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Rahm the crook and 'Magnetar'… ‘Some rob you with a six-gun, and some with a fountain pen…’ Update: Now they rob you with a spreadsheet and a swap

My family and I live in the 5th Illinois Congressional District, where we've also had the Substance office for the past 14 years. Although the district begins at Lake Michigan, it extends west through what in Chicago is called the "Bungalow Belt," the largely middle class and working class communities for which the city is known. The 5th Congressional District also has the Illinois distinction of having sent more of its recent Congressmen to prison (or, for the time being, to federal indictment) than any other Congressional District in the USA. Of the last four people the Fifth sent to the U.S. House of Representatives, one (Dan Rostenkowski) went to federal prison, one (Rod Blagojevich) is under federal indictment, and one (Mike Quigley) is currently serving in the U.S. House of Representatives and has not been indicted.

But for many of us, the biggest crook who represented the district over the last 50 years is not one of the two indicted, but the one who made his millions "legally" — Rahm Emmanuel.

On January 7, 2008, then President George W. Bush (above, left) chose Chicago as the place to celebrate the anniversary of 'No Child Left Behind.' From the beginning of the NCLB era, Bush was able to count on the support of Chicago Mayor Richard M. Daley (third from left, rear above) and Chicago's congressional delegation, including Congressman Rahm Emmanuel (to Daley's right, above). The photo opportunity for Bush was arranged jointly by the White House and Chicago's City Hall, with Emmanuel being the only member of the Chicago Congressional Delegation to be part of the event, which was held at Greeley Elementary School behind a phalanx of security who had sniper rifles on the roofs of buildings adjacent to the school during the 25-minute media event staged inside. Photo provided to Substance by the official press pool allowed inside at the event, courtesy of the Chicago Tribune. Substance photographers were not permitted inside the security perimeter at Greeley that day). In the opinion of many of us, the crookedest Congressman in the history of the 5th Illinois turns out, as some of us knew (and opposed him at the time he was running) was the guy who robbed the most, but did it legally during those days of Wall Street ripoffs: Rahm Emmanuel. As those who've paid attention know, the big thieves rob you, as Woody Guthrie wrote (in "The Ballad of Pretty Boy Floyd") during the last Depression, "with a fountain pen." If Woody were singing today, he'd have to update the song, but he'd understand the basic idea.

Today, they do it with spreadsheets and superfast computers (and in the fine print of their credit card revisions). They do it in something called "investment banking," or through managing Hedge Funds. But the scam is the same. As everyone who has watched our local bank (LaSalle Bank) go through the takeover by Bank of America knows: today, as in 1934, bankers rob most people, but they do it legally. Over the past couple of decades, the various kinds of banks have bought enough lawmakers to make sure their methods are legal. And the "banks" of today are far different from those Mom and Pop banks of 80 years ago. While Chicago's 5th Congressional District still has some local banks that take your deposits, make local loans, and know you when you walk in, "banks" today are usually those outfits on Wall St. and LaSalle St., half of which don't even have lobbies or tellers. And the bankers are able to "earn" millions of dollars without ever getting their thumbs musty counting out cash when small children make deposits into their (very very very low interest) "savings" accounts). And among the most proficient of all those bankers who never handle cash or get their hands dirty that way has been "former Clinton White House staffer" Rahm Emmanuel. According to the official version of the Rahm story, our former congressman took three years off from public service to do a little investment banking, and during those years "earned" about $18 million.

But first, a little history of recent pubic servants in the 5th Illinois Congressional District:

Dan Rostenkowski, who lives by Wells High School and will still hang out around there, went to prison for some penny-ante postage scams a long long time ago.

Rod Blagojevich is a now household word both for his silly hairdo and his drunken telephone talk about Barack Obama's Senate seat. No doubt, when the fun is over, Blago, as he was known, will be doing time, too.

