Saturday, December 3, 2011

Janet Tavakoli on crony capitalism


On Nov. 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....
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 articleappeared 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.
Read the rest at The Huffington Post
by Janet Tavakoli
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).
UPDATE: Crony Capitalism? Hank Paulson’s Extraordinary Meeting
by Jesse Eisinger
 at ProPublica, 

6 comments:

Ryan Harris said...

A better example of crony capitalism, and more current is the growing scale of the round ups of hispanics and loading them onto planes, trains and buses in Nazi style to dump them in places around the western hemisphere by the Obama administration at the behest of the Unions. While the Bush administration was beholden to Goldman, the Obama administration is beholden to unions that are threatened by immigrant labor. The Christian Science monitor does a great job exposing the corruption. This isn't some policy adopted in the middle of a crisis, like Paulson did. His wasn't well thought out and had unintended consequences. This is real modern day human rights violation material, an inconvenient truth, so to speak, for the left. Insidious because of the political motivations and the cover ups to garner support from the persecuted.

Dan Lynch said...

Why isn't Hank Paulson in jail ?

wilwon32 said...

Jeff Gates is interviewed on several videos accesible on YouTube.com. The third in this series on the Criminal State contains suggestions to deal with the current economic situation. While MMT is not mentioned, Jeff is no novice when it comes to finance, economics and political experience.

Criminal State - Part 1 of 3: A Closer Look at Israel's Role in Terrorism

http://www.youtube.com/watch?v=pNjb1MGmGDc

If you have an interest in gaining insight into the techniques of the 1%, including their dismissal of the "Occupy ..." movement, take a look.

beowulf said...

"loading them onto planes, trains and buses in Nazi style to dump them"
Didn't take long for Godwin to appear.
http://en.wikipedia.org/wiki/Godwin%27s_law

If someone is here illegally, they should be deported. When they aren't, it just sends the message to citizens and legal immigrants that in this country, if you play by the rules, wait your turn and obey the law... you're a sucker.

The Red Capitalist said...

Crony capitalism is a misleading term.

It's all part and parcel of the same package when you operate a system that emphasizes survival of the fittest.

Of course people are going to bend the rules - give me a break - you expect people to play fair when their own survival is at stake?

Don't begrudge Hank Paulson - he has worked the system more efficiently than almost anyone in the world today - wish that one day you can become his crony, friend or business partner.

Matt Franko said...

Tavakoli's finish: "In case our politicians or their staffers may have any remaining questions, let me be clear. The above meeting is an example of crony capitalism, and it is wrong."


Now there's a gal who knows how NOT to leave it open ended....

Resp,