In an editorial today, the New York Times calls for an investigation of Goldman Sachs and other financial firms for placing large bets against securities that they bundled and sold to clients. Titled “Betting against all of us,” the editorial was prompted by an article by Gretchen Morgenson and Louise Story that appeared in the Times on Christmas eve. That article is well worth a read (and deserved a bigger news day).
A key excerpt:
But Goldman and other firms eventually used the C.D.O.’s to place unusually large negative bets that were not mainly for hedging purposes, and investors and industry experts say that put the firms at odds with their own clients’ interests.
“The simultaneous selling of securities to customers and shorting them because they believed they were going to default is the most cynical use of credit information that I have ever seen,” said Sylvain R. Raynes, an expert in structured finance at R & R Consulting in New York. “When you buy protection against an event that you have a hand in causing, you are buying fire insurance on someone else’s house and then committing arson.”
The article also highlights the role of Treasury official Lee Sachs in this market. His firm prior to joining the Obama administration, Tricadia Investments, packaged many of these types of CDOs and won big on bets against them. The Times editorial notes that an investigation “would have to reach into the Obama Treasury Department.”
NewsShift: Watchdog Journalism With a Long Tail
By Matthew Skomarovsky • Dec 22, 2009 at 18:36 EST
Every year for the past few years, Knight Foundation has conducted a News Challenge that awards about $5 million in funding to a selection of projects that
- Use digital open-source media
- To distribute news and information
- In a geographic community
As Kevin recently noted, this year we finally got our act together and submitted a concept called NewsShift, a collaboration with our friends David and Mushon at ShiftSpace. In an attempt to provoke an escalating war of compliments, I will point out that the ShiftSpace folks, whose work we’ve followed for years, are highly talented designers and engineers, and ShiftSpace is a real beast waiting to be unleashed.
Larry Summers continues to refuse comment on his disastrous management of Harvard University’s finances, according to a lengthy Bloomberg article out Friday (aptly titled “Harvard swaps are so toxic even Summers won’t explain”). The former Harvard president’s failed bets on interest rates led to a historic liquidity crisis last fall that forced the school to take on an additional $2.5 billion in debt and implement campus-wide austerity measures.* Kudos to the Bloomberg reporters for continuing to chase this story (which carries national implications given Summers’s role in the White House).
One aspect of the story that has yet to break: Harvard’s leadership, including key members of its financial team, were severely conflicted by official roles with several of the university’s counterparties on the swaps.
In a blog post yesterday, Paul Krugman tells his readers that they shouldn’t look at a Rasmussen poll on healthcare reform in Massachusetts because “it’s Rasmussen.” He points to a poll that he deems more accurate and trustworthy, by the Harvard School of Public Health and the Boston Globe. The poll shows that healthcare reform in Massachusetts is actually fairly popular (Krugman supports Massachusetts-style healthcare reform).
But Krugman’s preferred poll is undermined by a significant conflict of interest: it was co-directed by a health insurance company board member, Robert Blendon. Blendon, a Harvard public health professor, has been on the board of Assurant since 1993, earns about $150,000 a year in this role, and is heavily invested in the insurance company.
The apparent conflict of interest was not disclosed by the Harvard School of Public Health or the Globe, so it’s not Krugman’s fault for not noticing.
Last week LittleSis reported that Rep. Melissa Bean receives significant support from the Wall Street interests who helped weaken new financial reform legislation. One such supporter is the Securities Industry and Financial Markets Association (SIFMA), Wall Street’s primary lobbying organization. SIFMA funds many of the New Democrats who helped pass the Bean amendment, as well as several key leaders in both the House and the Senate.
SIFMA was formed in 2007 through the merger of two separate lobbying groups, the Securities Industry Association and the Bond Market Association. Following the merger, the new organization took steps to revamp its lobbying operation to better influence the Democratic Congress, hiring Scott DeFife (a former senior policy advisor to House Majority Leader Steny Hoyer), Michael Paese (a former staffer for Barney Frank), and Ken Bensten (a Democratic insider and former Representative).
The Chamber of Commerce has led the fight against the financial reform bill making its way through Congress. The business lobby opposes the creation of the Consumer Financial Protection Agency, enhanced oversight of derivatives, and other key parts of the reform package, and it won many concessions on the bill recently passed by the House of Representatives.
Though the White House and the Chamber have been at loggerheads, recently, at least two members of President Obama’s inside circle teamed up with the Chamber in its efforts to fight financial reform.