Our current Congressman is Mike Quigley, who did some decent work while on the Cook County Board (he exposed the TIF scams, among other things) and hopefully won't catch the 5th District curse: sticky fingers.

But the crookedest Congressman of all over the past 40 years was the guy who will never get indicated, because he made his tens of millions of dollars legally — let's repeat that, LEGALLY — as an "investment banker" during his years out of government service. That's right, Rahm Emmanuel, currently serving as White House Chief of Staff, told voters with a straight face that he "earned" a mere $18 million during the three brief years he "worked" on Wall Street. Details were never provided.

Former Chicago Congressman and Illinois Governor Rod Blagojevich (above, at a media event at Chicago's Healy Elementary School on May 27, 2006) is one of two of the last four 5th District Congressmen to be indicted on federal corruption charges. Dan Rostenkowski did federal prison time after his conviction. Blagojevich is expected to go to trial in the summer of 2010. Substance photo by George N. Schmidt.Blagojevich, who made his way in Illinois politics after he married Patti Mell, daughter of one of the most powerful aldermen in Chicago, was used to old style Chicago politics, the kind that attracts the attention of what's left of the press corps in the city (it's been decimated by the bankruptcy of the Chicago Sun-Times and Chicago Tribune, which now avoid most local news coverage in favor of features and "investigations" of the usual suspects).

Emmanuel was part of a new era of corruption, the kind that politicians like Blagojevich, Mell, and Rostenkowski can barely understand.

Rahm Emmanuel's role as a banker still hasn't gotten the attention it deserves, but that story will have to wait. Before going to the latest news reports about Rahm's careers, let's try to put that $18 million he "earned" between leaving the White House (at the end of the Clinton years) and serving in Congress before returning to the White House (at the beginning of the Obama years).

Most people in Rahm Emmanuel's old Congressional District work for a living, many in jobs that Rahm Emmanuel and others are trying to drive down the wages of an take away the pensions of. Within a few blocks of the Substance office are a half dozen firefighters, none of whom is making more than about $70,000 a year, several police officers (ditto), and any number of construction workers, contractors, teachers, bar owners, grocery store clerks, tradesmen and women, etc., etc., etc. Basically, your working class of Chicago, complete with the racial and ethnic "rainbows" that make the city so interesting.

Not one of those people can hope to earn more than $2 million working a dangerous job every day for 35 or 40 years. Not one. So if one of our neighbors saved every penny of his paycheck for 40 years, he'd have about one tenth what Congressman Rahm "earned" in three years. How does that work? What does that mean when our neighbors are lectured about making their children study hard for the so-called "global economy."

One thing it doesn't mean is working in a dusty inner city classroom for 35 years in order to qualify for a $50,000 a year pension that you are supposed to be apologizing for today. Or eating smoke during all seasons fighting fires. Or taking that radio call at 4:00 a.m. Etc. You get the point.

As the recent exposes on National Public Radio and now below show, Rahm Emmanule is definitely a man of the New Age of Chicago politicians.

TUESDAY, APRIL 13, 2010, Rahm Emanuel and Magnetar Capital: The Definition of Compromised

Magnetar

1) A neutron star with an intense magnetic field, capable of emitting toxic radiation across galaxies

2) A hedge fund, the single market player most responsible for the severity of the 2008 financial crisis, through the toxic instruments it created

Rahm Emanuel

1) White House Chief of Staff

2) Politician selected by Magnetar’s CEO to be sole recipient of his political donations, 2006-2008

Strange as it may seem, nearly three years after the onset of the global financial crisis, its greatest, most destructive, and most profitable “it ought to have been a crime” has gone almost entirely unnoticed.

Most people believe that they understand the broad outlines of the financial crisis, and that a central element was an explosion in mortgages made to people who could not afford them.

But how did such destructive behavior occur on such a large scale? The conventional view is that the subprime mortgage blowup resulted from bank executives being short-sighted, greedy, or both.

