As Mitt Romney’s primary challengers make last ditch efforts to stop him by looking at his record at the helm of Bain Capital, he has fought back, trying to characterize this as “an attack on capitalism.” The problem is that not all “capitalism” is created equally. If Bain was just making money by taking risk and adding value to the companies they dealt with, that’s one thing. But we all know that’s not the only way to make money in the finance business. And the looters shouldn’t be allowed to hide behind the growers.
Matt Taibbi brings us a finance story entitled Everything You Need to Know About Wall Street, in One Brief Tale. A guy who worked for Bear Stearns personally enriched himself, in part, by doing the following:
1) Bundle a bunch of crap mortgages that you know to be crap.
2) Have them insured.
3) Sell them to investors.
4) Don’t tell the investors about a deal whereby the original mortgage lender would pay you back if a mortgage goes into default.
5) Pocket the default payback money when it comes.
6) Bet against the insurers.
7) When the insurers crash under the weight of your crappy mortgages, cash in on your short bet.
Then, apparently, you’ll have enough money to rent out 94 Aspen hotel rooms for three days to throw a party for your daughter.
Romney wasn’t a “financier.” My understanding is that with Bain he would take failing existing companies, strip them down and sell them off. Sometimes that has to be done. But some people are portraying him as a venture capitalist, putting money into startup type companies. That wasn’t the case at all.
As even the Wall Street Journal acknowledges, telling the looters from the growers is difficult.
In fact, your example has nothing to do with leveraged buyouts or Bain Capital.
And your brief example is a big part of the story behind the bursting of the housing bubble and the resulting recession, which we are still trying to battle out of, as the housing market has not yet recovered. But of course some try to blame Obama for not waving his magic wand and undoing what took a couple of decades to set up.
Remarkably, I think I agree with all three comments.
I’m not a Romney fan, but what he did as a venture capitalist is not the investment banking shenanigans Taibbi describes.
Tipsy, by definition Romney was not a “venture capitalist” at Bain.
But of course some try to blame Obama for not waving his magic wand and undoing what took a couple of decades to set up.
Obama has undoubtedly made things worse, or at least stretched out the healing process. In particular, we need to get people out of homes that they can’t afford to live in and get those homes back on the market, so that this shadow inventory of foreclosed homes gets behind us.
In particular, if you were a speculator who doesn’t live in the home, your foreclosure should be fast tracked.
The idea that we would do loan modifications for speculators is just insane.
Yes, this will cause some short term pain. Maybe a lot of pain. But it needs to be done, and not doing it just means that our malaise just lingers. It is going on 5 years now since the housing market imploded, it is time to get this crap behind us.
I’m reading a book about the great capitalists from about 1865 to 1900, and it is kind of funny that Doug’s anti-Wall Street rhetoric is nothing new. He could have been writing the same thing about J.P. Morgan back in that timeframe (when he tried to corner the gold market, and pretty much crashed the stock market and the economy as a result)
I’ll agree with you on the last point. The pendulum keeps swinging, so a lot of the same issues (and, therefore, rhetoric) keep cropping up.
At root, it’s an argument about how resources should be allocated, whether they’re currently being allocated in that fashion, and, if not, how to go about implementing a system that allocates them properly.
At root, it’s an argument about how resources should be allocated, whether they’re currently being allocated in that fashion, and, if not, how to go about implementing a system that allocates them properly.
Spoken like a planner who never read Hayek and knows nothing about “The Knowledge Problem”.
Allocation is not something that you are going to be able to control.
At the root cause, what is the problem in your example? Who did this guy swindle? Anyone who should have known better? It seems to me that there were a lot of professional financial types who didn’t do their due diligence.
As long as they’re losing their own money, too bad for them. We need only be concerned when the government comes in and starts making guarantees that need to be paid off.
Even in the JP Morgan example, the crash started when US Grant had the Treasury sell gold into the market, in an attempt to thwart Morgan. Before that point, it was just one Wall Street speculator making money off another.