Politeía Digest

Quis custodiet ipsos custodes?

Sunday’s New Yorker

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Letter from Boston

Tea and Sympathy
Who owns the American Revolution?

The Boston Tea Party Ship is not open to the public. She has no masts, no rigging, and hardly any decking. To clamber aboard, I had to climb down an iron ladder, cross two floating docks, crawl under a stretch of ropes, and walk a plank, barefoot. This ship is a replica; the original Beaver, whose cargo of tea was dumped overboard in 1773, is long gone. In 1972, three Boston businessmen got the idea of sailing a ship across the Atlantic in time for the tea party’s bicentennial. They bought an old Baltic schooner, built in Denmark, and had her re-rigged as an English brig, powered by an anachronistic engine that was, unfortunately, put in backward, and caught fire on the way over. Still, she made it to Boston in time for the hoopla. After that, anchored at the Congress Street Bridge, next to what’s now the Boston Children’s Museum, the Beaver became a popular tourist attraction. In 1994, the ship was bought by Historic Tours of America, “The Nation’s Storyteller,” a heritage-tourism outfit founded in the nineteen-seventies by entrepreneurial Floridians who also run, among other things, duck tours in D.C. In 2001, the site was struck by lightning, after which the Beaver was towed, by tugboat, twenty-eight miles to Gloucester, for renovation, where she has been ever since, all but forgotten.

The Tea Party, meanwhile, is the talk of the nation. Last year, the CNBC business commentator Rick Santelli, outraged by the federal government’s bailout plan, called for a new tea party. He wanted to dump some derivative securities into Lake Michigan. “This is America!” Santelli hollered from a trading-room floor in Chicago, surrounded by cheering commodities brokers. “How many of you people want to pay for your neighbor’s mortgage?” He was sure about one thing: “If you read our Founding Fathers, people like Benjamin Franklin and Jefferson, what we’re doing in this country now is making them roll over in their graves.”

The importance of the Founding Fathers and of the events of 1773 for the twenty-first-century Tea Party movement might seem slight; surely the name is happenstance, the knee breeches knickknacks, the rhetoric of revolution unthinking. But that’s not entirely the case, especially in Boston, where the local chapter of the Tea Party bears a particular burden: it happened here. After Santelli’s call to arms—dubbed “the rant heard round the world”—Austin Hess, a twenty-six-year-old engineer, showed up at a Tax Day rally on the Boston Common carrying a sign that read “I Can Stimulate Myself” and wearing a tricornered hat, the genuine article, wide-brimmed and raffish. “Everybody, anywhere I go, always asks me, ‘Where did you get that hat?’ ” Hess told me. “Everybody in the movement is interested in the Revolution.” He takes his debt to the Founders seriously: “We believe that we are carrying on their tradition, and if they were around today they would be in the streets with us, leading us, and they’d be even angrier than we are. I imagine we’d have to politely ask them to leave their muskets at home.” Read more in The New Yorker


by John Cassidy

New things excite the public as much as a financial scandal. When the scandal involves Goldman Sachs, the richest, most powerful firm on Wall Street, and the central figure is an unknown thirty-one-year-old Frenchman who refers to himself as Fabulous Fab, the result is a barrage of news stories that most people don’t fully understand but which create a widespread sense that some unprecedented skullduggery has been revealed and that villainous investment bankers will finally be held to account. Yet so far the facts don’t suggest anything that dramatic. On April 16th, the Securities and Exchange Commission filed a lawsuit against Goldman and Fabrice Tourre, a relatively junior employee, charging them with misleading investors during a 2007 deal involving subprime mortgages. Goldman has denied wrongdoing, and the suit, in any case, is a civil one. Unless the Justice Department launches a criminal investigation, neither Tourre nor his bosses will face the possibility of jail time.