But that simple story deters inquiry into how and why this disaster came to pass. Some recognize that the appetite for subprime mortgages seemed to come from investors. In fact, it resulted in a large degree from the way traders at certain large banks used subprime mortgages in a strategy to make their profits seem much larger than they actually were. The effect of this “negative basis trade” strategy was to overpay employees of those banks and consequently eviscerate the banks’ abilities to withstand future economic uncertainty.

The appetite for subprime mortgages was also inflated by people who were betting that the housing market would fail.

Moreover, the devastation wrought by this strategy remains virtually a secret. The fact that it has been almost invisible and appears to have been entirely legal, demonstrates a set of vexing problems. First, that investigations of the crisis have not delved deeply enough, and second, that the deregulation so keenly sought by the financial services industry has made activities legal that by any common-sense standard should be criminal.

But the sponsors of this toxic trade did bother to make sure they had a powerful friend. The head of the firm in question gave substantial amounts of money by political contribution standards to Rahm Emanuel’s PACs, and only his PACs, over the period when these transactions were in play.

The moving force behind a brilliant and devastating subprime short strategy was a heretofore unknown Chicago hedge fund, Magnetar, headed by Alec Litowitz, formerly of the hedge fund behemoth Citadel. Our studies indicate that Magnetar alone accounted for between 35% and 60% of demand for subprime mortgages in the year 2006.

This is how their strategy worked in detail.

The ruse at the heart of their transactions was creating subprime (so called “mezz” or mezzanine) collateralized debt obligations by investing in the riskiest layer, the so-called equity tranche. This kind of CDO consisted almost entirely of not just any subprime risk, but that of the dodgiest layer that could be sold short, the BBB tranches, via a combination of actual bonds and credit default swaps.

But Magnetar’s true objective was not to invest in this toxic waste, which its role as funder of the CDO would lead most to believe. While Magnetar paid roughly 5% of the total deal value for its equity stake, it took a much bigger short position by acting as a protection buyer on some of the credit default swaps created by these same CDOs. This insurance in turn was artificially cheap because over 80% of the deal was rated AAA. Most investors did not understand what Magnetar recognized: this concentrated exposure to the very riskiest type of bond associated with risky mortgage borrowers, each of these CDOs was a binary bet. It would either work out (in which case Magnetar would still show a thin profit) or it would fail completely, giving Magnetar an enormous profit and wiping out even the AAA investors who mistakenly believed they were protected by having other investors sit below them and take losses first. Thus the AAA investors were only earning AAA returns for BBB risk.

As the equity investor, Magnetar could further stack the deck in its favor through the influence it gained over the deals’ parameters. It was able to ensure that the CDOs held particularly dubious BBB exposures, and pushed for, and often got, “triggerless” structures, which stripped away another protection most deals had. When CDOs start to show significant losses, the payments to the lower-tier investors, including the equity tranche, are cut or halted to defend the AAA layer, much the way the human body, when exposed to severe cold, will restrict blood flow from the extremities to save the brain and organs. But triggerless deals, even as they started to fail, kept paying the lower tranche holders, including, in this case, Magnetar itself.

While these transactions may sound similar to the widely decried Goldman synthetic CDO program, Abacus, by which the firm went short various real estate exposures, effectively dumping the risk on customers, the Magnetar program was not only much larger, but also produced far more devastating systemic consequences, thanks to the distinctive structure of its CDOs.

One of the many programs that Rahm Emmanuel promoted during his time in the White House and Congress has been union busting, a program favored by the "Global Economy" people with whom Emmanuel worked while an "investment banker." During recent years, non union work has expanded not only around the world, but even in Emmanuel's old 5th Illinois Congressional District, where scab contractors are able to get away with more and more scab work. The 'Rat' — which unions bring to the curb when picketing scabs and scab contractors — was parked at the corner of Irving Park Road and Monitor Ave. on April 12, 2010, because a job there was using non-union bricklayers. Substance photo by Samuel G. Schmidt.As I explain at greater length in my book ECONNED: How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism, the use of cash bonds turned mezz CDOs from a dumping ground for otherwise unsellable mortgage bond risk to a breeding ground for demand. Ex Magnetar-inspired appetite, it is hard to find an explanation for the widely-discussed phenomenon of 2006 and 2007, of the mortgage securitization pipeline screaming for more subprime product, precisely when Federal Reserve interest rate increases should have stanched demand for risky loans above all others.

