Page 3 of
3 Vox populi: Why the Fed
did a U-turn By Julian
Delasantellis
representing
interests of under $1 billion or so, you probably
were going to be put on hold.
Late in the
day of August 8, a little over 24 hours following
the Fed's stand pat decision of August 7, Bernanke
took a call from the former Clinton era treasury
secretary and current director and chairman of the
executive committee of Citigroup, Robert Rubin,
the man whose picture encyclopedias should
probably use to
illustrate the entry for "the
establishment".
The phone logs do not
indicate the nature or specifics of the
conversation, but it is reasonable to assume that
Rubin was telling Bernanke that actual conditions
out there in the markets were not nearly as
rubicund as the previous day's chipper
post-meeting statement indicated.
Sure
enough, the next day, August 9, the Dow Jones
Industrials opened down 230 points.
"Ring!" "Hello, Chairman Bernanke’s
office."
August 9 was the day that the
rest of the tag team went to work At 11am, in
walked into Bernanke’s office none other than
Lewis Raineri, the man who, when working as a bond
trader at Salomon Brothers (now folded into, yes,
Robert Rubin’s Citigroup) in the early 1980s is
credited with the actual creation of the mortgage
backed securities market now at the core of the
subprime mess. More recently, Raineri had founded
the Hyperion group of private equity hedge funds;
it is entirely reasonable to assume that Hyperion
then had more than a few of those endangered
subprime collateralized debt obligations dragging
down its ledger books.
And still they kept
coming. At 2pm, Raymond Dalio, head of Bridgewater
Associates, the fourth largest US hedge fund,
along with other hedge fund honchos, met with
Bernanke. (It must have been murder trying to get
air traffic control clearance for private jets
flying from the New York area into Washington
airspace that day.) In my October 2 ATol article,
No such thing as a Sure
Thing, I described how it was the
market's simultaneous turning against many of the
hedge funds most popular trading strategies that
led to the steep equity market declines of early
August, so it is more than reasonable to assume
that these important gentlemen did not make these
previously unscheduled trips down to Washington
just to talk baseball scores or American Idol
contestants.
Like kids who keep pestering
a grownup for a toy until they get what they want,
by 4:30 that afternoon Bernanke had heard enough.
He initiated the Fed conference call that, when
announced before the market's opening the
following morning, led to the open market
interventions that commenced the interest rate
easing cycle.
Two things stand out from Dr
Thomas' findings. One is that there is absolutely
no suggestion that the plight of the quarter of a
million or so Americans now losing their homes
through foreclosure every month had any import or
consideration at all in these events. Nowhere in
the logs is there any indication that Bernanke
had, or made any attempt to, contact those many
community organizations that are now, in a mostly
futile cause, attempting to save the unfortunate
subprime borrowers from their impending
foreclosure.
Even more striking is the
fact that, just like your mother probably once
told you, hanging around with the wrong type of
people sends a bad message about you, for Bernanke
to so clearly be accepting policy advice from
these market types at that time sends a very
questionable message about how serious he actually
is in not wanting to be seen rewarding those who
make poor investment choices - the economic
regulatory conundrum known as "moral hazard".
As I’ve written before on these pages,
"moral hazard" involves rewarding imprudent
financial risk takers by not making them feel the
full penalty, specifically, insolvency and
bankruptcy, if their investment or speculative
decision-making proves faulty. By moving to inject
reserves into the system Bernanke was acting to
keep the losses manageable for the big speculators
represented by Raineri and Dalio, and to support
the financial system as a whole, as represented by
Rubin. At least in terms of costs and risks to the
financial system as a whole, and to US taxpayers
in particular, Ben Bernanke has proved that he is
more than willing to troll with some very shady
characters, in some very questionable
neighborhoods.
In the early 1980s, the old
line US stock brokerage firm E F Hutton (nowadays,
after many successive iterations of mergers and
buyouts, just another digestive of, yes, Robert
Rubin's Citigroup) garnered significant pop
culture buzz with its series of "When E F Hutton
speaks ..." television advertisements.
These spots featured two obviously well
off people talking in an upscale setting, such as
a fancy restaurant or on the golf course. One
person talks about some recent advice he has
received from his stockbroker. The other person’s
rejoinder went along the lines of, "well, my
broker is E F Hutton, and Hutton says ..."
Immediately, all those within earshot, whether at
adjoining tables or nearby fairways, would cease
whatever they were doing, lean in and cock their
heads so as to better hear these supposed pearls
of investing wisdom.
The ads were spoofed
in the 1983 movie Trading Places as an
entire restaurant full of dining sophisticates
leaned in close to hear ghetto hustler turned
commodity futures arriviste Billy Ray Valentine’s
call on the wheat market.
Of course, what
the travails of August now teach us is that "When
the most speculative sectors of the financial
services industry speak, Ben Bernanke listens." So
that he can do exactly what they tell him to do.
Julian Delasantellis is a
management consultant, private investor and
educator in international business in the US state
of Washington. He can be reached at
juliandelasantellis@yahoo.com.
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