Everyone’s buzzing about the Bloomberg Markets report that unveiled the details of a July 2008 meeting between former Treasury Secretary Hank Paulson and several big name hedge fund managers, during which Paulson tipped the hedge funders off about a possible government takeover of Fannie Mae and Freddie Mac. But should we really be surprised?
The substance of the information that Paulson disclosed and its significance to the severity of the financial crisis—an event that still affects and shapes the economic mindset today—has fuelled the angry sentiment among financial bloggers and the public in reaction to the expose. But, the sharing of information from federal regulators to the head honchos within the financial industry is nothing new.
Just last week, the Wall Street Journal reported that there was a group of “well-connected investors and analysts with access to top Federal Reserve officials who give them a chance at early clues to the central bank’s next policy moves” that knew the details of the Fed’s Operation Twist in August, over a month before its announcement in September. By that time, the chance to make profits off 10-year Treasury bonds, which soared after Twist was publicized, had long passed.
Conversations are important to both sides, making it difficult for the Fed to completely close its doors to traders and analysts. Fed officials want to know how investors might respond to changes in monetary policy and to avoid surprising markets. Investors, meanwhile, reveal developments that might pose unseen dangers to the U.S. economy, say people familiar with the matter.
Just browsing through Treasury Secretary Timothy Geithner’s schedule from 2010, which was obtained through a Freedom of Information Act back then, contact between the regulator and top financiers seem commonplace. We noted one day (May 7) where he received and made calls to Morgan Stanley’s James Gorman, Goldman Sachs’ Lloyd Blankfein, JP Morgan’s Jamie Dimon and Blackstone’s Larry Fink.
The WSJ noted a similar list of contacts for New York Fed President William Dudley:
Over the past two-and-a-half years, Mr. Dudley has had dozens of private meetings, according to his calendar, which lists SAC Capital Advisors, Citadel Investment Group, Duquesne Capital Management, and Tudor Investments, among others. Lloyd Blankfein, chief of Goldman Sachs Group Inc., and Mr. Fink, of BlackRock, also had private meetings, according to Mr. Dudley’s calendar.
Dudley was so concerned about what hedge funders and bankers thought, he created an Investor Advisory Committee on Financial Markets full of them to gather their thoughts. Meanwhile—investors on the panel were able to get insight on Fed thinking too.
The passage of information from Washington to Wall Street also has intermediaries. In October, the WSJ released a report on consultancies that essentially sell the information they gather from connections on Capitol Hill to those in the financial industry. In the wake of the financial crisis, investors are eager to receive information from Washington because any piece of regulation can swing markets.
The Bloomberg expose is a great piece of muckraking that uncovers exactly what transpired amongst top government officials during one of the most significant economic ordeals in recent history. But, as Bloomberg View columnist Bill Cohan pointed out, the value of the story lies in the fact that it “lets you behind the scenes, to let you know what we all suspect is happening anyway.”
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