Cross posted on Huffington Post
Sometimes the ways of Washington, DC are truly baffling.
In the U.S. Senate this morning a hedge fund manager gave testimony to the Committee on Health, Education, Labor and Pensions on a set of higher education companies.
The only problem is that the witness, financier Steven Eisman of FrontPoint Partners, stands to profit not from the success of higher education but from stock price declines of a specific group of companies in that sector. Eisman is a short-seller.
Most Americans would think investors lose money when stock prices go down. But a specific type of investor known as a short-seller makes money when stock prices go down, not up. Ain't America great? The companies go through the grinder, cut employees and investment while some guy on Wall Street gets rich.
The Securities and Exchange Commission explains short-selling this way:
A short sale is generally the sale of a stock you do not own (or that you will borrow for delivery). Short sellers believe the price of the stock will fall, or are seeking to hedge against potential price volatility in securities that they own. If the price of the stock drops, short sellers buy the stock at the lower price and make a profit.
This is exactly what Steven Esiman is doing right now, according to reports. While he is free to invest how he sees fit, the U.S. Senate HELP Committee shouldn't set the stage to help him cheer declining stock prices. Neither should any other part of the U.S government.
Eisman is best known from his role in author Michael Lewis' book The Big Short: Inside the Doomsday Machine for short-selling practices that helped crash the mortgage securities market. Bets against subprime mortgages helped FrontPoint double its hedge fund to $1.5 billion by the end of 2007. Eisman made his billions off of the crashed dreams of millions of homeowners. When he spotted housing trends he didn't blow the whistle -- he figured out how to get rich when it crashed.
Now Eisman is setting his sights on companies in the higher education sector -- often technical training schools like Devry or ITT Technical. This isn't just speculation about Eisman short selling higher education stocks. He has said it himself. During a May 26, 2010 speech at a hedge fund conference in Manhattan, Eisman promoted increased federal regulation of higher education as a means to assure that stock prices of higher education companies would fall by as much as 60 percent.
Get that? Steven Eisman wants the regulation of higher education to get rich -- not because it will be good for students or the schools. And now this hedge fund manager is leveraging a U.S. Senate hearing to take more short-selling profits.
A short-seller investor will always have a conflict of interest when speaking about a set of companies and that is why it is inappropriate to invite Eisman as an expert witness. He will typically always want to portray those companies in a bad light in order to generate news that would drive down their stock prices. His financial conflict of interest biases his testimony beyond redemption.
Could the committee possibly expect unbiased testimony? No. Eisman has staked a fortune on government action against higher education companies.
Worse than the conflict is that the entire Senate hearing plays into Eisman's strategy of creating a giant circus about higher education companies. The bigger the circus, the lower the stock price and the more money Eisman makes. The U.S. Senate shouldn't have a leading role in a Wall Street investor's "gambling" strategy -- especially a short-seller.
The threat a short seller represents to companies isn't false. The ginned-up threat of regulation or the suggestion of legislation has already been driving down the stock prices of these companies.
After all that has happened with the financial crisis and the role that short-sellers played in dragging big companies down into the muck you'd hope the U.S. Senate wouldn't play this role. But it is going on today.
It is an imperfect analogy but inviting Steven Eisman to a HELP Committee hearing on a sector he is short selling is like asking an arsonist whether a building will burn down. He'll say, "Yes" but that is because he plans to burn it down.
It is critical that the American people can trust that Wall Street hedge fund speculators and stock short sellers won't manipulate their elected representatives. They've caused enough damage to our economy already. No more Steven Eismans.
I released the following statement today on the appearance of hedge fund manager Steve Eisman, portfolio manager at FrontPoint Financial Services Fund, a Morgan Stanley subsidiary, at the Senate Committee on Health, Education, Labor and Pensions hearing, Emerging Risk? An Overview of the Federal Investment in For-Profit Education.
"In their hearing today, the Senate HELP Committee is ostensibly looking at higher education but the appearance by Steven Eisman makes the whole event look like a scam by Wall Street hedge funds and stock short sellers who place financial gain above all things including higher education.
“Inviting Eisman to a HELP Committee hearing on a sector he is short-selling is like asking an arsonist whether a building will burn down. He’ll say, “Yes” but that is because he plans to burn it down.
“Unless the Committee plans to grill Eisman on his stock shorting against higher education stocks, the invitation of this hedge fund manager is inappropriate because the hearing will influence the stock prices of companies that he is currently short-selling.
