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Posts Tagged ‘Wall Street’

Kevin Williamson of National Review is always worth reading, whether he’s kicking Paul Krugman’s behind in a discussion about the Texas economy, explaining supply-side economics, or even when he’s writing misguided things about taxation.

But I’m tempted to say that anything he’s written to date pales into insignificance compared to his analysis of the corrupt relationship between big government and Wall Street. Here are some excerpts, but read the entire article.

He starts out with a strong claim about the Obama Administration being in the back pocket of Wall Street.

…it’s no big deal to buy a president, which is precisely what Wall Street did in 2008 when, led by investment giant Goldman Sachs, it closed the deal on Barack Obama. For a few measly millions, Wall Street not only bought itself a president, but got the start-up firm of B. H. Obama & Co. LLC to throw a cabinet into the deal, too — on remarkably generous terms. …the real bonus turned out to be Treasury secretary Tim Geithner, who came up through the ranks as part of the bipartisan Robert Rubin–Hank Paulson–Citigroup–Goldman Sachs cabal. Geithner, a government-and-academe man from way back, never really worked on Wall Street, though he once was offered a gig as CEO of Citigroup, which apparently thought he did an outstanding job as chairman of the New York Fed, where one of his main tasks was regulating Citigroup — until it collapsed into the yawning suckhole of its own cavernous ineptitude, at which point Geithner’s main job became shoveling tens of billions of federal dollars into Citigroup, in an ingeniously structured investment that allowed the government to buy a 27 percent share in the bank, for which it paid more than the entire market value of the bank. If you can’t figure out why you’d pay 100-plus percent of a bank’s value for 27 percent of it, then you just don’t understand high finance or high politics.

Since I’ve compared Tim Geithner to Forest Gump, I’m not going to argue with this assessment.

Later in the article, Kevin makes a case that politicians are engaging in widespread insider trading.

Nancy Pelosi and her husband were parties to a dozen or so IPOs, many of which were effectively off limits to all but the biggest institutional investors and their favored clients. One of those was a 2008 investment of between $1 million and $5 million in Visa, an opportunity the average investor could not have bought, begged, or borrowed his way into — one that made the Pelosis a 50 percent profit in two days. Visa, of course, had business before Speaker Pelosi, who was helping to shape credit-card-reform legislation at the time. Visa got what it wanted. The Pelosis have also made some very fortunate investments in gasand energy firms that have benefited from Representative Pelosi’s legislative actions. The Pelosis made a million bucks off a single deal involving OnDisplay, the IPO of which was underwritten by investment banker William Hambrecht, a major Pelosi campaign contributor. …Besting Nancy Pelosi, Rep. Gary Ackerman (D., N.Y.) got in on the pre-IPO action, without putting up so much as one rapidly depreciating U.S. dollar of his own assets, when a political supporter — who just happened to be the biggest shareholder of the firm in question — lent him $14,000 to buy shares in the private company, which he then sold for more than a hundred grand after the firm went public. There wasn’t so much as a written loan agreement. On and on and on it goes: Sen. John Kerry invested aggressively in health-care companies while shaping health-care legislation. Rep. Spencer Bachus (R. Ala.) was a remarkably apt options trader during the days when he had a front-row seat to Congress’s deliberations on the unfolding financial crisis.

I wish I had known these details when I went on TV to discuss congressional corruption earlier this year.

Kevin also explained how Warren Buffett made a boatload of money thanks to insider knowledge about bailouts.

…during the financial crisis, a big piece of Goldman Sachs was bought by Warren Buffett, who stacked up a lot of cash when the government poured money into that struggling investment bank with the support of Barack Obama. When the federal government bought into Goldman Sachs, it negotiated for itself a 5 percent dividend. Warren Buffett got 10 percent — on top of the benefit of having Washington inundate his investment with great rippling streams of taxpayers’ money.

No wonder Buffett’s willing to lie in order to help his buddies in Washington raise taxes.

There’s a lot more in the article, but here’s a final excerpt that sums up Kevin’s article.

