of the founder of hedge fund Eton Park Capital Management, Eric Mindich, a former 15-year employee of Goldman Sachs who rose to be the senior strategy officer of Goldman’s Executive Office.  He is also current Chair of the Asset Managers’ Committee of the President’s Working Group on Capital Markets.


Then Secretary Paulson asked the hedge fund managers what the market might think if he placed mortgage giants Fannie Mae and Freddie Mac into conservatorship, a move that would have wiped out value for the shareholders and possibly wiped out value for subordinated debt holders. 

According to the article, one hedge fund manager had a short position in these stocks when he walked into the meeting.  He was shocked that Secretary Paulson blabbed specifics, and the hedge fund managers therefore believed the Treasury Department would implement the plan.  Seven weeks later, it did.  

The hedge fund manager called his lawyer at a break in the meeting, and his lawyer told him Paulson had divulged non-public material information.  His lawyer advised him to stop trading in the shares of these companies immediately.  Ironically, that meant the hedge fund manager could not cover his short positions, so he profited by riding the value of the shares all the way down to the bottom.  If he hadn’t been at the meeting, and if he had any doubts, he might have covered his short position earlier and made less money.  One will never know, because Secretary Paulson tied the hedge fund manager’s hands.

But the more interesting implication is for the other managers in attendance.  If they didn’t already have a short position in Fannie Mae and Freddie Mac, they now had non-public material information that would allow them to almost certainly profit mightily by initiating such a trade.  They could even be more confident in shorting other financial institutions that would likely take a shellacking.

Richard Teitelbaum quoted me: “What is this but crony capitalism?  Most people have had their fill of it.”

Meanwhile, then Secretary Paulson told the public a different story than he told the meeting attendees.  According to Bloomberg’s research, earlier that day, Paulson told the New York Times that the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books and he expected the result of this would inspire confidence.  The Times’s article appeared the following day.  Any investor in the shares of Fannie and Freddie would be less likely to sell their shares in the face of this reassuring message.

There is no way of knowing whether the hedge fund managers initiated new trades as a result of this meeting, but the key issue is that then Secretary of the Treasury Paulson communicated non-public material information that could financially benefit the recipients at the public’s expense.

Apparent Damage Control: That’s How They Roll

On Wednesday, November 30, 2011, I got a call from a staffer for Congressman Michael Quigley (D., IL.).  Congressman Quigley represents Illinois’s 5th district.  He replaced Rahm Emanuel, the current Mayor of Chicago, in a special election after Rahm resigned to become White House Chief of Staff.  Rod Blagojevich preceded Rahm Emanuel.  Blagojevich was elected Governor in 2002 and was subsequently impeached for corruption and misconduct and convicted of one count of lying to the FBI.  He awaits sentencing.

Congressman Quigley’s staffer called because he saw my quote in the Bloomberg article.  He claimed he was looking for clarification of my position, and I stated the article accurately reflected my viewpoint.  But the staffer seemed to me to defend the meeting. 

The staffer said this kind of meeting “happens all the time.”  I retorted: “Really?  What’s the excuse?” 

He then claimed he was just trying to play “devil’s advocate.”  But don’t we have a surplus of those? 

The staffer claimed that people want to discuss regulations with people who might be affected.  I responded that this excuse is ludicrous.  Then Secretary of the Treasury Paulson discussed material non-public information about the restructuring of Fannie Mae and Freddie Mac with people who were in a position to profit at the expense of the public.  I cut the phone call short at that point. 

I would like to give my local politician the benefit of the doubt that a staffer wasn’t acting as an errand boy trying to send a message, but that phone call didn’t give me much to work with.   It seems that whether it’s Henry Paulson working for a Republican administration or a Democratic errand boy doing apparent damage control, it looks as if we’re steeped in bi-partisan sleaze.  If the staffer was merely playing the fool, then U.S. citizens needn’t suffer them gladly.

By Janet Tavakoli

web site: www.tavakolistructuredfinance.com

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct associate professor of derivatives at the University of Chicago's Graduate School of Business. Author of: Credit Derivatives & Synthetic Structures (1998, 2001), Collateralized Debt Obligations & Structured Finance (2003), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, September 2008). Tavakoli’s book on the causes of the global financial meltdown and how to fix it is: Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street (Wiley, 2009).

© 2011 Copyright Janet Tavakoli- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014