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How Capitalists Become Cronies

Dec 14, 2016


BALTIMORE - Who's the biggest winner so far? 'Government Sachs!'

Fortune magazine reports that the winningest person since Trump's election is Goldman Sachs CEO Lloyd Blankfein.

Goldman's stock price is back to where it was just before the last crash in 2008. And Blankfein is back in high cotton, too; his holdings in the firm have gained $140 million in the last four weeks.

Trump Bump

Donald Trump pledged to take the elite down a notch. So far, they're going in the opposite direction.

Worldwide, they're up about $4.4 trillion, as their stocks have soared in the 'Trump Bump'.

Many of America's best investors - including Carl Icahn and Ray Dalio - think this is just the beginning.

And with some of the nation's most successful moneymen at his side, including a former Goldman guy in the Treasury, many people are betting that Trump will bring a sustained boom.

We've been looking at crony capitalism. Our hypothesis is that it is funded by the feds' fake money and enabled by their regulations.

So far, we've looked at ex-Goldman banker Steven Mnuchin, Trump's pick for secretary of the Treasury.

While he was making a fortune at Goldman, a major Main Street company, Sears was turned into a Wall Street victim. Its stock is down 90%. And it is expected to declare bankruptcy in a few months.

Wilbur Ross, Trump's new man for the Trump's new man for the Department of Commerce, used federal regulation of imports to make a billion dollars in the steel industry.

Jack Welch, a member of Trump's financial advisory team, used the credit-fueled boom of the 1980s and 1990s to turn Main Street manufacturer General Electric into a leveraged, go-go finance company. Its stock has been cut in half in the last 15 years.

Today, we look at two more of Trump's advisers, Blackstone Group CEO Stephen Schwarzman and BlackRock CEO Larry Fink. If nothing else can be said about these two, they have stones!

Schwarzman and Fink are two of Wall Street's most powerful CEOs. Both know how to play the game.

But what sort of game is this? Who wrote the rules? Who wins and how?

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Poison Ivy

Regulations generally give an advantage to one or more cronies.

One industry is favored. Another is punished. Costs, delays, and burdens are imposed. Often, there is little analysis or public discussion.

And then, the regulations grow like poison ivy, choking startup competitors and wasting time and money; soon, people all over the country are itching for a change.

Several of Trump's cabinet picks say they are determined to trim these vines. And 'The Donald' has proposed a new rule...cutting rules:

  • I will formulate a rule which says that for every one new regulation, two old regulations must be eliminated. So important.

Fewer rules would be good for the public - improving efficiency and competition. But cronies would suffer. Which makes us wonder...

The Reagan administration managed to spray some Roundup around the DC swamp. Regulatory growth slowed. Temporarily. But the evil weeds were soon growing again, faster than ever.

Only the public has an interest in cutting back the rules and keeping the system honest. And the public doesn't control the process - the swamp critters do.

How the Rich Got Richer

News comes that investment management behemoth BlackRock is moving into new digs in Hudson Yards, in Lower Manhattan.

The company has some $5 trillion in assets, making it perhaps the most successful capitalist business in history.

The feds' cheap financing caused a bubble in the housing, mortgage, and finance sectors. In our daily e-letters, we tracked that bubble, day by day, from around 2004 until it blew up in 2008.

BlackRock's role was significant. It created $5.5 trillion in mortgage-backed derivatives, which blew up in 2008. Housing prices crashed, leaving 20 million Americans underwater and 4 million in foreclosure.

Meanwhile, up on Park Avenue, Stephen Schwarzman was taking the other side of the trade. His private equity outfit, the Blackstone Group, bet against subprime mortgages and sold off most of its real estate in 2006 and 2007, getting rid of about $60 billion worth of property investments.

Then, after the crash, Blackstone made another sharp move. It bought up bargain prices. It spent $10 billion and acquired 50,000 homes.

Fake Money, Fake System

The elegance and chutzpah of it were breathtaking.

The financial industry created the bubble, lending the feds' fake that no one ever earned or people who had no business borrowing they could buy overpriced houses they couldn't afford.

Then, after the inevitable blow-up, Blackstone bought houses that had been heavily discounted by the accident its dark, lithic brethren had helped to cause.

A bold move by Blackstone? Yes. Risky? Maybe not.

The fix was in. The Fed brought forth another big round of financing. This time, interest rates went into the cellar and stayed there until the sector was fully reflated.

The Case-Shiller Home Price Indices show house prices up about 30% over the last six years. Assuming the boys at Blackstone operated efficiently - covering their costs with rents - they would have about a $3 billion unrealised capital gain.

And now, they are taking the whole kit and caboodle public, selling their real estate investment trusts to mom-and-pop investors who have been forced into stocks by the Fed's ultra-low interest rate policy.

Thus did the financial industry use its preferential access to the Fed's EZ credit to create the housing bubble...and then use it to convert private property - people's homes - into a tradable asset owned by Wall Street.

Left-wingers will say Fink and Schwarzman are 'greedy capitalists'. But money makes people in its own image. Fake money has created a false financial system and turned capitalists into cronies.


BILL BONNER Founder, Agora Inc

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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1 Responses to "How Capitalists Become Cronies"


Dec 14, 2016

I have one major objection to this article. Bonner has displayed his profound ignorance regarding the business that BlackRock is in. I happen to have worked at the firm during the crisis and am fairly familiar with its business. BlackRock did NOT create MBS derivatives. It may have traded them, but the trades are insignificant compared to the real culprits behind the crisis - the sub-prime MBS securities and derivatives created by the Lehman, Bear, Morgan Stanley, Merrill Lynch and the biggest culprit of them all - Goldman Sachs. BlackRock was an asset manager and INVESTED (or TRADED) in MBS securities.

And if I remember correctly, BlackRock was warning all of its clients - to whoever would listen to them - that these sub-prime securities are being valued wrongly. We were laughed out of countless board rooms - and then fired as advisors - only to be gratified to see our predictions come true and crestfallen to see may of our former advisory clients bite the dust.

A meta-note. If this is the extent of Bonner's knowledge about BlackRock and how he has railed against it, I think you can safely ignore 95% of his pronouncements - he speaks out of his you-know-where.

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