“Eisman is known from his role in author Michael Lewis’ book The Big Short: Inside the Doomsday Machine for short-selling practices that helped crash the mortgage securities market. Bets against subprime mortgages helped FrontPoint double its hedge fund to $1.5 billion by the end of 2007. Eisman made his billions off of the crashed dreams of millions of homeowners.
“Now, Eisman has trained his stock-speculating guns on the higher education sector; and he is using today’s Senate hearing to do one thing: win regulations against companies in order to decrease their stock value. Could the committee possibly expect unbiased testimony? No. Eisman has staked a fortune on government action against higher education companies. Eisman wants the hearings to hurt those companies so he can make more money.
“This isn’t just speculation about Eisman. He has said it himself. During a May 26, 2010 speech at a hedge fund conference in Manhattan, Eisman promoted increased federal regulation of higher education as a means to assure that stock prices of for-profit higher education would fall by as much as 60 percent. And now this hedge fund manager is leveraging a Congressional hearing to take more short-selling profits.
“To assure the fairness and objectivity of these hearings, Congress should ask Eisman, on the record and under oath, to disclose any short sell bets that FrontPoint Partners or any funds connected to FrontPoint or Eisman has made regarding higher education companies.
“Congress should not be manipulated by Wall Street hedge fund speculators and stock short sellers. They’ve caused enough damage to our economy already.”
An important dynamic is building in the fight for financial reform. Regular people are speaking out and being heard above the millions being spent by Wall Street and their Washington Lobbyists. Wall Street insider publication The Street notes the phenomena:
While Main Street headed to lawmakers' doorsteps with thousands of voter petitions on Wednesday to sway the debate on financial reform, Wall Street and corporate America were spending big bucks on lobbyists.
Both sides have just a matter of days.
A leading consumer-rights coalition was striving to assert its dominance in the dialogue by reminding lawmakers that voters are keeping a close eye on the outcome. Representatives from Americans for Financial Reform planned to visit lawmakers' offices in 25 cities to deliver petitions from "thousands of constituents," urging them to pass tough measures.
"Today members of Congress will get a message directly from Americans -- we're watching what's happening with Wall Street reform and we need you to stand up for Main Street," said Heather Booth, director of Americans for Financial Reform.
As AFR traipsed from Red Lake Falls, Minn., to Kansas City with petitions in hand, corporate lobbyists were scrambling across Washington, D.C. in their own last-ditch effort to grab lawmakers' ears. Meanwhile, the Chamber of Commerce organized a more modern type of grassroots campaign on the Web. Since the start of 2009, the top 10 lobbying firms have pulled in fees of more than $30 million, according to the Center for Public Integrity.
There are just a few more days left for lawmakers to hammer out a compromise for the Restoring American Financial Stability Act of 2010, which is supposed to be on President Obama's desk by the Fourth of July weekend. But Americans seem eager to oust incumbents regardless of political stripe, and several negotiators in the reform conference face an uphill re-election battle this fall.
People power is winning. But, we need to keep up the pressure. Keep signing those petitions and calling your legislators. We're almost there. Let's make it happen.
Let's not just hold the line from the onslaught of Wall Street money and lobbyists currently bombarding Capitol Hill. Let's improve the bill. So says the Boston Globe:
WHILE THE big bailouts of 2008 gave Congress a mandate to constrain the excesses of the financial system, the House and Senate have each passed bills that make major concessions to the status quo. But a conference committee now working to reconcile the two bills can salvage the effort. If conferees adopt the toughest parts of the House and Senate bills, the result would be a significant improvement in the oversight of the financial system. The final bill, set to be released by July 4, should be judged by a few key measures. One is the strength and independence of the new consumer financial protection agency. The House and Senate versions both create a new office with its own source of funding, rule-making authority, and the power to enforce its rules. Ideally, it should be an independent entity, rather than a unit of the Federal Reserve, as the Senate proposes.
But the precise structure matters less than the scope of the agency’s mission. The House version exempts auto dealers, real estate brokers, and accountants from direct agency oversight. These exemptions ought to be eliminated; otherwise the agency will be protecting consumers from only some of the forces that account for predatory practices.
The conferees should also strip out regulatory exemptions for banks with less than $10 billion in assets. More than 95 percent of all US banks fit into this exempted category. The new agency should be able to examine a greater proportion of those banks.