Market participants have estimated that Magnetar’s CDOs drove over 50% of demand for subprime bonds during the market’s toxic phase, 2006 and 2007. With the input of a team including professionals who have worked on some of these trades, ECONNED, we’ve performed repeated, conservative analyses that indicate the true figure is probably at least 35% of demand, and perhaps as high as 60%. And that’s before allowing for the fact that Magnetar’s strategy was imitated by the proprietary trading desks of major dealers. And for good reason. Magnetar made billions, some observers contend as much as subprime kingpin John Paulson, whose fund earned over $20 billion on its short strategy.

And the hedge fund’s cagey bet on Rahm? Litowitz and his wife had never before made significant political donations. In 2005, they started giving to Rahm and his PACs, and only PACs connected to Rahm, just before the Magnetar CDO program began, and continued through the first quarter of 2008, when the trade would have started to pay out handsomely. The Litowitzs gave a total of $8,000 to Emanuel and $10,000 to his Our Common Values PAC in May 2005. In 2006 and 2007, they contributed $51,700 to the Democratic Congressional Campaign Committee, while Emanuel was chairman. We have been advised by individuals involved in political fundraising that the amounts given would be considered significant, and the way the payments were distributed across the PACs is sophisticated. Put it another way: this money was not given impersonally.

But this troubling connection should be no surprise. Rahm has long been a favorite of the hedge funds, having raised more money from them than any Senator not running for President. Not surprisingly, he has been a staunch supporter of the financial services industry, and is widely credited with playing a key role in securing passage of the TARP after its initial defeat.

As the Magnetar-Rahm connection highlights, Obama raised more money from financial services players than any previous presidential candidate, so it can hardly be a surprise that he and his minions are happy to give the industry a free pass. Key policy figures maintain that no one was at fault, that there was a pervasive lack of regulation, and there are therefore no bad actors. That party line also means that destructive behavior is and will remain unquestioned, unexamined, uncorrected, and unpunished. We are still paying for the costs of the financial train wreck of 2007 and 2008. We can no longer afford the costs of willful blindness.

Addendum: Hat tip to Corrente who posted on this relationship on April 11, and finally prodded us to post our writeup of this story. We worked closely with Moe Tkacik on the story she put up on DailyFinance and took down, and had held off publishing our version pending her releasing her final version.

More on this topic:

Michael Lewis' New Book: The Big Short

Michael Burry & Scion Capital's Primer on Credit Default Swaps & the Subprime Mortgage Short Don’t Want To Read That Gigantic Report About The Hedge Fund Magnetar? (Phil’s Stock World - Members S..., 4/12/10)

Read more on Subprime lending, Collateralized debt obligation (CDO), 2008 Financial Crisis at Wikinvest

SUBSTANCE HAS ALSO POSTED THE COMMENTS THAT THE ABOVE STORY GENERATED DURING ITS FIRST TWO DAYS:

Bearman says: April 13, 2010 at 1:39 pm

I don’t suppose Magnetar’s CDO protection-selling counterparties were then made good by the AIG pass-through, by any chance?

