|»Vivek Kaul's Diary|
How Capitalists Become Cronies
14 DECEMBER 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.
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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:
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.
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 houses...at bargain prices. It spent $10 billion and acquired 50,000 homes.
The elegance and chutzpah of it were breathtaking.
The financial industry created the bubble, lending the feds' fake money...money that no one ever earned or saved...to people who had no business borrowing it...so 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.
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