Three big stories this week say a lot about the sorry state of American capitalism. Each development is deeply troubling but the revelations by some enterprising journalists and one Federal Judge's decision do offer some hope that rampant cronyism will no longer be tolerated.
I encourage all of you to click the links below and get the full stories. Here's a quick recap:
Sunshine Is Best Disinfectant: After a multi-year effort to obtain documents via the Freedom of Information Act, Bloomberg revealed details of the Fed's extraordinary lending to banks during the heart of the financial crisis in 2008-09. All told, the Fed lent banks an astonishing $7.7 trillion as of March 2009, including $1.2 trillion on just one day: Dec. 5, 2008.
"While Fed officials say that almost all of the loans were repaid and there have been no losses, details suggest taxpayers paid a price beyond dollars as the secret funding helped preserve a broken status quo and enabled the biggest banks to grow even bigger," Bloomberg reports. (Amen to that and kudos to Bloomberg for fighting efforts to keep the Fed's lending a secret.)
Paulson Tips Off Hedge Funds: Bloomberg scored another reporting coup this week with its story of a meeting between then-Treasury Secretary Hank Paulson and a group of hedge fund managers in July 2008. Contrary to his public comments, Paulson reportedly told the money managers — including several alumni of his former firm Goldman Sachs — that the government was considering putting Fannie Mae and Freddie Mac into conservatorship.
"Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock," Bloomberg reports, citing one money manager who attended the meeting. "The managers attending the meeting were thus given a choice opportunity to trade on that information," according to Bloomberg. (It may not have technically been insider information but sure smells like it).
Judge Pushes Back: U.S. District Judge Jed Rakoff denied Citigroup's $285 million settlement with the SEC saying (among other things) the settlement was "neither reasonable, nor fair, nor adequate, nor in the public interest." In essence, the judge said the SEC's practice of settling these cases without making firms admit or deny wrongdoing was a miscarriage of justice and violated the principle of separation of powers (executive and judiciary, in this case) on which the republic was founded. The judge also said the public has a right to know about any case that "touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives." (Again...Amen!)
In the accompanying video, I discuss the above stories with Barry Ritholtz, CEO of Fusion IQ and author of The Big Picture Blog and Bailout Nation. (Full disclosure: I was paid for my efforts as contributing editor of Bailout Nation.)
Collectively, the three stories show "we got big problems," Ritholtz says. "The Paulson case [makes me wonder]: What is going on here? Where is the sense of public service, ethics [and] duty? As a citizen you've got to scratch your head and say 'what the hell is the Treasury Secretary doing tipping off hedge funds?'"
As with many others, Ritholtz believes there should be further investigation of Paulson's actions and, if warranted, criminal — or at least civil - charges levied.
More broadly, the money manager and blogger says the lack of punishment for any of the myriad crimes committed in the years prior to the financial crisis (and since) is a national disgrace.
"It shouldn't be you can just rob and rape and pillage and say 'oh, I'm sorry' and write a check," Ritholtz quips. "Throw some of these guys into prison and you'll have less of this stuff." (And a triple...Amen!)
Which brings us back to Judge Rakoff's decision to block the SEC-Citi settlement. While a far cry from a decision of guilt in a criminal case, it's a small step in the direction of justice.
"This is absolutely progress," Rithotlz says. "It's not binding on any other judge…but this is going to be a very influential decision."
For the good of the country, let's hope so.
Editors Note: Yahoo! Finance to host a live twitter chat after the close of the market to discuss today's #mktmeltup with the host of The Daily Ticker @aarontask and our other colleagues @mattnesto @jeffmacke @grossdm. Join the discussion!
- Hank Paulson