KEITH OLBERMANN: A secret meeting — here in New York, in July 2008 — between President Bush’s Treasury Secretary and about a dozen top hedge-fund managers, right before the economy fell apart.
In our third story on the “Countdown” — nothing suspicious there, huh? News today that those hedge-fund managers got advanced word from Treasury Secretary Henry Paulson about how he would deal with the impending disaster at Fannie Mae and Freddie Mac and their trillions of dollars of mortgage-backed securities.
The story, released this morning by Bloomberg Markets magazine, said Paulson’s little lunch group included at least five former employees of Goldman Sachs, which he used to run. Did Paulson’s inside information really help the hedge-fund managers? Remembering that hedge funds are exactly what the name implies — means for big money investors to hedge their bets in case the stock market falls — consider the context. The morning of Paulson’s illicit meeting, the Dow Jones Industrial Average had opened at nearly 11,500 and, seven months later, the market had fallen so far that it had lost more than one-third of its value. It’s not the first time Paulson’s dealings have been questioned. Before a Congressional committee a year later, Republican Representative Cliff Stearns of Florida seemed appalled by how Paulson had bailed out some financial institutions.
(Excerpt from video clip) HENRY PAULSON: The next thing I would to say to you, and say it very, very clearly, is I — you know, I behaved with the —
(Excerpt from video clip) CLIFF STEARNS: You don’t think you should’ve recused yourself when you asked Lehman to go into bankruptcy and you didn’t put Bear Stearns in bankruptcy and then you folded Merrill Lynch into — I mean, isn’t there some point where you gotta say, “Hey, I got a conflict of interest here”?
OLBERMANN: Always a pleasure to welcome in the economist Jeff Madrick, senior fellow at the Roosevelt Institute and the author of “Age of Greed.” Good to see you again, sir.
JEFF MADRICK: Good to see you, Keith.
OLBERMANN: This sounds to me — as a layman — as if this is the ultimate insider trading. The hedge-fund managers get inside info from the Treasury Secretary before he does what he’s going to do. What do they do, theoretically, and what’s the evidence that they actually did it?
MADRICK: There is not much evidence that they actually did it.
OLBERMANN: Um-hmm.
MADRICK: What they could have done was sell Fannie Mae and Freddy Mac. He told them he was going to take them into conservatorship. That means they were gonna wipe out the stock. They could have sold the stock to unsuspecting investors and not have to pay it back. So, they could have made 10, 14 bucks on that — those shares with no risk. Did they do it? We don’t know for sure.
Is it likely that none of them did anything — even tell their best buddies in the other hedge funds about it? You know, I think the question answers itself. But I really have to answer — I really have to make clear how much this is taking advantage.
OLBERMANN: Yeah.
MADRICK: Of those who are not on the inside.
OLBERMANN: Right.
MADRICK: Because people often call insider trading a victimless crime. In the last “Wall Street” movie, they used that phrase. It’s not — let me go on.
OLBERMANN: Of course — no, yeah, I was just gonna say — how — people actually consider it a victimless crime when — when people who have more information are playing on the same field as — it’s as if you had people playing football who had wheels on the bottom of their feet, rather than shoes.
MADRICK: Exactly, it is indeed. I always use the example — and maybe I’ve used it with you — of the 1800s, when, if you knew where the train tracks were going —
OLBERMANN: Exactly, yes.
MADRICK: Boy, you could make a fortune. Well, needless to say, some people named Gould and Harriman and so forth knew and their cronies knew and so forth. You buy up the land from the unsuspecting farmers —
OLBERMANN: Right.
MADRICK: At a very low price. Farmland goes up. Same thing with insider trading. So, the idea that Paulson talked to these friends of his about this kind of thing suggests to me a set of values that’s very disturbing.
OLBERMANN: Uh-huh.
MADRICK: Not surprising. What’s surprising is we actually found out about it. Congratulations to Bloomberg. But the set of values that suggests, “It’s okay to take advantage of those people on the outside — who are they? We don’t have to worry about them. We have a privilege. We are special people.” And I think that’s what’s driven “Age of Greed,” if you don’t mind my saying that — the new title of my book. That kind of attitude — “Let’s not care about the little guys, the medium-size guys, even some of the big guys who, after all manage pension funds for all of us. Let’s just care about ourselves.”
OLBERMANN: Right, so we know, ethically, this has — this has very little legs to stand on. Is it — is it illegal in any way? Is there any — you can put Paulson in jail or anything?
MADRICK: No, you cannot put Paulson in jail. If they traded on the inside information — and it can still be discovered that they did, if the SEC decides to investigate or the Justice Department — if they traded on inside information, it would be illegal. Insider-information law is not entirely clear. It’s much less ambiguous than it used to be. What is clear is they could not trade and make money on that information. But again, to me, the shock — but the non-shock — is the set of values.
OLBERMANN: Right.
MADRICK: These people — this willingness to take advantage of others.
OLBERMANN: And there’s a personal twist to this? He wound up — Paulson wound up at the University of Chicago? What’s the meaning of that?
MADRICK: Well, to me, it has some meaning.
OLBERMANN: Yeah.
MADRICK: I do not treat Milton Friedman very well in my book. That was the House of Milton Friedman built — the House of Deregulation, laissez-faire, “Keep government out of almost everything” — and it’s entirely appropriate that Hank Paulsen is there.
OLBERMANN: In the Friedman chair. All right, we had this thing yesterday — $13 billion in pure profits out of the Fed. Now, we have this — about the ethically null-and-void Treasury Secretary. What are you expecting next to fall out from the Bush administration and the falling of the economy in 2008?
MADRICK: Well, there’s a good question. I think that we have to begin to understand — for a moment — TARP, Ben Bernanke and the Obama stimulus looks enlightened, compared to what’s going on in Europe. I mean, that is really something.
But the fact that they couldn’t use their advantage to get the economy going again — I don’t know what secrets lie of that. What’s very clear is the banks were bailed out, friends were bailed out. They made a lot of money. It was very easy to make money, as we found out in that story.
You just borrow at very low rates, you invest in slightly higher rates — riskless on that side — and then you borrow a lot of money to lever your investment and you’re making a fortune.
One friend of mine, Herb Allison — who’s now looking into the solar investments for the administration, hired by them, used to be president of Merrill Lynch — says nobody should get a bonus based on that kind of trading — borrowing low, investing a little more and just levering up your investment. And they got millions — tens of millions, twenties of millions — of dollars in bonuses. It’s pretty ugly.
OLBERMANN: Yeah.
MADRICK: I would call it corrupt.
OLBERMANN: I think that’s — that’s the polite term for it. The author of “Age of Greed,” Jeff Madrick. A pleasure, as always, sir.
MADRICK: Thank you.
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