Why Crony Capitalist Brats Make Me ILL

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When the central banks turn the money markets and the capital markets into carry-trade driven casinos in this manner, the result is inherently a massive, dead-weight loss to economic output and national wealth. That’s because capital and other economic resources are drastically mis-allocated to pointless secondary market speculation and pure economic waste. For example, there are now upwards of a trillion dollars of assets managed by so-called “funds-of-funds”. The latter skim off several percentage points of profit on top of the 20% that the underlying hedge funds extract on their winnings in the central bank casino. Yet they provide no free market based economic value added whatsoever—-except to deliver to their wealthy clients the equivalent of race track tips regarding which hedge funds are likely to win, place or show during the coming weeks or quarters.

Among the many evils flowing from the serial bubble machine ensconced in the Eccles Building is the stupendous boom and bust cycles that it unleashes among so-called “risk assets”.  This is not the free market at work in the slightest. Under a regime of honest interest rates and two-way price discovery (that is, absent the central bank put) there never would have been the legion of dotcom billionaires of the first Greenspan Bubble, nor the multi–billionaires who won the Big Short prize when the Fed’s housing bubble collapsed in 2007-2008. And the tens of millions of retail investors who got lured into these get rich manias would not have parted with nearly so much of their accumulated savings, either.

And so, living high on the hog from these unearned rents, the operators and owners of funds-of-funds—pure artifacts of financialization— consume the services of swank resorts, office chefs and chartered Gulf Streams that would not be demanded on the free market. There could never be enough profit in honest two-way markets in “risk assets” to absorb the cantilevered fee layering that exists in the Wall Street casino today.

By contrast, in a real free market the principal features of the Fed’s serial bubble machine would be precluded in the first place. The gambling windfalls which result from short-run speculation in risk assets funded primarily with ZERO-COGS—cheap, short- term repo and wholesale funding—-would not exist because there would be no pegged money markets offering the economic absurdity of free money for seven years running. Likewise, the abject plundering of the slow-footed home-gamers who get lured into these speculative ramps would also not exist because chronic “pump and dump” schemes could not survive in honest two-way markets.

Yet absent the inherent checks and balances of the free market these central bank enabled casinos do not simply boom-and-bust randomly—they do so chronically and predictably. With the ever increasing confidence levels developed over the bubble cycles since the early 1990s, an entrenched class of permanent, professional speculators has learned to front-run the maneuvers of our monetary politburo almost perfectly.

Accordingly, they do not hesitate to ride the bubble on the way up until they see the lights go off in the Eccles Building, nor plunge back into the post-crash carnage at cents on the dollar when the Fed re-opens the sluice gates, as it did in the winter of 2008-2009.  So what has emerged is a permanent moveable feast of speculation where the same so-called “risk assets” are strip-mined over and over as these massive and artificial central bank financial bubbles wax, wane and wax again.

Exhibit number one at the moment might be the $119 million annual paycheck that 30-year old Jimmy Levin earned recently trading “structured credit”  at Ochs-Ziff Capital Management. During the year in question his winnings apparently exceeded by 25% the combined $94 million that was hauled down by the CEOs of the largest 6 banks in the US—that is to say, the well-coddled crony capitalists who run JPM, BAC, GS, MS, C and WFC.

But when you strip away the euphemisms, it becomes clear that young Mr. Levin’s astonishing win did not result from inventing something unique, useful and permanent like Bill Gate’s desk-top software. No, the entire windfall resulted from the utterly transient trading fact of being audacious and lucky enough to be standing around in the vicinity of a Fed enabled “third dip” on toxic sub-prime securities.

During 2012 Levin’s 14-person team of speculators apparently made a $2.0 billion profit on a short-term bet on about $7.5 billion of busted loans and bonds— mainly the smoking remnants of sub-prime CDOs and private labor MBS. As head of the trading group, Leven’s share was apparently the aforesaid $119 million, and this swell outcome was truly a gigs-to-riches story.

It seems that only a few years back Jimmy had excelled at teaching the son of the joint’s founder, Daniel Och’s, how to water-ski at summer camp. Levin then got himself a “computer science” degree at Harvard, an intern job at a stepping-stone firm and eventually a gig at Ochs-Ziff Capital Management— where soon the sub-prime triple-dip presented itself. And then, lickety-split, Levin landed among the top 0.0001% of wealth holders in what is surely no longer Horatio Alger’s America.

Here’s the point. In an honest free market there would not be a Ochs-Ziff Capital Management with $40 billion of casino chips. There would not be tens of billions of busted financial assets laying around the streets of Wall Street for Fed front-runners to scoop up when the timing was propitious.

Likewise, in an honest two-way market, no one in their right mind would bet $7.5 billion on financial drek using high leverage and minimal hedges. And no 30-year old would be given leave to close his eyes and bet the ranch, as apparently Levin did, based on merely the “housing recovery” word clouds being emitted by the monetary politburo and its echo-boxes in the financial press.

In short, free market capitalism is not about something for nothing.

The central bank casino that gave rise to the Levin fortune has also rendered an even more noxious off-spring: namely, a culture of entitlement among the casino gamblers that fuels insensible crony capitalist plunder throughout the land. So today comes forward one Vincent Viola, founder of the HFT firm, Virtue Financial, demanding a $100 million ransom form the hapless taxpayers of Florida—-a burned-over economic province that might as well be labeled ground zero of the Fed’s serial bubble machine.

It seems that only a few months ago, Viola purchased the Florida Panthers hockey team for $750 million—notwithstanding the fact that it appears to be losing about $25 million annually. Needless to say, during the 5-years he was building Virtue Financial, Mr. “Viola”—-who is blessed with the happenstance of a truly resonant family name—did not have much experience loosing money. According to his IPO filings, Virtue Financial was profitable on 1,277 days out of 1,278 days it has operated in its current firm. That’s a win rate of 0.9992175.  Only in Bubbles Ben’s casino!

The point is simple. Once upon a time no honest capitalist tycoon would have had the gall to demand that taxpayers fund his polo ponies and players.  So add the noxious culture of entitlement and political corruption to the list of ills that our monetary central planners have created.

People like Vincent Viola should make true believers in liberty and free enterprise downright ill!

The worst thing is that the Vince Viola story is just par for the course. Try this nightmare of plunder that came out of the crony capitalist bailout of GM: the fast money boys reaped  billions from the busted securities of a bankrupt auto supplier based on outright blackmail of the White House. (from “The Great Deformation: The Corruption of Capitalism In America”,  pp 662-665).

READ ENTIRE ARTICLE HERE: http://davidstockmanscontracorner.com/why-crony-capitalist-brats-make-me-ill/

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commented 2014-04-18 00:19:11 -0400 · Flag
Beauforde writes:

Stockman is such a light in the Darkness. Men like him prove that there are still a few honest men of character in existence…tragically Washington D.C. is a hellish pit of decadence, opportunism, self-interest and naked greed. A man like Stockman in the Age of Obama is like Cicero at Nero’s orgy…a helpless observer.