| Repo Men
By Kevin D. Williamson
December 28, 2011 4:00 A.M. If you're making money on the Wall Street scale — which is nothing like your boring, middle-management in the Fortune 500, Hamptons-and-Mercedes, barely–a–1 percenter type money — then you can buy basically anything. When real-estate investor Robert Rosania put part of his storied champagne collection up for sale in 2008, the auction was predicted to fetch $5 million — couch-cushion change to Rosania, who had not yet reached his 40th birthday, making him a good deal younger than many of the vintages in his cellar. (Known in the wine world as Big Boy, he brandishes a special saber designed for decapitating head-clutchingly expensive bottles of champagne. Bespoke vintage-champagne cutlery: That's how you know you're rich.) Not far from Zuccotti Park, where Occupy Wall Street was fragrantly encamped, I noticed a young man wandering into a store to buy a pack of cigarettes on a bright Saturday morning, wearing blue jeans, a T-shirt, and a $237,000 Vacheron-Constantin watch. In a world of $600,000 cars (consult your local Maybach dealer) and $4,300-a-night whores (consult Eliot Spitzer), 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. President Obama, for a guy prone to delivering prim and smug little homilies denouncing greed, greed, greed — the only of the seven deadly sins that truly offends Democrats (though Mrs. Obama has done some desultory work on gluttony) — is strangely comfortable among the Gordon Gekkos of this world. Shall we have a partial roll call? Beat the drum slowly and call out the names: With unemployment still topping 9 percent, the catastatic world economy teetering on the brink of another, even larger financial catastrophe, and trillion-dollar U.S. deficits as far as the green-shaded eye can see, let's hear it for Obama's first National Economic Council director, Lawrence Summers (of hedge-fund giant D. E. Shaw and venture-capital firm Andreessen Horowitz), who has had some nice paydays courtesy of Lehman Bros., JPMorgan Chase, and Citigroup. Let's hear it for Citigroup's Michael Froman, deputy assistant to the president and deputy national-security adviser for international economic affairs, for Hartford Financial's Neal Wolin, deputy Treasury secretary, for JPMorgan's William Daley, Obama's chief of staff, and for his predecessor, Rahm Emanuel of Wasserstein Perella. Let's hear it for Fannie Mae's Tom Donilon, national-security adviser. (No, seriously: One of the luminous interstellar geniuses who brought Fannie Mae to its current aphotic state of affairs, upside down to the tune of trillions of dollars, is running national security, and the former director of the White House Military Office, Louis Caldera, was on the board of IndyMac when it finally went toes up — sleep tight, America!) And, lest we forget, let's have three big, sloppy cheers for economic-transition team leaders Robert Rubin (Goldman Sachs, Citigroup) and folksy tax enthusiast/ghoulish billionaire vulture Warren Buffett.
That's a pretty fantastic lineup, from Wall Street's point of view, but 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. But high finance is not the only corporate mystery to be unraveled here: President Obama's repetitious denunciations of Big Oil have not stopped his man David Axelrod's firm from setting up Astroturf campaigns on behalf of Exelon subsidiary ComEd, or stopped the president from appointing GE chief executive/tax-minimization engineer/offshoring guru/bailout baby Jeff Immelt to his risible White House jobs commission, or choosing former Kraft and Duke Energy board member Mary Schapiro to run the SEC. When President Obama opined during his 2011 State of the Union speech that a corporate tax-rate cut might be just the thing for America after a year of record corporate profits, his left-wing base was shocked and dismayed. Heck, some conservatives were caught offguard, too. Perhaps they hadn't noticed who was running the Obama administration: In large part, the same guys who plan to be running the next Republican administration.