Reply: Kid Dynamite says: April 13, 2010 at 1:46 pm

Yves – i’m sure you’ve seen the ProPublica piece, and the response from Magnetar:

http://www.propublica.org/documents/item/magnetars-letter-in-response

do you have any comment on their claim that “Notably, focusing solely on the group of CDOs in which Magnetar was the initial purchaser of the equity, Magnetar had a net long notional position. To put this into perspective, Magnetar would earn materially more money if these CDOs in aggregate performed well than if these CDOs performed poorly.”

that claim seems to conflict directly with what you wrote above: “each of these CDOs was a binary bet. It would either work out (in which case Magnetar would still show a thin profit) or it would fail completely, giving Magnetar an enormous profit and wiping out even the AAA investors who mistakenly believed they were protected by having other investors sit below them and take losses first.”

Reply. Richard Smith says: April 13, 2010 at 2:08 pm

Hi Kid,

Yves is brewing up a response right now, in between chewing horribly scented gum.

Had to do the Rahm thing first — been sitting on it for ages politely waiting for Moe T to do her version, then the alert corrente did their own homework. You have of course homed right in on the key point (have you read ECONned??). Odd – the macroresilience piece gets the idea of the trade, but doesn’t spot the BS in Magentar’s response. We think we can fix that… Bit of polishing and cussing from Yves and we’ll have something up in an hour or two I should think.

Reply: Kid Dynamite says:

April 13, 2010 at 1:50 pm

yves, i also recommend this piece, if you haven’t seen it:

http://www.macroresilience.com/2010/04/11/the-magnetar-trade/

especially for this explanation of why Magnetar wanted the riskiest equity tranches they could get (due to the binary skew of the outcome):

“So what does all this have to do with Magnetar’s desire to include riskier assets in their long equity portfolios? If one believes that only a small perturbation is required to tip the market over into a state of collapse, then the long position should be weighted towards the riskiest possible asset portfolio. Essentially, the above framework implies that there is no benefit to having safer “long” positions in the long-short portfolio. The fragility of the system means that either there is no perturbation and all assets perform no matter how low-quality they are, or there is a perturbation and even “high quality” assets default.”

Reply. Nude says: April 13, 2010 at 2:30 pm

I used to think there was a difference between the parties. I mean, I really thought that there was a fundamental philosophical difference in how Democrats and Republicans governed. But this particular clusterf*ck has roots going back to the Clinton administration, continued by the Bush administration, and further enabled by the Obama administration. This post clearly illustrates that there no difference in the results, regardless of who is in power.

In the meantime, the population is distracted by the class envy arguments being put forth (wealth inequality, income redistribution, etc.) by the parties through the media, but the truth is really this: it’s not the wealthy trying to enslave the population, it’s the government. The wealthy are just the tools being used to accomplish the task, by both sides. It’s no longer “of, by, and for the People”, but a consolidation of Federal powers enabled by crisis after crisis after crisis.

Reply. Valissa says: April 13, 2010 at 3:23 pm

I used to think it started with Clinton too, but I was surprised to discover that neoliberalism started out rather quietly under Jimmy Carter (via his financial advisors and political backers), the first corporatist Democrat, and then came out in a much stronger Republican flavor via Ronald Reagan. Clinton tried to do a kinder, gentler form of corporatism than Reagan and then came Bush Jr’s special neo-con version of neoliberal economics. IMO, corporatism and it’s cousin neoliberalism have been cultural trends for some time. Blaming any particular political party seems rather pointless as it has to do with financial belief systems of the elites who decide on candidates to back their agendas, while spouting party line memes for the party faithful as part of divide and conquer.

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turn_self_off says:

April 13, 2010 at 7:36 pm

sounds to me like government and the wealth are one and the same in this. One pay the other to pass laws so that it becomes easier for the “investor” to get even more money.

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lambert strether says:

April 13, 2010 at 8:25 pm

That would be called “rent-seeking behavior” by the rich and (I’d say) “rent-enabling behavior” by the state.

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turn.self.off says:

April 14, 2010 at 7:58 am

and in the end we are back at the pre-industrial stage, where the nobles where both rent-enabler and rent-seeker. Only diff is the title of investor rather then count.

