To paraphrase Paul Krugman, it looks like the zombies have won. Insolvent banks continue to roam the earth, sucking up unfathomable sums of taxpayer capital, provided to hedge fund intermediaries as nonrecourse loans. The scheme is designed to create inflated “auction” prices by incentivizing investors to over-bid on assets which carry almost no downside risk – for them, that is.
Geithner, Summers and company test-marketed the plan with friends and former colleagues on Wall Street thoroughly over the past month to find the formula that would send high finance into the fits of ecstasy we witnessed on Monday. Hedge fund directors were among Treasury’s most coveted focus groups.
On March 13, the Wall Street Journal reported on a typical consultation with hedge funds regarding the parameters of TALF, which was expanded substantially yesterday and now permits investors to use toxic debt as collateral:
Some of the biggest hedge funds in the business have participated in calls and meetings with other hedge-fund managers, lawyers and regulators about the program. They include Harbinger Capital Management, Highbridge Capital Management, Elliott Management Corp., Paulson & Co., Perry Capital, Citadel Investment Group, Cerberus Capital Management and D.E. Shaw Group.
As the Democratic Party that Rubin Built huddles with its Wall Street masters to plot the unloading of toxic assets at enormous expense and risk to taxpayers, LittleSis will explore conflicts of interest and cozy connections between prospective “investors”, Treasury regulators and Obama administration officials.
Today, we take a look at ties between the Obama team and D. E. Shaw, which, as reported by the Journal, helped to shape the new TALF, and presumably other features of the Geithner plan.
Here’s how it breaks down:
- Lawrence Summers, Assistant to the President for Economic Policy and Director of the National Economic Council, served as managing director of D. E. Shaw from October, 2006 until 2008.
- D.E. Shaw donated $225,650 to the Democratic National Committee in 2008, making the company the 12th largest donor to the DNC, according to Open Secrets.
- David E. Shaw, founder of D.E. Shaw, was among the largest donors to the Obama inauguration committee, with a $50,000 gift. Chandra Jessee, wife of D.E. Shaw partner Julius Gaudio, also donated $50,000 to the Obama inauguration committee.
- Darcy Bradbury, D.E. Shaw Director of External Affairs, worked in the Clinton Treasury Department alongside Obama adviser Lawrence Summers and Treasury Secretary Timothy Geithner. Bradbury served as Assistant Secretary for Financial Markets.
- In her role as Assistant Secretary, Bradbury was a close ally of Robert Rubin and Lawrence Summers in their effort to ward off regulation of the hedge fund industry. Bradbury fought off attempts by Congressman Edward Markey and General Accounting Office director James Bothwell to regulate derivatives markets in 1994. In a typical press statement in response to Congressman Markey’s call for regulation, Bradbury stated, “The Treasury has not concluded that other legislation concerning over-the-counter derivatives is necessary or appropriate at this time.” (Financial Times, 6/16/94)
- D.E. Shaw executive Anne Dinning was one of the largest donors to Obama’s transition team, granting a total of $28,500 to the transition committee.
- D.E. Shaw employees gave more than $75,000 to the Obama Presidential campaign, according to searches on Open Secrets. They gave $0 to McCain.
DE Shaw clearly wields a great deal of influence over the Obama economic team. These conflicts of interest should be front and center in media scrutiny of this hedge fund giveaway, which could send hundreds of billions of dollars in taxpayer money to firms like DE Shaw. Yet with the notable exception of Frank Rich, journalists, economists, and media pundits continue to ignore the relationships – financial, personal, and otherwise – that hedge funds like DE Shaw are leveraging to control the flow of taxpayer funds to Wall Street.
Meanwhile, the New York Times reported today that David Shaw made $275 million in 2008, more than the entire AIG bonus pool. This in a year when the fund was restricting withdrawals. How much of this money flowed straight out of government coffers? It’s a valid question: hundreds of billions of bailout funds have passed through large Wall Street banks to counterparties like hedge funds over the past year.