Obama's Right to Free Speech
- May 10, 2009
President Obama enjoys the same rights as the average citizen,
even when he engages in political grandstanding and advocates
substantively bad economic policies.
Clifford Asness, Principal of AQR Capital Management, seems to
disagree. He calls the president’s recent remarks about
hedge funds “libelous,” but he may have meant to
write slanderous. (Hedge
Fund Manager Strikes Back at Obama,
NYTimes Dealbook, May 5, 2009.)
President Obama called hedge fund managers “speculators” who
were “refusing to sacrifice like everyone else” and
who wanted “to
hold out for the prospect of an unjustified taxpayer-funded bailout” of
Hedge fund managers are outraged, and Asness calls himself “unafraid” and
paints himself a hero for speaking out against a popular President.
He thinks hedge fund managers are caving out of fear.
I agree with Mr. Asness that neither the United Auto Workers
nor its pension fund should receive special treatment. Hedge
fund managers are obliged not to “sacrifice” their
clients’ money or agree to payouts that would have been
out of order under bankruptcy.
In Mr. Asness’s parlance it is “stealing” to “sacrifice” clients’ money.
Mr. Asness says it is the job of hedge fund managers to maximize
the outcome for its investors, but in this unregulated industry,
many high profile hedge fund managers helped themselves to investors’ funds
or made material misrepresentations to investors. I don’t
recall Mr. Asness’s letter expressing outrage about outright
theft by hedge fund managers. Then there is the more benign but
galling hubris of “quant funds” that touted how their
models enabled them to outperform the market—until they
wildly underperformed the market during the current debacle.
It probably felt like a “sacrifice” to their investors.
Mr. Asness is not defending Eagle Scouts, albeit there are many
hedge fund managers of high integrity, even when their returns
are not high.
Mr. Asness writes that “the President screaming that the
hedge funds are looking for an unjustified taxpayer-funded bailout
is the big lie writ large." He adds it
is “because hedge funds have not
taken government funds that they could stand up to this bullying.” Yet
indirectly at least, some hedge funds have been beneficiaries
of the taxpayer funded bailout, and some were direct contributors
to the need for bailouts. Hedge funds may not have had a starring
role in the financial meltdown, but they were supporting actors.
Where was Mr. Asness’s outrage about the role of certain
hedge funds in value destroying securitizations that fueled the
financial meltdown? In my opinion, several hedge funds deserve
scrutiny by the Department of Justice for their role in disastrous
CDOs. If the worst hedge funds get is a misdirected scolding,
then some of them are getting off too lightly.
Taxpayers are on the hook both directly and indirectly. When
the creditors of Bear Stearns Asset Management’s (BSAM)
hedge funds demanded that Bear Stearns step in, it did. BSAM’s
other hedge funds may have had their credit lines yanked if Bear
Stearns had not bailed out the creditors of two of its problem
funds. Those money-losing hedge fund assets ended up on the balance
sheet of Bear Stearns. Now JPMorgan Chase is holding the bag.
I’ll bet some of those assets or like-kind assets ended
up in the $30 billion Maiden Lane vehicle that has already been
written down by $4.4 billion. Citigroup took $9 billion of assets
on balance sheet from Old Lane Partners, the hedge fund Vikram
Pandit ran before he became CEO of Citigroup. Merrill Lynch,
prior to its merger with Bank of America, supplied hedge funds
with non-recourse financing, and those financed assets may boomerang
back on its balance sheet. The U.S. taxpayer bailed out AIG’s
credit default swap counterparty/creditors that included some
hedge funds. Taxpayers handed over TARP money partly to fund
these debacles. Many prime brokers are able to continue funding
hedge funds only because the government (the taxpayer) is providing
them with unprecedented funding. Saying that hedge funds have
been truly off balance sheet is—to use Asness’s words—“the
big lie writ large.”
Mr. Asness ends with this taunt: “I am ready for my ‘personalized’ tax
rate now.” Would that be the ‘personalized’ tax
rate currently paid by most of his fellow citizens on their income? Mr. Asness should not be suggesting that other citizens—even
when that citizen is the President—should have fewer citizenship
rights than he, especially since he (along with other hedge fund
managers) enjoys tax breaks on his hedge fund management fees
unavailable to the average wage earner. Perhaps Mr. Asness is
afraid hedge fund managers are caving from fear that their privileged
tax breaks will be revoked.
President Obama’s apparent financial naivete—or
perhaps a willingness to destroy capitalism by changing the
rules—is indeed annoying. It is especially annoying to
me if it was partly inspired by the actions of some hedge funds.
But Mr. Asness is correct when he says: “I’m entitled
to my voice and to speak it loudly...in this great country.” That
is why I take issue when Mr. Asness seems to characterize a
public Presidential scolding as illegal.
In this great country, POTUS is equally free to vent his frustration
as Mr. Asness. Nothing about President Obama’s remarks
seemed slanderous; it is called free speech. POTUS has a right
to spout bad financial policies in public. I disagree with POTUS
that bond investors should take a back seat to union interests.
But I also disagree that hedge fund managers should have the
same easy access to leverage and tax breaks that they enjoyed
in the past, since both investors and taxpayers have ultimately
paid for the mistakes of hedge fund managers.
Tavakoli is the president of Tavakoli Structured Finance,
a Chicago-based firm that provides consulting to financial institutions
and institutional investors. Ms. Tavakoli has more than 20 years
of experience in senior investment banking positions, trading,
structuring and marketing structured financial products. She
is a former adjunct professor of derivatives at the University
of Chicago's Graduate School of Business. She is the author of: Credit
Derivatives & Synthetic Structures (John
Wiley & Sons,
1998, 2001), Structured
Finance & Collateralized Debt Obligations (John
Wiley & Sons, 2008), and
Mr. Buffett: What An Investor Learns 1,269 Miles
From Wall Street (John
Wiley & Sons
of Tavakoli Structured Finance
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