Barack Obama (Nasdaq: bho) has been a pretty good buy for Goldman Sachs et al. Sure, the Frank-Dodd financial-reform bill is going to be a sharp pain in Wall Street's pinstriped posterior, and it's going to cost some moneymen some money, but not enough that anybody's going to be out a champagne saber. Mostly, Big Business has got just what it wanted from the Big Government guys in the Obama administration: Frank-Dodd did not do much of anything to lift the cloud of opacity over the world of structured finance, which is what the investment bankers feared most. President Obama has made some noises about ending the carried-interest treatment that allows the fine fellows who run private-equity funds to pay 15 percent in taxes on their gazillion-dollar take-homes instead of 35 percent, but the private-equity guys know that isn't going to happen, mostly because they've heard this story before, from Senator Schumer, and they recognize it for what it is: an inelegant appeal for campaign donations. Beyond Wall Street proper, your Fortune 500 types are looking at the many-splendored tax credits and subsidies and grants and stimulus dollars lavished upon firms such as the now-defunct Solyndra and the really-should-have-been-defunct General Electric and wondering: How do I get me some of that? What's worse is that much of official Washington is looking at Wall Street and asking the same question. The answer: Easy. If Wall Street has done pretty well by investing in Washington, the more despair-inducingly germane fact is that Washington has done pretty well by investing in Wall Street. A catalogue of recent congressional insider-trading, self-dealing, IPO shenanigans, and inexplicably good investment luck would fill an entire volume, and in fact it has: The book has the Tea Party–bait title Throw Them All Out: How Politicians and Their Friends Get Rich Off Insider Stock Tips, Land Deals, and Cronyism That Would Send the Rest of Us to Prison, by Peter Schweizer of the Hoover Institution. That's a lot of title for a fairly slim book (176 pages of reportage, plus end notes), but, despite its relatively slender dimensions, it cost me an entire night's sleep: I spent half the night reading it in a single sitting and the other half having nightmares about it. It's the most offensive and disturbing thing I've read since sampling the oeuvre of the Marquis de Sade as an undergraduate.
Some of the highlights: 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 gas and 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. Writes Schweizer: "The same Bill Hambrecht went before the House Finance Committee, chaired by Barney Frank, a Pelosi ally, to push for a change in the registration process for stock IPOs, an exemption called Regulation A. Under current law, a company that plans an IPO of less than $5 million in stock gets an exemption from detailed reporting. Hambrecht wanted the exemption raised to $30 million, which would greatly benefit his business, making IPOs easier, quicker, and far less expensive. As the hearings began, Congressman Frank said, 'I should note also that it was Speaker Pelosi who first called this to our attention earlier in the year. It is something that the speaker has taken a great interest in.'"
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. The Obama administration poured billions of dollars into solar companies, of which the failed Solyndra is the most infamous. But a lot of that money went to other firms, including First Solar, which is owned by billionaire Obama supporter Ted Turner and by Goldman Sachs. Goldman Sachs is omnipresent. And 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. Republicans are no saints, either, but Democrats were running the congressional show during such crucial episodes as the implementation of the bailouts and the health-care debate — which were big investment opportunities for political insiders with access to market-moving information. Congress has effectively exempted itself from insider-trading rules, not that the SEC would have the guts to go after a Senator Schumer or a Speaker Pelosi for these exploits. And that — not campaign contributions, not lobbying — is the really stinky petri dish of festering corruption at the nexus of Washington and Wall Street. You want a case for limited government? That's it. And Wall Street is on the wrong side of the argument, which is one reason free-market conservatives should not romanticize the lords of finance. Say this for them, though: Gordon Gekko at least was an honest social Darwinist. He made a lot of money and declared that "greed is good." Michelle Obama (2007 household income: $4,238,165) made a whole lot of money and then lectured a bunch of blue-collar women in Zanesville, Ohio (median household income: $28,854) that they had a moral obligation to forgo high-paying jobs in "corporate America" (which, notice, is not exactly HQ'd in Zanesville, Ohio, poverty rate: 26.3 percent) in order to "work for the community." Like Gordon Gekko, she's a carnivorous competitor at the top of the socioeconomic food chain, but she's telling us to eat our veggies, like good little herbivores.
