Tuesday, November 29, 2011

Bailouts Are Not Enough. Former Treasury Secretary Henry Paulson Gave Advance Tips to Friends (Big Surprise)

Finally we get a story about the inside information that former Treasury Secretary Henry Paulson provided to hedge fund friends (As the former CEO of Goldman Sachs, you can be sure he has many). This story is from bloomberg. It's long so I have excerpted parts below (but it is all worth a read).
"It was July 21, 2008, and market fears were mounting. Four months earlier, Bear Stearns Cos. had sold itself for just $10 a share to JPMorgan Chase & Co. (JPM)"
"On the morning of July 21, before the Eton Park meeting, Paulson had spoken to New York Times reporters and editors, according to his Treasury Department schedule. A Times article the next day said the Federal Reserve and the Office of the Comptroller of the Currency were inspecting Fannie and Freddie’s books and cited Paulson as saying he expected their examination would give a signal of confidence to the markets."
"At the Eton Park meeting, he sent a different message, according to a fund manager who attended. Over sandwiches and pasta salad, he delivered that information to a group of men capable of profiting from any disclosure.
But of course! Tell the press one thing (what you know is a lie) and tell your friends the truth.
Around the conference room table were a dozen or so hedge- fund managers and other Wall Street executives -- at least five of them alumni of Goldman Sachs Group Inc. (GS), of which Paulson was chief executive officer and chairman from 1999 to 2006. In addition to Eton Park founder Eric Mindich, they included such boldface names as Lone Pine Capital LLC founder Stephen Mandel, Dinakar Singh of TPG-Axon Capital Management LP and Daniel Och of Och-Ziff Capital Management Group LLC.
After a perfunctory discussion of the market turmoil, the fund manager says, the discussion turned to Fannie Mae and Freddie Mac. Paulson said he had erred by not punishing Bear Stearns shareholders more severely. The secretary, then 62, went on to describe a possible scenario for placing Fannie and Freddie 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, he said."
"The fund manager says he was shocked that Paulson would furnish such specific information -- to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information."
“You just never ever do that as a government regulator -- transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”
To be a little more accurate he should have said "You just never ever SHOULD do that as a government regulator." This story is only an example of what goes on all the time. 
"Janet Tavakoli, founder of Chicago-based financial consulting firm Tavakoli Structured Finance Inc., says the meeting fits a pattern.
“What is this but crony capitalism?” she asks. “Most people have had their fill of it.”"
"An official such as Paulson has no legal obligation to keep material nonpublic information to himself, says Phillip Kaplan, partner for litigation at Manatt Phelps & Phillips LLP, where he specializes in securities and class-action cases."
“I don’t think a government person is liable,” he says. “He didn’t profit from the information or trade on it.”
But here is the issue, to say that his actions were OK because he didn't profit or trade on it is a bunch of BS. First of all, how is it acceptable behavior to lie to the press (and therefore the Public you represent) while telling your friends the truth? Second of all, who is to say that he did not profit from it? Just because he himself didn't trade on it? Even if those he told did not trade on it, they could have told someone who did. The profit does not need to be immediate (many ways to work around insider trading rules). Good Old Boys network......Favor for a Favor......That it how these things work.

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