Sunday, September 28, 2008

Wall Street-Washington collusion?


By Peter Brimelow

12:56 AM ET Sep 29, 2008

NEW YORK (MarketWatch) -- How did I become rich and famous while toiling as a wage
slave in the impecunious trade of financial journalism? When my grandchildren ask
this question, I will be able to reply: by writing two articles that prevented the
financial meltdown, and likely recession, of 2008.

Sort of.

I really did co-write the first one, for Forbes magazine on Jan. 4, 1993. The
Federal Reserve Bank of Boston had just published a study purporting to prove
definitively that mortgage lenders were discriminating against minorities, the hot
cause of the day.

But when my brilliant co-author, Leslie Spencer, asked the Boston Fed's research
director, Alicia H. Munnell, what minority default rates were, she said proudly that
census tract data showed that they were equal to whites. When Leslie pointed out that
this actually proved there was no discrimination, because the lenders had somehow
weeded out the credit risks down to the same acceptable level, Munnell was
dumbfounded and had to concede (on tape) that she did not, in fact, have definitive
proof of discrimination at all.

We had discovered a fundamental technical flaw. We sat back and waited for our
Pulitzer Prizes.

Nothing happened. The Boston Fed study continued to be cited by press and
politicians. Alicia Munnell was apotheosized into the Clinton administration.

Partly this was because Forbes magazine, albeit then very successful, just didn't
figure in the media food chain. Its readership seemed to be confined to 750,000
retired dentists. That mattered, in the dark days before the Internet.

But mostly nobody wanted to know. Subsequently, University of Texas economists Stan
J. Liebowitz and Ted Day demonstrated that the study's own data was riddled with
errors. Nobody paid any attention to them, either.

That's a bipartisan "nobody," by the way. Questioned later about the Boston Fed
study, a Bush Fed governor just smirked and said he was sure the banks would make
money. If anything, pressure on the financial industry to make marginal loans
increased under George II, part of his Latino outreach strategy.

I don't want to say I told them so. But I (we) did.

Of course, the financial industry was all too happy to be pressured. It no doubt
figured it could make commissions and, if there was trouble, the government would
bail it out.

And guess what?

This brings me to my second rich-and-famous making article, on the 1998
Fed-orchestrated bailout of Long-Term Capital Management hedge fund.

Which, I have to admit, I didn't actually write. I could never interest any editor
in it. But they were wrong and I was right. (Notice a pattern?) LTCM was the current
bailout in microcosm.

I was fascinated by the LTCM bailout. I couldn't figure out why the Fed needed to
rescue a relatively small firm. But two excellent books "When Genius Failed" and
"Inventing Money," respectively by Roger Lowenstein and Nicholas Dunbar (who really
do deserve to be rich and famous) provided a lot of damning detail, albeit without
drawing conclusions.

Bottom line: LTCM seems to have been bailed out because it was well-connected. Its
connections were significantly to Goldman Sachs, which in turn was extremely
well-connected to federal government. Its former CEO, Robert Rubin, was Treasury
Secretary at the time.

By an amazing coincidence, another former Goldman CEO, Henry Paulsen, is
orchestrating the current bailout.

Significantly, the books revealed that LTCM has made itself the "chosen instrument"
of, for example, the Italian government in its efforts to groom the Italian bond
market in order to join the Euro. LTCM repeatedly cornered the Italian bond market
with the Italian government's tacit connivance, even though this was devastating to
Italian small investors.

Dunbar wrote of LTCM that by the end of 1997: "Governments treated it as a valued
partner, to be used whenever markets weren't efficient enough to achieve
macroeconomic goals."

My questions: What governments? What goals? Are subprime mortgages just a later

How long has this sort of collusion been going on?

After the Panic of 1907, the U.S. Congress set up the Pujo Committee to investigate
the so-called "money trust."

Of course, that resulted in the Federal Reserve, which arguably is now part of the

But maybe we should try again.

And this time look at Washington as well as Wall Street.

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