12/20/10 Laguna Beach, California – Deception, like a mushroom, flourishes in darkness and manure. And the only way to end a deception is to drag it out into the light…and cut out the BS.
Two weeks ago, for the first time ever, the Federal Reserve dragged its crisis-era bailout activities out into the light of day (thank you Senator Bernie Sanders and Congressman Ron Paul!). The resulting revelations exposed a number of shocking truths, like the truth that the big Wall Street banks did not merely receive one $10 billion loan each from the TARP facility; they also received tens of billions of undisclosed loans from other lending facilities. On top of that, many of the big banks raised hundreds of billions dollars by secretly selling mortgage-backed securities directly to the Fed.
These massive undisclosed bailouts contributed greatly to the relatively robust earnings results many big banks produced during 2009 and early 2010 – results that would have been impossible without the hidden assistance. Accordingly, stock market participants came to believe the fiction that the big banks were “healthy,” rather than the truth that they were massively subsidized. As opinions changed, so did share prices, corporate bond prices, credit default swap prices, etc.
Some investors made money from the resulting asset-repricing, some lost money. Neither side reaped the reward it deserved, but only the result that the Fed’s manipulations produced. In an honest and transparent marketplace, the list of winning and losing investors would have been very different than the actual list that emerged from the crisis.
In a truly free market, the financial markets, themselves, pick the investors who win or lose, not the Chairman of the Federal Reserve or the Secretary of the Treasury.
Deceptions flourished during 2009, primarily because the Fed was secretly pumping trillions of dollars into various private companies without ever disclosing the recipients, timing or sums involved. The outside world was left to guess. By so doing, the Fed dramatically “un-leveled” the playing field of American capitalism.
Many undeserving companies benefited from preferential treatment during the crisis, while many deserving investors, savers and taxpayers directly or indirectly subsidized this preferential treatment. That’s not free-market capitalism, dear investor. That’s cheating.
Eric Fry
for The Daily Reckoning
Eric Fry
Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research — institutional research products dedicated to international investment opportunities and short selling.
Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
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Well put. For example if you had slapped a short position on “gods work” Goldman, then suffered losses was it due to Goldman doing great or the Fed gigging the game behind the scenes?
Had the “free market” been left to be a free market, you should have seen a decent return. Instead, people were punished for doing their homework and not being stupid.
One wonders if a person who was burned in this manner would have a legal footing against the fed for manipulating the market.
That is not a “free market”. It is very close to Chavez’s recent declaration regarding guaranteed returns on investments in Venezuela’s government controlled entities.
Very enjoyable read. I hope the rain is not making the 101 into a sloppy drive today.
America has been conquered by bankers. Creating new money steals purchasing power from the people for the ruling party. It’s partially our own fault for being dumb enough to trust paper money. “A fool and his money (wealth) are soon parted.”
Good article.
But we alll know all of this and have for a long time now.
Anybody have any ideas on how to return to a purer capitalism?