Roubini, Chanos Use Hollywood To White-Wash Hedge Funds

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Aha! Searching for more confirmation of my theory that there’s an ongoing effort to white-wash the role played by hedge-funds/speculators in destabilizing the economy, I came across this intriguing passage at wiki, about the upcoming Oliver Stone movie, Wall Street: Money Never Sleeps, a reprise of his 1987 movie Wall Street:

“The New York Times reported that, as part of research for the film, Douglas and Stone had a dinner meeting with Samuel D. Waksal, the founder of the biopharmaceutical company ImClone Systems, who spent five years in federal prison for securities fraud.[42] They also stated that LaBeouf, along with Stone, discussed the financial collapse with multiple hedge fund managers.[42] Stone stated that, earlier in the summer he had taken LaBeouf to a cocktail party, organized by Nouriel Roubini, a New York University economics professor and chairman of a consulting firm who earned acclaim for predicting the financial crisis early. At the party Stone and LaBeouf discussed the financial collapse with Roubini and also
discussed hedge fund managers, who are clients of Roubini’s firm. Roubini stated that: “In this financial crisis it was the traditional banks and the investment banks that had a larger role in doing stupid and silly things than the hedge funds.”[42] Stone also stated that he had conversations with Jim Chanos, a “prominent” hedge fund manager who had urged him to focus less on hedge funds and more on the banking system, Chanos stated: “There was a much more important story, a bigger story, in what happened with the system.”[4]”

Wouldn’t you know it…

Of course, here at the MBP we don’t have a problem with the thesis that the investment banks behaved stupidly…and badly. We just have a problem with the accompanying non-sequitor – that the hedge-funds behaved any smarter or better.

A few made out like..er…bandits, true. But, it’s our theory, and we’re sticking to it,  that many of the ones who did – especially the ones who’re getting a boost in the media – were part of the “inner circle” of government-connected banks that essentially ran this whole racket.

Chanos seems to have been part of that clique.

And Paulson too.

It’s not government versus banks. That’s the silly black-and-white debate created for mass consumption.

It’s more like some parts of the government +some banks + some speculators versus everyone else.

With the SEC (government), “captured” by some hedge-funds and banks, any regulatory change (whether it’s more reg. or less reg.) ends up serving the same set of masters. It’s heads-I -win- tails- you- lose for them….

Unless we can start seeing this for what it is and bypass ideological rigidity, we will never be able to prevent the system being gamed.

Or, to put it in terms of those formulae beloved of financial “masterminds” who think we rubes can’t see through this baloney:

It’s not G v. B.

It’s

(s)G+(s)B +(s)S  v. EE, where ‘s’ is always a positive integer.

(Chuckle). I think I have a future as a “quant.”

Of course, all this is only the short-term fix. The long-term fix is the Federal Reserve.

But while we’re working on the illness, there’s no reason we can’t treat some of the symptoms correctly, as well.

Equal People Are Not Free

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Larry Reed:

“Equal people are not free, the second half of my first principle, really gets down to brass tacks. Show me a people anywhere on the planet who are indeed equal economically, and I’ll show you a very unfree people. Why?

The only way in which you could have even the remotest chance of equalizing income and wealth across society is to put a gun to everyone’s head. You would literally have to employ force to make people equal. You would have to give orders, backed up by the guillotine, the hangman’s noose, the bullet or the electric chair. Orders that would go like this: Don’t excel. Don’t work harder or smarter than the next guy. Don’t save more wisely than anyone else. Don’t be there first with a new product. Don’t provide a good or service that people might want more than anything your competitor is offering.

Believe me, you wouldn’t want a society where these were the orders. Cambodia under the communist Khmer Rouge in the late 1970s came close to it, and the result was that upwards of 2 million out of 8 million people died in less than four years. Except for the elite at the top who wielded power, the people of that sad land who survived that period lived at something not much above the Stone Age.”

My Comment:

The Reed quote shouldn’t be misconstrued.

Reed isn’t advocating violence against the government...he is making the commonplace observation that, ultimately, government authority is backed up by force…and he then gives examples of that force…from the guillotine (revolutionary government of France)..to the bullet (modern standing army, police officers etc.).