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scraping_by says:

April 13, 2010 at 7:44 pm

“The wealthy are just the tools being used to accomplish the task, by both sides. It’s no longer “of, by, and for the People”, but a consolidation of Federal powers enabled by crisis after crisis after crisis.”

Sorry, dear. The people who pay the money are the buyers, and the ones who take money are bought. Business executives don’t retire to cushy government jobs, our officials retire to cash in without shame to the private sphere. Elected officials don’t sit around exclusive clubs mocking corporate CEOs, it’s the business types who laugh up their sleeves.

I think this is the crime other writers have called “financial arson.” If so, that’s an interesting analogy. Arson is a crime of changing neighborhoods, places going seedy and being deserted by productive citizens. It’s a last quick score on assets that would otherwise go to nothing. In other words, America is Detroit.

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Doug Terpstra says:

April 13, 2010 at 11:38 pm

They launder and sanitize their crimes in Orwellian legislation, but they are still crimes against the people And one day they must pay dearly.

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decora says:

April 13, 2010 at 8:04 pm

“the way the payments were distributed across the PACs is sophisticated”

can you be more specific? i thought the whole point of giving money to a party’s ‘campaign committee’ was to avoid the impression that you were targeting specific congress people?

here is the FEC.gov stuff for ‘litowitz’ in illinois.

LITOWITZ, ALEC

FRIENDS OF RAHM EMANUEL

05/02/2005 2100.00

05/02/2005 2100.00

OUR COMMON VALUES PAC

05/02/2005 5000.00

JOHN KERRY FOR PRESIDENT INC

12/29/2003 2000.00

DEMOCRATIC CONGRESSIONAL CAMPAIGN COMMITTEE

05/16/2006 26700.00

03/31/2003 10000.00

03/28/2007 25000.00

LITOWITZ, JENNIFER L

DEMOCRATIC SENATORIAL CAMPAIGN COMMITTEE

02/25/2008 28500.00

FRIENDS OF MARK WARNER

05/16/2008 2300.00

FRIENDS OF RAHM EMANUEL

05/02/2005 1700.00

05/02/2005 2100.00

OUR COMMON VALUES PAC

05/02/2005 5000.00

total: 112500.00

So yeah they sure loved them some Democrats… but why’d they love ‘em so much?

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decora says:

April 13, 2010 at 8:22 pm

i mean obviously they targeted emanuel but.. emanuel was a top dog.. what did he supposedly do ‘in return’?

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Doug Terpstra says:

April 13, 2010 at 11:59 pm

This may shed light on Oh-Bummer’s continued obeisance and genuflection to Israel as well as his prostrations toward Wall $treet . The Litowitz connection may relate to Eretz (greater) Israel.

Rahm Emanuel’s pappa is a Zionist and former member of Israel’s Irgun paramilitary (terrorist group). Shortly after Oh-Bummer’s election win, he said of Rahm’s role for the new-boss-same-as-the-old-boss, “Obviously he’ll influence the president to be pro-Israel. Why wouldn’t he?” “What is he, an Arab? He’s not going to be mopping floors at the White House.”

Rahm also recently called progressive’s intent to target conservadems blocking public-option helathcare “fucking retarded”. Perhaps a better question would be, “what has he not been willing to do for all that blood-money bribery?” He and his boss slither on their bellies.

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VenusVictrix says:

April 13, 2010 at 2:45 pm

Thank you for “illuminating” the special relationship with Rahm. Reading it kind of makes my skin crawl, but at least I have a better understanding of the current administration’s apathy about this entire con.

Say Yves, I think you need to revisit the Michael Lewis Big Con story and continue your debunking. It’s important for the public to realize what a scam he is perpetrating with that book. I haven’t had the stomach to actually buy it, but I did read an excerpt from the latest Vanity Fair. This piece, featuring the Michael Burry character, actually contradicts claims made by Lewis in his earlier Vanity Fair piece on Joe Cassano and AIG (August, 2009: The Man Who Crashed the World).

