Posts filed under “Hedge Funds”
My recent tirade against bailing out the hedge fund half of AIG makes much more sense when you consider who is actually getting all of the taxpayer largesse: Counter-parties of AIG, especially one Goldman Sachs. Some estimates have been in excess of $25 billion to GS.
As AIG ran into the arms of the Fed for the first of 4 bailouts, Bloomberg reported:
“As much as $37 billion from federal bailout loans to American International Group Inc. has gone to investment banks including Goldman Sachs Group Inc., the firm Treasury Secretary Henry Paulson used to run.
Without the government money, Goldman, Merrill Lynch & Co., Morgan Stanley, Deutsche Bank AG and other firms could have become some of the biggest creditors in a bankruptcy filing by AIG, the world’s largest insurer, because of its billions in losses on subprime bonds and corporate debt. The firms received cash as AIG borrowed from a Federal Reserve credit line endorsed by Paulson, Goldman’s former chief executive. The insurer had borrowed $44.6 billion from the credit line as of Sept. 25, the Federal Reserve reported that day.”
Other rumored recipients of taxpayer dole include Morgan Stanley, Merrill Lynch, and Deutsche Bank.
Why rumored? Because of the infuriating refusal to turn over any information as to who these counter-parties are by the Fed and Treasury:
“The Fed refused yesterday to disclose the names of the borrowers and the loans, alleging that it would cast “a stigma” on recipients of more than $1.9 trillion of emergency credit from U.S. taxpayers and the assets the central bank is accepting as collateral.
Fed secrecy was the focus of a Senate Banking Committee hearing today in which the panel’s top two members said the central bank’s reluctance to identify companies benefiting from the American International Group bailout risks undermining public confidence in the government.
“If the American taxpayer’s money is at stake, and it is, big time, I believe the American taxpayers, the people, and this committee, we need to know who benefited, where this money went,” said Senator Richard Shelby of Alabama, the committee’s top Republican. “There is no transparency.” (emphasis added)
Who is being made whole at the taxpayer expense? The taxpayer isn’t merely getting screwed here, we are taking the royal shaft up the patootie in previously unimaginable ways.
Nouriel Roubini explains the refusal to allow the public to learn how their monies are being disbursed:
“In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on “bank nationalization” is borderline surreal, with the U.S. government having already committed–between guarantees, investment, recapitalization and liquidity provision–about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).
Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
. . . AIG, which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
News and banks analysts’ reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout.”
Could Goldman Sachs dig in any deeper at Treasury?
Yes they can. Over at naked capitalism, Yves has the story of yet another highly conflicted Treasury nominee, Sullivan & Cromwell chairman H. Rodgin Cohen:
Sullivan & Cromwell has long been the outside counsel for Goldman, and outside counsel is a vastly more important role for a securities firm than just about any other type of business. In the stone ages, when I worked for a few years at Goldman, certain S&C partners had so much clout at Goldman that they could get a mid-level banker fired. And even then, “Rodg”, head of the banking practice, was a very influential figure at Goldman.
All for the greater glory of Goldman . . .
Solvent Insurer / Insolvent Insurer (March 4, 2009)
Fed Refuses to Release Bank Data, Insists on Secrecy
Mark Pittman and Craig Torres
Bloomberg, March 5 2009
The U.S. Financial System Is Effectively Insolvent
Forbes, 03.05.09, 12:01 AM EST
Goldman, Merrill Collect Billions After Fed’s AIG Bailout Loans
Bloomberg, Sept. 29 2008
Forget the good bank/bad bank, I have an even bigger beef with this INSANE absurdity: Why are the taxpayers making good on hedge fund trades gone bad? I cannot figure that one out. When AIG first faltered, there were two companies jammed under one roof. One was a highly regulated, state supervised, life insurance company….Read More
We add another chapter in the ongoing debate between Barron’s, the weekly paper that is sister to the WSJ, and James Cramer, the former hedge fund manager now turned pundit/CNBC star/game show host. The back and forth between CNBC and Barron’s amounts to an absurd debate over what Cramer’s stock picking record on the show…Read More
Part of the story about the Madoff Ponzi scheme was that Madoff created this elusive, difficult-to-become-a-member club. The exclusivity and rejections made membership all the more desirable to greedy investors. That actually is turning out to be somewhat of a myth. There is much more to his canny trick of rejecting investors than initially meets…Read More
The Quote of the Day comes from David Swensen, Yale University’s endowment’s chief investment officer, in Tuesday’s WSJ: Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can’t make an intelligent decision about picking managers, how can he make an intelligent decision about picking…Read More
Paul Brodsky & Lee Quaintance run QB Partners, a private macro-oriented investment fund based in New York.
Outlook: As we look at the macroeconomic landscape at the onset of 2009 we see obvious negatives and not-so obvious positives for nominal asset prices. The negatives include:
• Almost unanimous deflationary expectations
• Tattered household balance sheets
• Almost no corporate growth visibility
• A higher cost of debt funding for most businesses
• An obliterated mortgage banking industry
• General pessimism among consumers and homeowners
• Heightened global military tensions, as energy exporting nations with nascent democracies struggle to maintain control while their economies contract
The lesser-recognized positives for nominal asset prices include:
• Trillions of new US dollars sitting latent in foreign reserve accounts that could be used to purchase assets at distressed prices
• Extraordinary amounts of inflation being generated by the Fed (and much more to come) – trillions of new dollars sitting latent on bank balance sheets waiting for the multiplier effect to turn them into up to 10 times that amount, leading to higher nominal prices for commodities, goods, services and financial assets
• US and European governments and central banks willing to act as “bad banks” so that their private sectors can maintain and/or enhance the nominal paper value of their assets
• The recent crash of commodity input costs and downward wage pressures, which should temporarily help businesses produce positive earnings at lower revenue levels
• US fiscal policymakers actively subsidizing home affordability and consumer recuperation
• A likely return to US–led global realpolitik, in which developed countries attempt to engage current and potential flashpoints in the developing world with diplomatic solutions.
If past is prologue, there are strong reasons to fade the notion that G7 economies are headed for a 1930s-type deflationary depression. Chief among them is that all economies of the world (via their respective central banks) issue fiat currencies, which means they can simply print money (inflate) to counteract organic deflationary pressures. This was not the case in the 1930s and it is precisely what global policymakers have begun to do.
As we look across the global investment landscape we see:
• Almost 0% “risk-free” global nominal rates of return (and therefore, substantially negative real rates), implying a dearth of risk capital at work in the markets
• Historically wide yield spreads across most tertiary bond markets (widest since the 1930s in many cases), implying; 1) a dearth of risk capital, 2) internal rates of return closer to risk-adjusted, inflation-adjusted equilibria, or 3) both
• Recently crashed global commodity prices, implying; 1) a dearth of risk capital relative to global demand, 2) global equilibrium pricing that better reflects sustainable global demand
• Generally weak US equity prices, implying; 1) a dearth of US dollar-denominated risk capital, 2) more sustainable corporate enterprise values and capital structures
• Weak US and European real estate prices, implying that previous high watermark values
We see both a reasonably-argued case for general pessimism – the continuance of declining fundamentals, and a reasonably-argued case for optimism – quickly improving commodity and equity markets (in nominal terms) that anticipate the end of poor fundamentals. The pessimistic case is obvious to all and markets either greatly or fully reflect that case. The optimistic case (in nominal terms) is less obvious, proven by generally declining prices of risk assets.