To reduce financial risk in the future, reform legislation should adopt former Fed chairman Paul Volcker’s call to prohibit banks from trading for their own account and from owning hedge funds or private equity firms. Both the Senate and House allow regulators to study the issue and decide whether to impose a trading ban. This gaping loophole should be closed.
There must be no diluting of the requirement in both the Senate and House bills that derivatives — complex securities, such as those backed by subprime mortgages, that derive their value from the performance of some other financial transaction — be traded on public exchanges and approved by central clearinghouses. Until now, they were traded in private transactions, and were a principal cause of the tidal wave that washed away Lehman Brothers; they would have swamped AIG if not for a federal bailout.
Let's improve the bill. And, strip those loopholes that the banksters are pushing for. Congress can make it happen.
The next meeting of the Financial Crisis Inquiry Commission is set for June 30th - Julyl 1st. The meeting is titled "The Role of Derivatives in the Financial Crisis."
Witnesses giving testimony include representatives from American International Group (AIG), Goldman Sachs, the U.S. Commodity Futures Trading Commission, the Office of Thrift Supervision, and the New York State Insurance Department.
These manipulation of so-called 'complex financial instruments' certainly played a role in bringing about the worst financial crisis since the Great Depression. We welcome the hearings.
The 43 lawmakers negotiating the final version of the Wall Street reform bill have collected more than $112 million from the finance, insurance and real estate sectors during the past 20 years. And the financial services sector gave a total of $695 million during the same period, according to a new report by the Center for Responsive Politics, a campaign finance watchdog group...
“It really is an indictment of the entire system of how we fund candidates,” said Craig Holman of Public Citizen. “Because these people are on what’s considered a juice committee, the financial services committee, those who are subject to their regulations go out of their way to contribute to those people. It’s really an effort to buy influence...”
In a separate report, the Center for Responsive Politics and Public Citizen found that at least 56 industry lobbyists once worked directly for the 43 conferees. An additional 59 lobbyists worked on the Senate and House financial services committees — but never directly for a conferee.
All of this money and all of this influence peddling and they're still losing. Let's make sure they keep losing. Call the conferees and tell them to stand up for the American people and not to bow to the whims of the powerful Wall Street banksters.
Wall Street's lobbying army is marching around Washington in a push to shape the final financial-overhaul bill. But it has gotten harder to get through the door with some lawmakers.
One bank has complained that it no longer has access to House Financial Services Committee Chairman Barney Frank (D., Mass.), whose schedule has filled up to accommodate negotiations with his Senate counterparts during the next two weeks.
This is a step in the right direction. Lobbyists need to be locked out as early in the process as possible. Our legislators should be working for us, not the lobbyists.
All eyes are on the reconciliation team as they meet and decide whether they're going to weaken or strengthen the Wall Street reform legislation. The New York Times reports:
Negotiators from the House and Senate gathered on Thursday to merge two bills representing the most comprehensive changes to financial regulation since the Depression, but the script they acted out was largely being written elsewhere...
Both sides called for avoiding a repeat of past mistakes. Representative Maxine Waters, a California Democrat, recalled that she sat on a similar conference committee for the Gramm-Leach-Bliley Act, the milestone deregulation legislation that ended Glass-Steagall.
“I feared deregulation would have serious negative consequences,” Ms. Waters said. “I voted no. I was right.”
As we noted yesterday, the lobbyists are stepping up their efforts during reconciliation. We must step up ours as well. Otherwise, behind the scenes, the lobbyists will rule.
The lobbyists are panicking. They're working harder than ever, behind the scenes to water down reform and create loopholes that the Wall Street banksters plan to exploit.
Lobbyists are shifting into overdrive today as Congress formally begins its attempt to smooth out differences between the House and Senate versions of the Wall Street bill.
Financial services trade associations, big banks and a slew of other companies that provide financial products are blanketing Capitol Hill trying to get a last word in.
Although this will be the first public conference in a long time, the real negotiations aren’t expected to happen in front of the cameras. And the real lobbying will begin once behind-the-scenes negotiations between Senate and House conferees start in earnest...
Lobbyists declined to name specific Members who refused to meet with K Streeters on financial regulatory reform but said they were focused on getting meetings at the staff level and with lawmakers who have the ear of the conferees as well as House and Senate leadership...
The lobbyists are playing their usual inside game. This game is part of the problem in Washington. Now is the time that will test the resolve of our legislators. Will they remain firm or will they bow to the immense pressure of the banksters? Time will tell - but, you can have your voice heard by calling your members of Congress and calling on them to stand firm and don't retreat.