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. As Schweizer points out, until fairly recently the Blackstone Group, the world's largest private-equity manager, had spent only about $250,000 a year on lobbying, which to me sounds like one part-time K-Streeter and a lot of lunches. After a friendly encounter with Senator Schumer, the firm saw the scales fall from its eyes and began to spend millions of dollars a year on lobbying — and hired Senator Schumer's former staff counsel, along with dozens of other Democratic staffers, to do its lobbying. (Senate Republicans will get their chance, don't you worry, as soon as they're back in the majority.) You'd think that the Blackstone Group, along with the rest of Wall Street, would be happy with its investment. But the pinstripes gang is suffering from a collective case of buyers' remorse: Sure, the insurance guys got the keys handed to them with Obamacare, and the structured-finance guys still are sitting securely behind their fortifications of impenetrable complexity and staggering leverage, and the investment banks got to underwrite a lot of "Build America Bonds" and nonsensical stimulus financing. But they want more — that is their nature. And they're sizing up a cozy little investment in Mitt Romney, a fact that should give Republicans pause.
Blackstone's boss, Stephen Schwarzman, will hold a fundraiser for Romney at his Park Avenue apartment in December, and he's encouraging his fellow pirate captains to climb aboard the USS Willard. Romney is himself a Wall Street guy, hailing from a firm with the cartoonishly villainous name of Bain (say it out loud) Capital. Bain, charmingly, is not really backing its founding partner or his party, its donors thus far preferring to channel most of their political contributions to President Obama. But Bain, currently the No. 2 political donor bloc among moneymen, is a tiny minority among the major financial-sector political players in that it is currently leaning Democrat. The top dog — Goldman Sachs, as though you needed to be told — is backing Republicans by a wide margin at the moment. So is practically every other major Wall Street player: Donors associated with Bank of America, Paulson & Co., the American Bankers Association, New York Life, the National Association of Realtors, JPMorgan Chase, Morgan Stanley, Credit Suisse, UBS — all are going Republican. At this point in the cycle, only Citigroup's donors have joined Bain in staying Democratic — and, really, how could you blame them, given the sweet deal that Tim Geithner laid in their lap? Romney's ten biggest donor blocs include Goldman Sachs (his biggest — No. 1, as always), Credit Suisse, Morgan Stanley, Barclays, Bank of America, and JPMorgan Chase. Bain's thrown a little goodwill money his way, too.
So, what does Wall Street want?
Here's what Wall Street doesn't want: It doesn't want to hear from Sarah Palin or Michele Bachmann or even Newt Gingrich, or suffer any sort of tea-party populism. It wants you rubes to shut up about Jesus and please pay your mortgages. It doesn't want to hear from such traditional Republican constituencies as Christian conservatives, moral traditionalists, pro-lifers, or friends of the Second Amendment. It doesn't even want to hear much from the Chamber of Commerce crowd, because those guys are used-car dealers and grocery-store owners and for the most part strictly from hick, so far as Wall Street is concerned. Wall Street wants an administration and a Congress — and a country — that believes what is good for Wall Street is good for America, whether that is true or isn't. Wall Street doesn't want free markets — it wants friends, favors, and fealty.
Also, the princes of finance don't want to be hearing the name "Jon Corzine," king of the Wall Street Democrats, former senator from and governor of New Jersey, legendary former CEO of Goldman Sachs, echoing throughout the corridors of power too much in the near future. The too-big-to-fail banks want Corzine crucified, but they want him crucified quietly, because they are looking to wring a little cash and preferential treatment out of his richly deserved crucifixion. And that may be the real reason the Wall Street gang is giving Republicans a second look.