In the Cassano/AIG story, Lewis claims AIG had no idea what was in the CDOs that they were insuring. But then in this latest piece, he credits Burry with actually “inventing” the CDS on specific subprime mortgage bonds, which he arranged directly with Goldman Sachs (which they then supposedly had AIG “reinsure”, or something to that effect).

So this raises an interesting question: how did Goldman fool AIG into insuring CDOs they knew nothing about – when Burry was supposedly very specific about the bonds he was betting on?

Furthermore, why would Goldman be entering into credit default swap agreements with a guy who had no securities license, nor was his firm licensed or registered as an investment advisor with the SEC? Seriously: even Madoff filed his Form ADV (albeit a little late, but there is one on file for him: http://www.adviserinfo.sec.gov/IAPD/Content/ViewForm/ADV/Sections/iapd_AdvAllPages.aspx?ORG_PK=0262B11C0008014200BE1FE001EB5709056C8CC0&STATE_CD=&TOTAL_DRPS=2&Print=Y)

Not only that, but at the time that Burry supposedly held credit default swaps valued at $750 million (per Lewis), his Scion Fund reported a mere $100 million in equities holdings, according to the Form 13F filed with the SEC (see Scion Capital LLC: http://www.sec.gov/cgi-bin/browse-edgar?company=scion&match=contains=&filenum=&State=&Country=&SIC=&owner=exclude&Find=Find+Companies&action=getcompany) In fact, I’ve looked at all of the quarterly Institutional Investment Manager Reports filed by Scion, and I don’t see how this guy returned any profit to his investors – let alone the whopping returns Michael Lewis claims in his story.

There’s a number of other problems with his account, but it all lends credence to my own contention that Lewis is a propaganda-meister, and I think there is good reason to suspect anything he prints or promotes.

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liberal says:

April 13, 2010 at 2:59 pm

There’s a number of other problems with his account, but it all lends credence to my own contention that Lewis is a propaganda-meister, and I think there is good reason to suspect anything he prints or promotes.

Heh.

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AK says:

April 13, 2010 at 3:16 pm

Yves:

>> We worked closely with Moe Tkacik on the story she put up on DailyFinance and took down, and had held off publishing our version pending her releasing her final version.

gone …

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Yves Smith says:

April 13, 2010 at 5:36 pm

We have a copy of the one that was posted briefly, as well as some of her drafts, but since it is her work, it isn’t right for us to post it. She has gone incommunicado, FWIW.

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alex says:

April 13, 2010 at 5:52 pm

“She has gone incommunicado”

This is starting to sound like a Cold War thriller.

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lambert strether says:

April 13, 2010 at 8:27 pm

You don’t have that copy stored on just one server, right? And you’ve got a few offline?

Second the motion on thriller-esque.

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George Washington says:

April 13, 2010 at 3:17 pm

This is a very important post by Yves.

If you want it to get more eyeballs, vote it up at reddit:

http://www.reddit.com/r/business/comments/bqf9v/key_policy_figures_maintain_that_no_one_was_at/

http://www.reddit.com/r/Economics/comments/bqf9r/obama_raised_more_money_from_financial_services/

http://www.reddit.com/r/politics/comments/bqf4o/rahm_emanuel_and_magnetar_capital_the_definition/

(and someone should post to Digg)

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Dave says:

April 13, 2010 at 3:57 pm

Wow!

And what a BS response from Magnetar, full of finance mumbo jumbo they are hoping to confuse ProPublica with.

Fun fact: I interviewed for a job in Magnetar’s NYC office in 2006. Little did I know of their evil machinations in the background!

Here’s to hoping for some justice yet…

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VietnamVet says:

April 13, 2010 at 4:11 pm

Rahm Emanuel was a Congressman, the fourth-ranking House Democrat. This does not change the fact that there are power and money ties between the Corporate and Political Elites.