A must read editorial in today's New York Times argues that the FCIC needs to push harder:
Congress created the Financial Crisis Inquiry Commission last year to investigate the causes of the meltdown. Many banks, financial firms and other witnesses have cooperated. But not Goldman Sachs.
On Monday, Mr. Angelides announced that the panel had finally subpoenaed Goldman. He told reporters that Goldman’s performance had been “abysmal, unacceptable and won’t be countenanced.” He added that it is his job to ensure that the American people are not “played for chumps.”
We couldn’t agree more. We also have to ask what took the commission so long — and hope this new toughness will carry through to a smart and tough report. The commission’s final product is due on Dec. 15. If Goldman’s lawyers think they can play out the clock, Congress had better disabuse them of that notion right now.
If Goldman doesn’t comply, the commission can — and should — ask a court to enforce the subpoena. If Goldman still balks, the court could find Goldman in contempt.
We still don’t know in detail what the crisis panel is hoping to learn from Goldman. In its own disturbing lack of transparency, the panel has not made the subpoena public. A summary on its Web site, posted late Monday, says that it is looking for information on Goldman’s derivatives’ deals and wants to interview Goldman’s top executives and other employees with knowledge of specific transactions. The public clearly has the right to know those details and how they may have contributed to the financial crisis.
The Goldman subpoena is only the latest of many black eyes for the bank, including a civil suit for securities fraud brought by the Securities and Exchange Commission earlier this year.
In the conference call on Monday, the panel’s vice chairman, Bill Thomas, a former chairman of the House Ways and Means Committee, suggested that Goldman’s failure to cooperate indicated that the bank had something to hide. “They may have more to cover up than either we thought or than they told us,” he said. At the least, it suggests that Goldman is still trying to control the narrative of the financial crisis.
That is a prerogative it and all of the banks forfeited when they nearly brought down the financial system and then were bailed out by American taxpayers.
The country needs a full accounting of what went wrong. To do their job, Mr. Angelides, Mr. Thomas and the commission are going to have push a lot harder.
This is a positive step, but, as the New York Times notes, the FCIC needs to push harder.
Lobbyists are raking in big bucks off of Wall Street firms looking to water down Wall Street Reform. And, as evidenced by their history, some have close ties to top Republicans on Capitol Hill. Politico:
It’s impossible to know exactly how much the Top 10 firms have made from the regulatory reform fight because lobbyists and their clients aren’t required to itemize spending by issue. But an analysis of lobbying disclosure forms by the Center for Public Integrity shows that those 130 clients have paid the 10 firms more than $30 million for work on financial reform and other issues since the beginning of 2009.
Clark Lytle & Geduldig, a small Washington firm with six partners, scooped up more regulatory reform clients than any other, the Center found. The firm represented 20 clients on financial reform and other concerns in 2009 and 2010, billing them a combined $1.26 million.
Its client list included two giant associations: the Financial Services Roundtable and the U.S. Chamber of Commerce, which were major players influencing bills written by the House and Senate.
In addition to Clark Lytle & Geduldig, the U.S. Chamber of Commerce hired three other outside firms and deployed its in-house lobbyists to Congress. The business association spent more than $148 million lobbying on financial reform and other issues in 2009 and the first quarter of 2010. The Financial Services Roundtable spent more than $9.5 million overall and supplemented its in-house staff with four outside lobbying firms, according to disclosure documents.
Steve Clark, a partner at Clark Lytle & Geduldig, declined to comment on the firm’s success in attracting financial industry clients, but it very likely has much to do with its ties to the Republican Party. Before hanging his shingle on K Street, Sam Geduldig, the firm’s main financial lobbyist, worked as political director for House Minority Leader John Boehner (R-Ohio) and as a senior adviser to Rep. Roy Blunt (R-Mo.).
In many ways, the lobbyists are losing, but, their intense pressure is, unfortunately, having some success:
Although public anger over the financial industry’s role in the recession has helped shape the regulatory reform debate, the financial industry won some battles during the process, scuttling proposals to break up large banks and enabling community banks and credit unions to sidestep new consumer protection rules. And consumer advocates fear the final reform bill may be weaker than the Senate version, thanks in part to intense industry pressure.
We have to keep up the pressure and shine a bright light on the shady, behind the scenes lobbying of the big banks.
