Hank Paulson and Some Animals Are More Equal than Others
Barry Ritholtz points us to a Bloomberg article showing, once again, that when it came to measures to prop up the economy in 2008, some animals are more equal than others:
Paulson explained that under this scenario, the common stock of the two government-sponsored enterprises, or GSEs, would be effectively wiped out. So too would the various classes of preferred stock, he said.
The fund manager says he was shocked that Paulson would furnish such specific information — to his mind, leaving little doubt that the Treasury Department would carry out the plan. The managers attending the meeting were thus given a choice opportunity to trade on that information.
There’s no evidence that they did so after the meeting; tracking firm-specific short stock sales isn’t possible using public documents.
And law professors say that Paulson himself broke no law by disclosing what amounted to inside information.
The article goes on:
At the time Paulson privately addressed the fund managers at Eton Park, he had given the market some positive signals — and the GSEs’ shares were rallying, with Fannie Mae’s nearly doubling in four days.
William Black, associate professor of economics and law at the University of Missouri-Kansas City, can’t understand why Paulson felt impelled to share the Treasury Department’s plan with the fund managers.
“You just never ever do that as a government regulator — transmit nonpublic market information to market participants,” says Black, who’s a former general counsel at the Federal Home Loan Bank of San Francisco. “There were no legitimate reasons for those disclosures.”
Janet Tavakoli, founder of Chicago-based financial consulting firm Tavakoli Structured Finance Inc., says the meeting fits a pattern.
“What is this but crony capitalism?” she asks. “Most people have had their fill of it.”
The Bloomberg article is worth reading in its entirety.
Perhaps the love affair both political parties have for GS alumni is a bit misplaced. Wow.
Hate to be further typecast into a role here, because I was disgusted by the article – but Devil’s Advocate – let’s say Paulson was looking for feedback from market participants about how the financial markets would react to pre-mature conservatorship of the GSEs (i.e., before there was a credit event that forced the issue) – how would he go about collecting that information? And if he’s confined to talking to other members in public service, e.g., the Fed (I know, technically it’s private), Treasury Undersecretaries, other members of the Administration Cabinet, doesn’t he run the risk of of politicized group think?
There is something he could have done, which is quite common, called “wall-crossing”, where the party with material non-public information informs the other party – e.g., hedge fund manager – that s/he is about to receive such information and agrees (in the presence of compliance lawyers) to not trade on that information until it enters the public domain.
Furthermore, my understanding of securities laws is that, as noted in the article, the onus falls on the recipients of the information to comply with insider trading laws, not on the provider of the information. That is, if the new CEO of Apple tells me iPad 3 is going to be a complete disaster, or the CEO of Pfizer tells me that he heard from the FDA their new drug is going to be approved in the next week – they’re not in violation of insider trading laws, and as long as I neither act on the information, nor pass it along to anyone else, I’m not either.
Question. Why is Paulson’s behavior such a big surprise to anyone? Didn’t the other Paulson, hedge fund manager extraordinaire, have some too cozy relationship with one of the big banks that was issuing trashy CDOs? Does anyone really believe that these financial wunderkinds had earned their extraordinary incomes during the past decade by sheer brilliance? If it weren’t so disheartening it would be mildly amusing that these players get to cheat and then keep the ill gotten gains when the cat’s (or should that be the rat) out of the bag.
have never thought about this topic but if that is the law then it is crazy – I would propose that a group of people hardly ever contain information that could potentially enrich them. There must be good study on this. I would also bet that financial industry players, advised by legal, know how to pass on such information without getting into trouble. Shouldn’t the lay cover both parties…..