Now, is every one who resists paying tax, for example, going to be eliminated? Obviously not. Much more likely, they’re in for a long, tedious court battle, endless letters, petitions and hearings…culminating in a fine/penalty, confiscation of their property, possibly a jail sentence.

But let’s not get sentimental. Should you resist court orders and flee, you can be shot. Should you resist a warrant or arrest physically, it’s almost a certainty you will be shot. This isn’t the violence of the citizen. This is the violence behind Leviathan.

Pointing it out doesn’t make me an advocate of violence. It makes me realistic.

It’s why I don’t advocate physical resistance. It would be very stupid today, against the kind of arsenal the federal government has at its command. Nor do I advocate tax evasion.

Legal tax avoidance I heartily recommend, as does the IRS itself. However, I don’t see why I should regard anyone at the receiving end of state justice to be necessarily guilty of some great moral sin.

There’s legitimate authority (the cop who comes to a victim’s defense) and there’s corrupt authority (tax laws or criminal penalties applied differentially to the powerful and the powerless).They are two different things.

There are crimes that involve injustice to another human being (murder, fraud) and there are legal infractions that are based simply on dissidence from the prevailing views on economic freedom and justice (many so-called tax “crimes”). Those are two different things…

Illegal Immigrant Workers

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David Kramer, at Lew Rockwell blog:

“You know what an “illegal” immigrant worker is, don’t you? It’s someone who voluntary decides to move from one piece of land on the planet Earth to another piece of piece of land on the planet Earth because he or she knows of a person at that second piece of land on the planet Earth who wants to voluntarily exchange with him or her a medium of exchange for his or her labor services—but wasn’t given permission to by a third party with a gun (i.e., the government).”

Portugal and Spain In Trouble Too…

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Will Frankfurt (the European Central Bank) come to the rescue of Greece, or Spain, or Portugal? Maybe in the end, but not now, reports Ambrose Evans-Pritchard in The Telegraph:

“Mr Callow of Barclays said EU leaders will come to the rescue in the end, but Germany has yet to blink in this game of “brinkmanship”. The core issue is that EMU’s credit bubble has left southern Europe with huge foreign liabilities: Spain at 91pc of GDP (€950bn); Portugal 108pc (€177bn). This compares with 87pc for Greece (€208bn). By this gauge, Iberian imbalances are worse than those of Greece, and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.

Jean-Claude Trichet, head of the European Central Bank, gave no hint yesterday that Frankfurt will bend to help these countries, either through loans or a more subtle form of bail-out through looser monetary policy or lax rules on collateral. The ultra-hawkish ECB has instead let the M3 money supply contract over recent months.”

Mr Trichet said euro members drew down their benefits in advance — “ex ante” — when they joined EMU and enjoyed “very easy financing” for their current account deficits. They cannot expect “ex post” help if they get into trouble later. These are the rules of the club.”

Europe Thumbs Its Nose At G-Sax, Banksters

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The Guardian:

“For the first time in five years, no big US investment bank appears among the top nine sovereign bond bookrunners in Europe, according to Dealogic data compiled for the Guardian. Only Morgan Stanley ranks at number 10.

Goldman Sachs doesn’t make the table. Goldman made it to number five last year and in 2006, and number eight in 2007, the data shows. JP Morgan was in the top ten last year and in 2007 and 2006 but doesn’t appear this year.

“Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit,” said Arlene McCarthy, vice chair of the European parliament’s economic and monetary affairs committee. “It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments.”

Rogers Tells Greeks To Go Bust

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Rogers gets it right, as usual. From the Wall Street Pit:

“Commodities legend Jim Rogers talks in this Bloomberg interview about Greece’s fiscal problems which needless to say are hardly a new development. According to Rogers, a bankruptcy for Greece would benefit the euro.

“They should let Greece go bankrupt,” said Rogers. “It would be good for the euro. It would be good for Greece. It would be good for everybody. If Greece went bankrupt then everybody would say, boy, the euro is serious, is going to be a sound currency and the euro would go straight up. Is not gonna happen that way, but that’s what should happen.”