Take a little trip down Bad Memory Lane back to 2008 and the ignominious death of Lehman Bros. A particular Lehman maneuver, infamous in the financial world as "Repo 105," is worth taking a look at. (Warning: Very light and totally digestible financial gobbledygook ahead.) "Repo" is short for "repurchase agreement." A repurchase agreement is something that is used when a big institution that has a lot of assets, like an investment bank, needs some cash, as all such big institutions do from time to time, to run its daily operations while waiting for various deals to mature and unwind. Investment banks don't usually sit on a lot of cash, because cash just sits there. A repo works like this: I give you a whole bunch of securities and you give me a whole bunch of cash, on the condition that I agree to buy back those securities from you in the near future, along with a fee. You get a little profit and I get the liquid cash I need and, if I'm a gold-plated Wall Street name, like Lehman Bros. once was, you probably don't worry all that much about the securities I'm giving you to hold, since you expect me to be able to repay that short-term loan. If the Mister Magoos at Standard & Poor's or Moody's say it's Triple-A, that's good enough for you. Unless the day comes when you actually have to sell them because I can't pay you back. Repos are a really good and totally legitimate tool for raising short-term cash. But Lehman noticed something interesting about the way repos are regulated: If the ratio of the value of the securities lent out to the cash received is anywhere between 98 cents and 102 cents on the dollar, then it goes on the books as a loan. But if the ratio is, say, 105 cents on the dollar, then the deal is booked as a sale — even though the lender is getting his money back and the borrower is getting his securities back. If the deal is booked as a sale, then you can, if you can find a willing counterparty, get a whole bunch of bad assets off your books and a whole bunch of cash onto them, which makes your firm look like it's in a lot better shape than it is — bonus time! That is true even though there is a repurchase agreement in place, meaning that the deal is going to get reversed and unwound at some point.
You'd think that after the Lehman debacle, all that would have changed. In fact, you'd think that would be practically the first thing to be changed — not credit-card swipe fees or executive-compensation rules or any of the rest of it. But it wasn't. Corzine's firm, MF Global, used something called "repo to maturity" — basically Repo 105 with a facelift — to accomplish the same goal: making the books look better by hiding bad assets, in this case a bunch of losing investments in European government bonds. The bigger problem is that while MF Global was both acting as a broker for its customers and making its own bets, it failed to keep the customers' money segregated from its own, which is why some $600 million in customers' money went missing. Now there's a whole bunch of people wanting to get paid back and not enough money for everybody to get made whole, and the big Wall Street banks want to make sure that they're first in line, with the government rewriting the rules of bankruptcy to put them ahead of the local-yokel customers out in the sticks. If you don't think that the government can just arbitrarily rewrite the bankruptcy rules to suit its political preferences, revisit the General Motors bailout, when it did just that, shortchanging bondholders in favor of the union goons who act as Democratic footsoldiers and dues-collectors. "At the risk of oversimplifying it," one Wall Street insider explains, "imagine a bank went bankrupt. Then the regulators came in and cracked open all the customers' safe-deposit boxes, even though they knew for certain that none of the contents belonged to the bank. Then they tossed those assets into the pile for the creditors to pick through and told the box holders to get in line as well. That's what folks are saying is happening here. And in a situation like that, who wants a safe-deposit box?"
So there you have it: 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. If anything, the fact that Romney is having the least luck with the firm that knows him best speaks better of him than does the enthusiasm he apparently inspires in Goldman Sachs et al.
Either way, the last thing Wall Street wants is for the Corzine scandal to launch a new round of frenzied outrage out there on the fruited plains where dwell people who don't know an IPO from a CDS, and who might suspect that something here is not entirely on the up-and-up. They're hoping that conservatives can be buffaloed with a bit of cheap free-market rhetoric into not noticing that something is excruciatingly amiss here. They are the repo men, headpiece filled with subprime-mortgage derivatives, and they are looking to repossess the Republican party they abandoned in 2008 (see "Losing Gordon Gekko," National Review, March 9, 2009). 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.
— Kevin D. Williamson is a deputy managing editor of National Review. |
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