Obama’s Not-So-Hot Date With Wall Street
SEC Keeps Ratings Game Rigged
One day in late October, Jim Messina, Obama’s campaign manager, slipped into the Regency Hotel in New York and walked up to a second-floor meeting room reserved by his aides. More than 20 of Obama’s top donors and fund-raisers, many of them from the financial industry, sat in leather chairs around a granite conference table.The Opportunity Society
One of the guests raised his hand; he knew how to solve the problem. The president had won plaudits for his speech on race during the last campaign, the guest noted. It was a soaring address that acknowledged white resentment and urged national unity. What if Obama gave a similarly healing speech about class and inequality? What if he urged an end to attacks on the rich? Around the table, some people shook their heads in disbelief.
“Most people in the financial world,” a top Obama donor later told me, “do not understand how most of America feels about them.”
Today's New York Times has a story about the private equity firm Tagg and the chief fundraiser from his dad's 2008 presidential run started after that campaign ended, called Solamere Capital. They didn't do anything illegal or unethical, so it isn't an exposé of wrongdoing or a potential problem for the current Romney campaign, just a somewhat interesting tale about how "that familiar path from politics to profit" works. But here's the portion that jumps out. Though neither of the two original founders had any experience in private equity, using their contacts among people who had donated to the Romney campaign they quickly found investors who gave them $244 million to play with....The Purpose of Spectacular Wealth, According to a Spectacularly Wealthy Guy
Does Tagg Romney actually believe that his dad had nothing to do with his successful entry into the private equity game, and the millions he has made and will continue to make are the result only of his own merit? That his life is radically different from those of the millions of people struggling to get by only because they don't work as hard as he does, or have his gumption and entrepreneurial spirit? Maybe he does. That may strike you and me as utterly insane, but it wouldn't surprise me a bit.
I recently met Edward Conard on 57th Street and Madison Avenue, just outside his office at Bain Capital, the private-equity firm he helped build into a multibillion-dollar business by buying, fixing up and selling off companies at a profit. Conard, who retired a few years ago at 51, is not merely a member of the 1 percent. He’s a member of the 0.1 percent. His wealth is most likely in the hundreds of millions; he lives in an Upper East Side town house just off Fifth Avenue; and he is one of the largest donors to his old boss and friend, Mitt Romney.N.B.: Reread those last two paragraphs together. Go ahead. I'll wait.
Conard understands that many believe that the U.S. economy currently serves the rich at the expense of everyone else. He contends that this is largely because most Americans don’t know how the economy really works — that the superrich spend only a small portion of their wealth on personal comforts; most of their money is invested in productive businesses that make life better for everyone.
Conard concludes that for every dollar an investor gets, the public reaps up to $20 in value. This is crucial to his argument: he thinks it proves that we should all appreciate the vast wealth of others more, because we’re benefiting, proportionally, from it.
What about investment banks, with their complicated financial derivatives and overleveraged balance sheets? Conard argues that they make the economy more efficient, too. The financial crisis, he writes, was not the result of corrupt bankers selling dodgy financial products. It was a simple, old-fashioned run on the banks, which, he says, were just doing their job.
Conard argues in retrospect that it was these withdrawals that led to the crisis — not, as so many others have argued, an orgy of irresponsible lending. He points to the fact that, according to the Financial Crisis Inquiry Commission, banks lost $320 billion through mortgage-backed securities, but withdrawals disproportionately amounted to five times that. This stance, which largely absolves the banks, is not shared by many analysts. Regardless, Conard told me: “The banks did what we wanted them to do. They put short-term money back into the economy. What they didn’t expect is that depositors would withdraw their money, because they hadn’t withdrawn their money en masse since 1929.”
Conard concedes that the banks made some mistakes, but the important thing now, he says, is to provide them even stronger government support. He advocates creating a new government program that guarantees to bail out the banks if they ever face another run. ...
A central problem with the U.S. economy, he told me, is finding a way to get more people to look for solutions despite these terrible odds of success. Conard’s solution is simple. Society benefits if the successful risk takers get a lot of money. ... He said the only way to persuade these “art-history majors” to join the fiercely competitive economic mechanism is to tempt them with extraordinary payoffs. ... “I think it’s simple economics,” he said. “If the payoff for risk-taking is better, people will take more risks.”
SEC Keeps Ratings Game Rigged
The Securities and Exchange Commission seems to think that it has done a much better job of investigating financial crisis wrongdoing than the Justice Department. And it's true.
But it's like being proud that you're the "Dumb" of "Dumb and Dumber."
The agency brought a civil case against a tiny, iconoclastic ratings agency called Egan-Jones, run by the outspoken Sean Egan, accusing it of, well, essentially filling out forms wrong.
Before the S.E.C. charges, Egan-Jones was best known for two things: having made some bold calls about shaky credit prospects and having a business model that was different than that of the big boys — Moody's Investors Service, Standard & Poor's and Fitch. Mr. Egan's outfit gets paid by the users of his ratings; the oligopoly gets paid by the issuers whose debt is going to be rated.
You don't need to be a hedge fund quant to see the conflict of interest: the more ratings, the more profits to the ratings agencies, so the temptation is to be extra lenient. And, boy, were they. ...
All told, the allegations seem especially paltry when compared with the disastrous performance of the ratings agencies that matter — Moody's and S.&P. Egan-Jones's ratings didn't cripple the global economy. Mr. Egan's business model is far less prone to compromise and corruption. The inescapable conclusion is that the S.E.C. is letting Moody's and S.&P. officials walk free while pursuing Mr. Egan on minor technicalities.
This is your S.E.C., folks. It courageously assails tiny firms, and at the pace of a three-toed sloth. And when it goes after its prey, it's because it has found a box unchecked, rather than any kind of deep, systemic rot.
Unfortunately, there's an even worse problem here. The action against Mr. Egan gives the appearance, perhaps inadvertently, that the agency is persecuting a longstanding critic of the ratings agencies. That just solidifies the woeful ratings oligopoly we have today.
Relative to Eric Holder's Justice Department, that record makes the S.E.C. look like the god Shiva, destroyer of worlds. But the S.E.C. has hardly been aggressive about the ratings agencies. It hasn't moved against any top executives of any major ratings firm for actions leading to the financial crisis.
In one of its timorous moments, the agency punted on a case involving Moody's and a questionable rating on a complicated European structured finance product. The S.E.C. determined that it was unclear whether it had jurisdiction because the securities were created and sold in Europe.
Promising leads on other potential wrongdoings by credit rating agencies seemingly go to the S.E.C. to die....