Exactly right.  Currencies go under because the governments behind them behave imprudently, as Cato’s Dan Mitchell points out.

Robert Wenzel, who has been right on top of the Greek story, writes:

“In fact, a Greek bankruptcy would be the best thing for the euro. It would show that the European monetary union is less subject to political pressures than individual sovereign states, for most assuredly the PIIGS, if they still managed their own moneys right now, would certainly be printing away right now.”

Had the US let the financial industry go under and refused to bail them out, the dollar would immediately have shot up. The decline of the dollar reflects the market’s loss of faith in the US and its reserve currency.

When governments act like genuine market participants – i.e. take their medicine –  their currencies strengthen. Greece, acting on its own, showing independence of European bureaucratic constraints or bail-outs, would have to be a positive for the euro, because it indicates an end to the bottomless pit of financial irresponsibility..

Rogers is also right that speculation isn’t the prime mover of these events.

In the Greek case, I understand the notional value of the CDS’s (credit default swaps) involved are not big enough to impact the debt. However, for whatever reason, Rogers avoids talking about the larger issue of fraud in the use of currency swaps, fraud in the original contracts, and fraud in short-attacks, which are quite a different matter from market participants voicing their “opinion.” (the notional value of CDS in relation to debt is apparently not large in this case, though it’s important in other cases, like AIG)

Rogers, like the rest of the financial industry, is thus talking the professional ideology of the financial industry, and you can see all the others – from Mish Shedlock to Zerohedge to Chanos – lining up to defend that ideology.

It’s unfortunate, but it’s also something I feared…that some of the “citizen journalist” sites would corral popular outrage over Goldman Sachs and its allied hedge funds….and then steer that outrage in ways that protect the industry. And that they would finally end in support of the big players, while defusing the original anger into essentially useless diatribes. Meanwhile, those engaged in any action that might actually weaken the powers-that-be would be demonized and marginalized.

That’s seems to be what’s happened. Which is why the  call for a ban of CDS contracts strikes me as not (necessarily) terribly useful.

My point is that that while it’s true that CDS’s have been gamed, a ban on them distracts from all the other issues of fraud. CDS’s are sold as if they’re insurance….and they’re used to gamble on price-movements. A player intent on fraud doesn’t need to rely on CDS contracts alone to commit a fraud. Ban CDS contracts, and he will just use another technique. Again, the problem is not the CDS contracts themselves, but the fraud involving them.

To recognize this, you just need to go back a bit. If you rewind twenty-five years, to Milken’s junk-bond innovations, there too what ought to have been an instrument of financing became an instrument of gambling.

Read Michael Lewis’ Liar’s Poker for a brilliant account from a former insider. Yet, today, it is Lewis, with Einhorn, who’s arguing to ban CDS’s.  You’d think Lewis of all people would know it isn’t the gun that’s the problem, it’s the people who use guns to commit crimes. (Felix Salmon has a good criticism of Lewis on CDS’s at Portfolio.com).

Indeed, Lewis himself makes that point in his book:

Quote:

“Junk bonds behave much more like equity, in shares, than old-fashioned corporate bonds…… Therein lies one of the surprisingly well-kept secrets  of Milken’s market. Drexel’s research department , because of its close relationships with companies, was privy to raw inside corporate data that somehow never found its way to Salomon Brothers. **When Milken trades junk bonds, he has inside information. Now it is quite illegal to trade in stocks on inside information, as former Drexel client Ivan Boesky has ably demonstrated. But there is no such law regarding bonds*** (My emphasis)

……Not surprisingly, the  line between debt and equity, so sharply drawn in the mind of a Salomon bond trader (Equities in Dallas!) becomes blurred in the mind of a Drexel bond trader…” (p. 217)

Lila: Eventually,  the flood of money attracted to junk bonds had to find new places to go. From that, sprang the leveraged buy-outs (LBO’s), the corporate raids of the 1980s.

