Saturday, June 9, 2018

How much low can this get?

Two news stories over the week gave good illustrations of how far down the slope that the mainstream discourse and the establishment elites have slipped.

The first is an excellent story in FT about the latest in line from Wall Street's stable of financial market innovations. This one is manufactured default. In simple terms - buy default insurance on a company for a specific form of default, sell that company a loan which it "defaults", pocket the default insurance even as the loan keeps getting serviced in normal course. The graphic below nicely captures the transaction.
The description,
It is the debt equivalent of a controlled explosion: offering a company favourable financing, such as low interest loans, to convince it to intentionally default in a way that will trigger payouts on CDS contracts, but without bringing down the whole company. By doing this GSO pushed its trading edge on rivals to the limits of what many saw as legal.
The protagonist being Blackstone Group's GSO Hedge Fund, and the market being that for the very controversial Credit Default Swaps (CDS). And for once, Goldman Sachs was at the receiving end of chicanery that they have been used to dispensing, ending up owning the CDS which GSO had purchased. 

There are two observations. One, the surprising thing here was what a friend described as the break down of the "honour code" among the Wall Street majors. Goldman complained in public about manufactured defaults. Clearly, even by Goldman's standards this was a new low!

Two, this was not the work of a rogue trader. This was led by a Senior Managing Director, who apparently sat on  Blackstone's European Investment Committee. Clearly this was a part of Blackstone's (or GSO's) formal business plan. 

The second concerns this article on the happenings at London's Evening Standard tabloid whose editor is the former British Chancellor of Exchequer George Osborne (HT: Ananth). The ubiquitous London daily may be the first to almost formally breakdown the barrier between news and advertisements and package advertisements as news. Here is the summary,
London’s Evening Standard newspaper, edited by the former chancellor George Osborne, has agreed a £3 million deal with six leading commercial companies, including Google and Uber, promising them “money-can’t-buy” positive news and “favourable” comment coverage... The project, called London 2020, is being directed by Osborne. It effectively sweeps away the conventional ethical divide between news and advertising inside the Standard – and is set to include “favourable” news coverage of the firms involved, with readers unable to differentiate between "news" that is paid-for and other commercially-branded content... The London Evening Standard has a circulation of close to 900,000 and distributes more copies within a two-mile radius of Westminster than the Times does across the UK nationally. Many London commuters, who pick up their free copy of the Standard at underground and rail stations, will be unaware that they will be reading paid-for news coverage that is part of a wider commercial deal.
There is another important dimension to this story - the conflicts of interest associated with George Osborne. He also hold a £650,000 a year part time job (a day a week) with BlackRock, which holds a £500 m stake in Uber, one of the six groups.

Clearly, if these are true, Osborne is pioneering the standards for a new low in the formal news media industry. 

It also draws attention to the relevance of career politicians, as against those successful elites who foray into politics occasionally. Are we better served by corrupt career politicians who may have sufficient administrative capabilities? Or are we better off with fleeting professionals (and in the net maybe equally corrupt in a more sophisticated way) whose administrative capabilities are questionable (assuming that it does require some experience of government processes to be able to control government bureaucracies and get stuff done)? After all how can we reconcile President Obama who would have been confronted with very hard decisions on Wall Street firms and regulations governing them with Citizen Obama who is hobnobbing with them in the most egregious manner? Or Governor Ben Bernanke and Economist Ben Bernanke?

Now consider this. Both Blackstone and its executives, and George Osborne form part of the liberal elite establishment on both sides of the Atlantic. Their actions and the venality inherent in them are clear enough. Despite these they remain the most respectable icons of the establishment. 

I struggle to understand why Trump's actions are any more morally repugnant than these? I can understand the indignation that comes out when Trump uses public office to aggrandise himself. But I cannot understand when such egregious fraud and venality by the icons of the liberal establishment, which by the way is pervasive, gets nary a mention. FT has to be complimented for covering the GSO story. If this is the case, why should we at all be surprised by Trump or Brexit?

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