Even before the S.E.C. suit, it was widely believed that Goldman had placed bets against subprime-mortgage bonds while simultaneously hawking them to some of its clients. This belief persisted despite Goldman’s insistence that it neither foresaw the housing collapse nor positioned itself to benefit from it. In a calculated display of humility, David Viniar, Goldman’s chief financial officer, recently told Business Week that the firm wasn’t that smart. But we now know that, in early 2007, John Paulson, a New York hedge-fund manager and Goldman client, was determined to sell short the subprime market in anticipation of a crash. To help him do it, he enlisted the services of Tourre, a mortgage trader who was then just twenty-eight. The case turns on whether Goldman had a legal obligation to disclose Paulson’s involvement in its subsequent issuance of a complicated derivative security known as a “synthetic collateralized debt obligation,” whose value was tied to dozens of subprime-mortgage bonds. If the individual home loans that backed the bonds performed well—if the borrowers continued to make their monthly payments—the C.D.O.’s buyers would enjoy a decent return. But if delinquencies and foreclosures rose, they stood to lose heavily.

In such a setup, the buyers assume that someone will be betting against the bonds, so the quality of the underlying credit is key. Goldman told investors that a specialist mortgage firm called A.C.A. had compiled the portfolio. “One thing that we need to make sure A.C.A. understands is that we want their name on this transaction,” Tourre wrote in an e-mail, adding that it “will be important that we can use A.C.A.’s branding to help distribute” the securities. The government alleges that Goldman failed to disclose that not only was Paulson betting against the new securities but that he had helped select the mortgage assets, supplying A.C.A. with a list of individual subprime bonds to include with its own choices. (This sounds a little like a racetrack allowing a gambler to select horses and jockeys to run in a race, without informing the other bettors.) Tourre also allegedly told A.C.A.—falsely, the government contends—that Paulson invested two hundred million dollars in the new securities. Read more in The New Yorker

The Financial Page

Déjà Vu
by James Surowiecki

A major Wall Street firm is accused of misleading clients by concealing key conflicts of interest. E-mails suggest that an employee touted its wares in public while slamming them in private. The scandal is front-page news, and observers anticipate severe damage to the firm’s reputation. We could be talking about Goldman Sachs today. But we could also be talking about Citigroup or Merrill Lynch in 2002, after the tech bubble burst. Then there was widespread anger at banks’ dodgy practices and reckless behavior, and an insistence that investors and regulators needed to be more vigilant. So why are we going through this all over again?

In the middle of the past decade, it seemed as if Americans thought that Wall Street could do no wrong. But just a couple of years earlier people thought that Wall Street could do nothing right. High-profile analysts had put “buy” ratings on the stocks of companies that they privately called “pigs.” WorldCom and Enron committed outrageous accounting fraud, the latter abetted by the venerable Arthur Andersen. There was so much bad behavior that it was hard to keep track—I.P.O. spinning, mutual-fund late trading, Adelphia, Tyco. There was shock that companies whose viability depended on reputation had so casually exploited their clients, and a sense that it would take a long time for the banks to win back trust.

If only. The post-bubble backlash gave rise to useful new regulations, but it had no discernible impact on Wall Street’s actual business. The very year that the analyst scandal broke, investors gave major offenders like Citigroup and Merrill Lynch more money to manage. Within a few years, financial-industry profits were at an all-time high. Will investors forgive as easily this time? “The rational part of my brain says that after something like the Goldman thing no one will want to do business with them in the future,” Barry Ritholtz, an asset manager and the author of “Bailout Nation,” says. “But the experienced part of my brain says that nothing significant is going to change.” Goldman, at least, can point to a track record of enormous success, but even terrible performance doesn’t always drive customers away. Ritholtz points to Merrill. Its advice helped bankrupt Orange County, in 1994. Its clients lost huge sums during the Internet bubble. And it lost more than fifty billion dollars in the credit crisis. Yet plenty of people still trust it with their money. Ritholtz says, “It’s like what Hegel supposedly said: The only thing we learn from history is that we learn nothing from history.”

Why the amnesia? Greed is part of it. Easy money, which the housing bubble seemed to promise, put people in a forgiving mood. Investors’ losses during the technology bubble also had the paradoxical effect of making them need Wall Street more: they wanted high returns in order to make up what they’d lost. Just as gamblers who are down keep returning to the casino (it’s called “chasing losses”), state pension funds and nonprofits that had lost a bundle in the tech bubble were among the most aggressive investors in the risky parts of the subprime swamp. Read more in The New Yorker


Written by Theophyle

May 2, 2010 at 9:58 am

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