Quote:

“The new  and exciting job of invading corporate boardrooms appealed mainly to men  of modest experience  in business and a great deal of interest in becoming rich. Milken funded the dreams of every corporate raider of note: Ronald Perelman, Boone Pickens, Carl Icahn, Irwin Jacobs, Sir James Goldsmith, Nelson Peltz, Samuel Heyman, Saul Steinberg, and Asher Edelman….” (P. 220)

Lila: Transpose an octave….fast forward twenty-five years…and you could be describing CDS’s…. And just as the problem then was not the junk bonds themselves, but the use made of them (to gamble and raid companies), so too with CDSs.

Of course, the raiders saw themselves as performing a valuable service in cutting out fat from management…and in many cases, that was so. But, killing someone to cure him isn’t usually regarded as the most brilliant of remedies. Why should it be different in the financial industry?

Again, the problem is the actors and the activity, not the instrument. We need to differentiate between them. We also need to differentiate clearly between short-selling (legitimate) and naked short-selling (fraudulent); between speculation (helpful to the markets proportionate to economic activity), versus casino capitalism (extremely game-changing and dangerous where it is now); between investment (socially productive) and gambling (socially destructive); between legal and fraudulent activity.

Now they’re all mashed up and argued fungibly.

People blame either the government..or the speculators, black and white, forgetting that in many cases the speculators ARE the governments…in the sense that they’re in collusion with some of the banks that have their functionaries creating government policies, and have their advocates in the media, influencing public opinion as they wish.

More on this later….

Meanwhile, sift through the opinion-making carefully…looking for a confusion of all the terms I’ve listed. Wherever you find that confusion, be wary. Sometimes the confusion is just honest error. The rest of the time it seems to show an intent to mislead.

Climate Scientists: Academic Barrow Boys

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Climate scientists are fighting back, reports The Washington Times.

Paul R. Ehrlich, a Stanford University researcher says:

“Most of our colleagues don’t seem to grasp that we’re not in a gentlepersons’ debate, we’re in a street fight against well-funded, merciless enemies who play by entirely different rules.”

Of course, climate skeptics (or rather, critics of anthropogenic global warming, AGW) would argue that it’s the climatistas who’ve brought Barrow boy (street-wise) tactics into what ought to be a nice, genteel gathering of Harrow alumni.

Popular British TV writer and eminent free-speech QC, John Mortimer, author of the serial, “Rumpole of the Bailey,” saw through this convenient sentimentality about “gentlepersons” a bit more keen-sightedly than most.

In one episode of the serial, Rumpole, Mortimer’s aging, scruffy, Shakespeare-quoting Old Bailey barrister, defends Nigel Timson, a youthful member of a clan with an inelegant and chequered past, a true Barrow boy, who’s accused of insider- trading at the silk-stocking firm where he’s a broker.

It doesn’t help things that Nigel is living with the daughter of the head of the firm, who isn’t keen on a Barrow boy for a son-in-law. The plot-twist is that the Barrow boy, despite his spotty family history, is actually innocent. I won’t tell you the rest, but the larger point is that clever crooks know how to play to their advantage on public preconceptions about class behavior.

The same holds true for university intellectuals. They also usually enjoy the general presumption that they hold to higher standards of behavior and ethics than the ‘baser sort’ outside the ivory towers.  What the climate fracas shows is that that presumption might be just as outdated as the presumption about the virtues of Harrow boys that Rumpole overturns…

Kurt Tucholsky On Love Of Country

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“We have just written “no” on 225 pages, “no” out of sympathy and “no” out of love, “no” out of hate and “no” out of passion – and now we would like to say “yes” for once. “Yes” – to the countryside and the country of  Germany America. The country where we were born and whose language we speak. (…)

And now I would like to tell you something: it is not true that all those who call themselves ‘national’ and who are nothing but gentrified militants have taken out a lease on this country and its language just for them. Germany America is not just a government representative in his tailcoat, nor is it a headmaster, nor is it the ladies and gentlemen of the steel helmets. We are here too. (…)

Germany America is a divided country. We are one part of it. And whatever the situation, we quietly love our country – unshakably, without a flag, or a street organ, no sentimentality and no drawn sword.”

(Kurt Tucholsky, Heimat, in Deutschland, Deutschland über alles, Berlin 1929, p. 226)