Wall Street can do math, and the math looks like this: Wall Street + Washington = Wild Profitability. Free enterprise? Entrepreneurship? Starting a business making and selling stuff behind some grimy little storefront? You’d have to be a fool. Better to invest in political favors. …hedge-fund titans, i-bankers, congressional nabobs, committee chairmen, senators, swindlers, run-of-the-mill politicos, and a few outright thieves (these categories are not necessarily exclusive) all feeding at the same trough, and most of them betting that Mitt Romney won’t do anything more to stop it than Barack Obama did. …Free-market, limited-government conservatives should be none too eager to welcome them back, nor should we let our natural sympathy with the profit motive blind us to the fact that a great many of them do not belong in the conservative movement, and that more than a few of them belong in prison.

All of this underscores why TARP was such an unmitigated disaster – and why we should be suspicious of politicians like Romney and Gingrich who supported the bailouts.

Remember, capitalism without bankruptcy is like religion without hell.

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It certainly is true that a rising stock market, over a long period of time, is a good thing.

But does that mean it is always a good development if the stock market has a big jump in one day? Or is it unambiguously bad news if there’s a significant one-day drop in financial markets?

I’ve been pondering this issue because recent stock market gyrations have triggered predictable finger pointing by politicians and pundits. Indeed, the past few days have been somewhat similar to the blame game that took place during the TARP bailout fight. Republicans and Democrats often have the same message: Any upward blip in markets is because “my side” did something good and any fall is because “your side” did something bad.

But so what? I certainly don’t pretend to be anything other than a policy wonk, so maybe people with real experience in financial markets can tell me that I’m way off base, but here are a couple of reasons why a short-term jump in the stock market might be a sign of bad news.

1. What if the Federal Reserve suddenly reveals that it intends to pursue an aggressive, easy-money policy? One likely result of such an announcement is that investors will pull money out of bonds, because of an expectation in the short run of lower interest rates (and therefore lower returns), and put that money into stocks.

Would that rising stock market be a sign of good economic policy, or would it just be a result of portfolio shifting, probably followed by weaker economic performance?

2. What if the Treasury Department announces that it will pay every underwater mortgage in the country. I wouldn’t be surprised if that was followed by a big jump in the stock market, led by financial companies such as banks.

Would that jump in stocks be a sign of good economic policy, or would it simply measure the value of a one-time wealth transfer from taxpayers to bank shareholders, probably followed by weaker economic performance?

My gut instinct is that these are examples of bad economic policies leading to short-term jumps in stocks. And this is why I try to avoid predicting markets when being interviewed.

But, if nothing else, I try to unleash a good one-liner during every interview. Here are two recent appearances, where I mention the “Sword of Damocles of big government” and “another Keynesian who’s been rattling around the revolving door of Washington and Wall Street.”

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Peter Wallison of the American Enterprise Institute has been one of the few sane voices in the fight over bailouts, regulation, and the financial sector. His new column in the Wall Street Journal exposes the White House’s misleading arguments for more government control of an already over-regulated financial sector:

…the government’s case for bailing out AIG has rested on the notion that the company was too big to fail. If AIG hadn’t been rescued, the argument goes, its credit default swap (CDS) obligations would have caused huge losses to its counterparties—and thus provoked a financial collapse. …The truth about the credit default swaps came out last week in a report by TARP Special Inspector General Neil Barofsky. It says that Treasury Secretary Tim Geithner, then president of the New York Federal Reserve Bank, did not believe that the financial condition of AIG’s credit default swap counterparties was “a relevant factor” in the decision to bail out the company. …The broader question is whether the entire regulatory regime proposed by the administration, and now being pushed through Congress by Rep. Barney Frank and Sen. Chris Dodd, is based on a faulty premise. …The administration’s unwillingness or inability to clearly define the problem of interconnectedness is not the only weakness in its rationale for imposing a whole new regulatory regime on the financial system. Another example is the claim—made by Mr. Geithner and President Obama himself—that predatory lending by mortgage brokers was one of the causes of the financial crisis. …At the end of 2008, there were about 26 million subprime and other nonprime mortgages in our financial system. Two-thirds of these mortgages were on the balance sheets of the Federal Housing Administration, Fannie Mae and Freddie Mac, and the four largest U.S. banks. The banks were required to make these loans in order to gain approval from the Fed and other regulators for mergers and expansions.

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