Mellody Hobson, president of the mutual fund company Ariel Investments, and JP Morgan executive William Daley are both affiliated with the Chamber of Commerce’s Center for Capital Markets Competitiveness. Both Daley and Hobson served on the Center’s predecessor committee and signed a letter from the Center urging the Obama administration to adopt Wall Street-friendly regulatory reform. Hobson and Daley were two of the only Democrats to sign the letter, judging from campaign finance data; it’s an overwhelmingly Republican bunch.
As I noted in my previous post about Representative Melissa Bean’s ties to the Obama fundraisers, Daley and Hobson are both very close to the president. Hobson has been raising money for him since 1995, is business partners with one of the first family’s closest friends, and campaigned side-by-side with Michelle Obama. Daley was an adviser to the Obama transition and co-chair of the Obama inauguration.
By Kevin Connor • Dec 13, 2009 at 15:34 EST
Matt Taibbi includes a devastating analysis of the role that Robert Rubin has played in shaping this young administration in his latest piece for Rolling Stone, Obama’s Big Sellout:
Despite being perhaps more responsible for last year’s crash than any other single living person — his colossally stupid decisions at both the highest levels of government and the management of a private financial superpower make him unique — Rubin was the man Barack Obama chose to build his White House around.
There are four main ways to be connected to Bob Rubin: through Goldman Sachs, the Clinton administration, Citigroup and, finally, the Hamilton Project, a think tank Rubin spearheaded under the auspices of the Brookings Institute to promote his philosophy of balanced budgets, free trade and financial deregulation. The team Obama put in place to run his economic policy after his inauguration was dominated by people who boasted connections to at least one of these four institutions — so much so that the White House now looks like a backstage party for an episode of Bob Rubin, This Is Your Life!
A group of “New Democrats” led by Representative Melissa Bean has reportedly won major concessions in the financial reform fight:
The compromise reached late Wednesday between pro-reform House Democrats and the banker-friendly wing of the party could significantly weaken consumer protection in states where lawmakers support tougher rules against tactics such as predatory lending and excessive ATM fees than historically submissive federal regulators.
Barney Frank chalked up Bean’s intransigence to the lobbying of a generic group of “big banks,” without providing much in the way of details. The Huffington Post has pointed to the amount of campaign cash flowing from Wall Street, and Public Citizen released a report on the subject on Tuesday.
But “big banks” have a human side, after all; Bean draws her support from real, live, human beings. And a closer look at who these people are suggests that the Representative’s efforts are backed by financial elites tightly linked to President Obama.
PIMCO’s handshake with Kashkari
By Kevin Connor • Dec 08, 2009 at 16:47 EST
Neel Kashkari, ex-Treasury Secretary Henry Paulson‘s pick to oversee TARP, has joined the bond firm PIMCO, the trillion dollar bond manager based in southern California. The move comes just days after the Washington Post ran a lengthy profile of Kashkari and his life after Treasury.
Felix Salmon notes that with the move, PIMCO has cemented its status as a favorite outpost of former Washington policymakers (Alan Greenspan is an advisor there):
Pimco seems to be establishing itself as a key part of the revolving-door structure in contemporary finance: if you’re a senior government bureaucrat making decisions affecting the financial industry, there’s a good chance that if and when you leave there’ll be a job waiting for you in sunny southern California. It’s win-win for everybody: technocrats will tend to treat the financial industry with kid gloves when they’re in power, so as to maximize their chances of getting a good job upon their exit, while the likes of Pimco “make billions” as a result of doing so.
Former Washington types like Greenspan and Kashkari help PIMCO “make billions” by leveraging the relationships, influence, and access they developed in Washington. It’s all part of PIMCO’s strategy, as outlined in this market commentary by PIMCO chief Bill Gross:
Wall Street’s tunnel to the White House
By Kevin Connor • Dec 07, 2009 at 14:29 EST
Are Treasury officials and their friends able to avoid appearing on the White House’s newly-released visitor logs?
I raise this question because there is a tunnel between the White House and the Treasury Department, and it appears to be used quite frequently by members of the administration’s economic team. See this New York Times article on White House economic advisor Brian Deese:
Several times a day he speed-walks to Treasury, taking a shortcut through the tunnel under the colonnade, near the kitchens.
Ronald Kessler’s Inside the White House has more (colorful) background on the tunnel.
Deese’s comings and goings would not show up on the logs, since he works in the White House. But do Treasury officials avoid appearing on White House visitor logs when they use the tunnel? More troubling: can Wall Street executives and other friends of the Treasury “speed-walk” the tunnel with them?
It’s not just the existence of the tunnel that makes me wonder if the Wall Street wing of the Obama administration is immune to these transparency efforts; the possibility of an exception is borne out by the data.