Tuesday, April 20, 2010

Obama: Looking Tough, Staying Cozy

On Friday the Securities and Exchange Commission filed a civil suit against the investment bank Goldman Sachs for creating and selling a financial instrument secretly designed to capitalize on the collapse of the housing market. According to the SEC complaint, prominent hedge fund manager John Paulson paid Goldman Sachs to structure the instrument in question, known as Abacus 2007-AC1, to fail. Mr. Paulson subsequently earned an estimated $3.7 billion in 2007 by correctly betting on the failure of Abacus and the collapse of the housing market.

The Abacus deal may remind some of you of the Magnetar trade discussed in the April 14 posting of this blog in that they are, essentially, the same: hedge fund managers composed of equal parts savvy and sleaze with a penchant for donating to Democratic politicians shorted the market for massive personal gain and widespread loss to run-of-the-mill investors.

Yes, you read correctly: Just like Magnetar CEO Alec Litowitz who bankrolled White House Chief of Staff Rahm Emanuel, John Paulson is a heavy Democratic donor. Mr. Paulson generously shared tens of thousands of dollars of his housing market collapse money with seven cash-needy Democratic United States Senators: Minority Leader Harry Reid ($2,300), Banking, Housing, and Urban Affairs Committee Chairman Christopher Dodd ($4,800), Finance Committee Chair Max Baucus ($4,600), Senator Carl Levin ($4,600), Senator Dick Durbin ($4,600), Senator Arlen Specter ($4,600), and Senator Frank Lautenberg ($4,600). And for good measure he also gave a walloping $30,400 of housing collapse money to the Democratic Senatorial Campaign Committee.

Given the Democrats’ tired refrain that Republicans are the “party of Wall Street” one might expect to be surprised to find that so many hedge fund moguls are Democratic donors. The fact of the matter is that the Democrats receive 62% of the securities and investment industry’s campaign contributions to the Republicans’ 37%. In the presidential election Barack Obama raised $14,891,735 from the securities and investment industry compared to John McCain’s $8,698,635. The Democrats are shrieking that the Republicans are too well fed by Wall Street, but compared to the Democrats the Republicans are eating off the dollar menu.

Goldman Sachs, the bank charged with defrauding investors over the Abacus deal and the Democrats’ No. 1 business donor in the 2008 election, gave seventy-five percent of its political donations to the Democrats. That’s 3-1 in favor of the Democrats! What overwhelming ratio do the Democrats need to reach before they will freely admit to the plainly obvious fact that they are betrothed to Wall Street?

Oh how their hearts must ache that their love can never see the light of day! The Democrats and their Wall Street backers must keep their love closeted, for President Obama has been losing his grasp on the false narrative that he and his party are working hard to protect the ordinary Americans injured by the economic meltdown.

The Democrats will use the SEC complaint against Goldman Sachs as a springboard for them to “get tough” (read as “look tough”) on Wall Street. What’s coming is a new era of derivatives regulation. This should happen. Derivatives, heretofore widely unregulated, played a critical role in creating the global financial crisis. It’s asinine that with bipartisan support, a supermajority, and the years-old knowledge that derivatives were a major cause of the financial train wreck that the Democrats have waited this long to act—but hey, they haven’t wanted to bite the hand that feeds!

The mainstream media will be unable to resist the desire to credit President Obama and his Democrats for getting “tough” by dragging the derivatives market into the daylight of public trading. He’ll surely have a grand signing ceremony, senators will give big speeches, and they’ll posture as though they’ve ended Wall Street shenanigans forever.

But this will all be done with a wink and a nod to Wall Street. Because both the Democrats and Wall Street know what’s coming: grand new opportunities for Wall Street elites to win big off of the little guys and a rushing new river of campaign donations for the Democrats.

Wall Street will be upset about the loss of their black box derivatives playground, to be sure. However, any despondence they feel will be tapered by an exhilarating new financial boon on their horizon—the coming of cap-and-trade! (Barack Obama is far too skillful of a politician to slap one of his biggest donors in the face without apologizing profusely by offering up a deeply valuable gift.)

Under a cap-and-trade system, the government issues permits which grant companies the right to emit a certain amount of greenhouse gases. Companies that emit more than permitted then must either buy allowances from other companies that have emitted less than their granted limit or purchase carbon offsets, investments in a project that cuts greenhouse gas emissions someplace else (such as a developing country).

As one can infer from the “trade” part of cap-and-trade, there would be a lot of allowances changing hands. And guess where all that allowance trading would be going down. That’s right: Wall Street.

The passage of a climate change bill such as the one soon to be unveiled in the U.S. Senate, which is said to retain the cap-and-trade structure of a bill that cleared the House of Representatives last June, would create a $2 trillion commodities market—“the largest commodity market ever” according to the U.S. Commodity Futures Trading Commission.

Before its demise Enron executives salivated that cap-and-trade “would do more to promote Enron's business than almost any other regulatory initiative outside of restructuring the energy and natural gas industries in Europe and the United States.” Wall Street bankers also know how much the Obama-approved policy would enrich their bottom line. That’s why they have been employing over one hundred climate change lobbyists to influence their friends in government to create a cap-and-trade system.

Cap-and-trade is a win-win for Obama and Wall Street, but it’ll be a major loss for you and me. The carbon allowances businesses would be required to purchase are nothing more than a tax by another name and that tax will be passed on to us as consumers. Furthermore, the offset provisions encourage businesses to move their operations—and jobs—overseas to countries with laxer emission standards.

So Wall Street gets a $2 trillion market, the Democrats get rewarded by Wall Street campaign donations, and we get increased costs and job destruction. When Barack Obama said he was going to “spread the wealth around” I didn’t realize he meant like that!

This November, let’s cap the Democrats’ political careers and trade them for legislators who will be on our side—not their banker’s.