According to records obtained under the Freedom of Information Act by Kenneth H. Thomas, lecturer in Finance at The Wharton School, a phone call from none other than Robert Rubin (a.k.a. u201CMr. Bailoutu201D) to Ben Bernanke in early August set in motion a series of public and private sector conversations that culminated in the surprise discount rate cut on August 17th:
The Federal Reserve’s Aug. 7 decision to keep interest rates unchanged set off a chain of high-level discussions with Wall Street executives, money managers and cabinet officials that culminated in Chairman Ben S. Bernanke’s public about-face 10 days later, according to records of his schedule.
Starting with a phone call from former Treasury Secretary Robert Rubin the day after the August rate meeting, Bernanke’s appointments included Lewis Ranieri, founder of Hyperion Capital Management Inc., and Raymond Dalio, president of Bridgewater Associates.
Not surprisingly, Bernanke also consulted with Hank Paulson:
Bernanke was also in frequent contact with Treasury Secretary Henry Paulson, who said in an interview last month that he meets the chairman regularly.
Let’s establish a time line, keeping in mind Rubin and Paulson are ex-Goldman Sachs CEOs in direct communication with the chairman of the Fed…
Aug. 7 — The Fed stands firm, keeping rates unchanged.
Aug. 8 — Rubin calls Bernanke.
Aug. 9 — Bernanke calls some Wall Street bigwigs including Ray Dalio at Bridgewater Associates, the 4th largest U.S. hedge fund firm with $32 billion under management (Dalio is personally worth $4.0 billion according to the latest Forbes 400 issue). The Wall Street Journal reports, “the Fed twice entered the market today to pump a total of about $24 billion of liquidity into the system, more than its typical daily open-market activities.”
Aug. 10 — A Goldman Sachs “quant” hedge fund, Global Equity Opportunities, suffers a brutal week, losing about 28% of its value to $3.6 billion. Its North American Equity Opportunities fund and Goldman’s flagship, Global Alpha, are also taking significant losses.
Aug. 13 — Goldman Sachs injects $2.0 billion into Global Equity Opportunities. The company is joined by a group of big-name investors, including AIG’s Hank Greenberg and Eli Broad, who pony up $1 billion. (Greenberg, 82, is worth $2.8 billion; Broad, 74, is worth $7.0 billion according to Forbes.)
Aug. 16 — In a wild day, the Dow rallies back to unchanged in the final hour after being down nearly 400 points intraday. The Dow closes at 12,846.
Aug. 17 — Before the market opens, the Fed drops the discount rate by 0.50% to 5.75%, timed for maximum bullish effect on an option expiration Friday. The Dow rallies 233 points to 13,079. Global Equity Opportunities rises 12% for the week.
Aug. 31 — Global Alpha loses 22.5% in August, its worst month ever. Year-to-date, the fund has lost a third of its value. According to Bloomberg, “Investors last month notified… Goldman, the most profitable securities firm, that they plan to withdraw $1.6 billion, or almost a fifth of the fund’s assets as of July 31… Global Alpha will have to return 80 percent before the managers can resume collecting 20 percent of investment profits from clients who were in the fund at the beginning of last year.” Global Equity Opportunities finishes the month down 23%.
Sep. 14 — Global Equity Opportunities is reportedly down 1.9% so far for the month. Global Alpha is down 2.8% (and off 46% from its March 2006 peak). “People aren’t going to keep suffering losses,” said Brett Barth, a partner at New York-based BBR Partners, which invests in hedge funds. “These funds are supposed to do well with risk management. Something has gone badly awry.”
Sep. 18 — The Fed surprises the market with 0.50% cuts in both the fed funds and discount rates. The Dow rockets 336 points, its best day in 5 years, to 13,739.
Sep. 20 — Goldman reports much better than expected 3rd quarter results. Trading and principal investments revenue checks in at $7.6 billion, up 21% from the 2nd quarter and up 73% from a year earlier. “The numbers are great,” Glenn Schorr, an analyst at UBS AG in New York, wrote in a note to investors today. The earnings demonstrate Goldman’s “ability to not only navigate choppy waters, but make a ton of money doing so,” he said.
Oct. 1 — The Dow closes at a record 14,088.
Oct. 3 — Goldman Sachs stock hits an intraday high of 230.63, up 46% from its mid-August lows and within 2% of its all-time high.
It is no secret Goldman Sachs has plenty of friends in high places. It is no secret the company, as well as the rest of Wall Street, was on the ropes in August. In mid-August, politically-savvy Hank Greenberg wrote a big check and a week later he was 12% in the black. By the end of August, Goldman reported its second best trading results ever. How much of their good fortune was a result of skill we’ll leave to the reader’s imagination.
Were Goldman, Hyperion, Bridgewater and others privy to what is essentially inside information? A friend and keen observer of the financial scene writes:
Bernanke might defend himself by arguing that he only asked the questions and didn’t answer any. Give me a break! Great traders like Ranieri made their fortunes reading the nuances of comments made by other traders AND policymakers. Tone and emphasis matter as does the types of questions being asked. It is a HUGE advantage having this kind of special access.
Lew Rockwell is right: Politics is a rich man’s game.
Kevin Duffy [send him mail] is a principal of Bearing Asset Management.