More encouraging news from the FCIC:
Today, Chairman Phil Angelides and Vice Chairman Bill Thomas announce that the Financial Crisis Inquiry Commission has issued a subpoena to Goldman Sachs & Co. for failing to comply with a request for documents and interviews in a timely manner.
In seeking documents and testimony from public agencies and companies, the Commission has made it clear that it is committed to using its subpoena power if there is a lack of, or delay in, compliance. Failure to comply with a Commission request is viewed with the utmost seriousness, as the Commission will not be deterred from getting desired information.
In creating the Financial Crisis Inquiry Commission under the Fraud Enforcement and Recovery Act of 2009, Congress granted the Commission the power to “require, by subpoena or otherwise, the attendance and testimony of witnesses and the production of books, records, correspondence, memoranda, papers, and documents.”
Goldman Sachs refuses to comply with federal investigators probing the roots of the financial crisis, a government panel said Monday.
The Financial Crisis Inquiry Commission slapped Goldman with a subpoena compelling the most profitable firm on Wall Street and the nation's fifth-largest bank by assets to turn over documents and produce employees for interviews.
Thus far, most of the firms at the heart of the worst financial crisis since the Great Depression have voluntarily turned over documents and allowed crisis investigators to interview their employees.
This is at least the panel's third subpoena pushing financial industry exes to comply with its request. The FCIC's first such subpoena was issued to Moody's Corporation in April for the firm's delay in producing documents and allowing investigators to interview Moody's Investors Service personnel. Its second subpoena was issued last month to famed investor Warren Buffett, compelling his June 2 testimony before the FCIC. Both parties complied.
In a statement, the FCIC said it issued its subpoena to Goldman for "failing to comply with a request for documents and interviews in a timely manner."
More, please, FCIC.
Sorry isn't good enough for the millions of Americans suffering from job losses, underemployment and plummeting house values. But, in testimony before the FCIC yesterday, Moody's CEO won't even off an apology! The Huffington Post:
The chairman and chief executive of Moody's Corporation joined the long list of top Wall Street executives who have refused to apologize for their role in causing the worst financial crisis and resulting economic collapse since the Great Depression.
Appearing on Wednesday before the panel created by Congress to investigate the roots of the financial crisis, Raymond W. McDaniel, the head of the corporate parent of Moody's Investors Service, said that while the credit rating agency's disastrous performance has been "deeply disappointing" and that the firm is "certainly not satisfied" with it, after more than two hours of testimony he didn't say the one thing much of America may have been looking for: I'm sorry.
They're unrepentant. And, they'll do it again - unless, we reform the credit ratings agencies. The Senate must act.
Today, Warren Buffett testified before the Financial Crisis Inquiry Commission (FCIC). His widely panned performance may just be the catalyst that keeps credit agency reform in the Wall Street Reform bill. The Guardian:
There was an excruciating moment when Buffett argued that the rating agencies "made the same mistake as 300 million other Americans" in believing that house prices would never fall. Come on, most of those 300 million people didn't have the same access to the sponsors of mortgage-backed securities as did Moody's and Standard & Poor's.
When the storm broke in 2007, the agencies were taken wholly by surprise. The most revealing comment on the affair came in a well-documented memo sent by a Moody's employee to his bosses in the same year. The company's errors, he wrote, made it look "either incompetent at credit analysis, or look like we sold our sold to the devil for revenue".
Why would Buffett want to be associated with such an industry? That's easy – he liked the business model. Who wouldn't? Two firms sit at the top and many institutional investors are forbidden from buying financial products that don't carry a rating.
It is not obvious how the industry should be reformed. The fee structure – whereby issuers pay for a rating from the agencies – creates conflicts of interest. But it's not clear that an "investor pays" formula would be viable. On that score, Buffett was correct. But his woolly defence of past mistakes merely underlined the madness of taking these agencies so seriously. That, at least, was a public service of sorts.
It's no surprise that in response to Buffett's performance, Senator Al Franken and others renewed their fight to keep a credit-rating amendment in the Wall Street Reform bill. Reform is moving forward.
This is a good sign. The FCIC is using subpoena power.
When Warren Buffett testifies before the Financial Crisis Inquiry Commission next Wednesday, it will be because he was subpoenaed. If you don't know how a subpoena works, this one begins with capital letters, "YOU ARE HEREBY COMMANDED to appear and give testimony."
The subpoena followed a request. It is a good sign that the FCIC is starting to use it's subpoena power. Now, it should use it to uncover more truths about the cause of the worst economic crisis since the Great Depression.