The real question is how the United States got hit by the greatest financial crises since the Great Depression.

Two reasons: Greed and Religious Ideology. The Elites grabbed the money. The Enablers deregulated the financial industry. Stealing investor’s money is not a crime today.

WaMu’s government regulators informed DC Headquarters of their financial irregularities but the revolving door and political contributions assured that the Corporation had a free hand until it collapsed the American housing market.

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i on the ball patriot says:

April 13, 2010 at 4:29 pm

i on the ball patriot is throwing in the towel at NC …

… this comment was intended for Alex, who was responding to Lee Anne’s first in thread comment; “wake me up when these fellas start talking fraud.” (good comment Lee Anne) in the Ed Harrison post; “The Origins of the Next Crisis”. Best to you all and keep up the good fight …

Its a very well planned and orchestrated intentional global take down of the underclass and middle class. Forgiving it for sheer ineptness of the charlatan VOODOO ‘economists’ is either naive or apologist bullshit!

Governments are captured by the central banks of the ruling elite and thereby rendered non responsive to the will of their respective citizens.

The elite and their central bankers, and their hijacked governments, are going about their take over through debt trapping the entire planet through the use of captured media and an army of sell out, VOODOO SCIENCE ‘economists’ (read fucktards whose only claim to fame in life is to create ever more complex derivative variations of debt traps — easy credit — that mask the deceptions, the over leveraged dangers, and the selective placement of that easy credit.

Debt traps (easy credit) are intentionally and selectively deployed not to assist the debtor and extract a ‘reasonable’ profit, as in the good old vanilla greed days, but now, in the newer more pernicious greed world that we live in, to control the debtor by pitting his less prudent consumption against his prudent neighbor’s consumption to create intentional rifts. Easy credit is being use to divide and conquer us all by putting us all in a well planned and executed perpetual conflict with each other. The comments in this post, the post itself, and many other posts at NC, are testimony to how well the scheme is working.

The really superfluous VOODOO ‘economists’ (similar to those who create intercontinental ballistic missiles and nuclear weapons in the military industrial complex), work to justify the existence of their sorry ass, sell out, scum bag jobs and products, and so get involved in the factional wars justifying one weapons system versus another (vanilla greed vs pernicious greed).

The reality is that it really is a Military Banking Complex, and it is in effect more powerful and more damaging to humanity than the Military Industrial Complex, because its weapons — easy credit and its many derivative variations — are being fired and exploded right now, in real time, all over the planet, and enslaving, exploiting, and eliminating, large portions of the world underclass and middle class.

Deception is the strongest political force on the planet.

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Doug Terpstra says:

April 14, 2010 at 12:12 am

This stuff can be hard on the soul and injurious to the spirit. Take a break for rehab, but please dont’ go. Your intensity of caring, your brilliant wit, and even your refreshing vulgarity are most appreciated and would be too sorely missed.

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Albatross says:

April 14, 2010 at 6:36 am

Me, too, will miss your posts dearly ‘i on the ball patriot’.

What other blogs do you follow, let us know please.

All the best.

Albatross

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cc says:

April 13, 2010 at 5:13 pm

just please dont tell the media and spoil the idol worship, of the deceiver in cheif.

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BenF says:

April 13, 2010 at 5:56 pm

what the heck happened to Moe Tkacik’s story?

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Yves Smith says:

April 13, 2010 at 6:26 pm

We had given Moe the lead on the Rahm connection, but to her credit, she did an impressive amount of reporting (as in proving out our analysis of the trade and putting considerable color on the Rahm angle).

My understanding was that it was not supposed to be posted when it went up (in fact, our Richard Smith found that it was up, with “Hold” on it, and I alerted Moe). She had it completed from her perspective, but as a matter of protocol wanted to give Magnetar the opportunity to comment before it was published. They had hired a high-powered PR person with a journalism background. Moe and he had at least one substantive conversation and then seemed to engage in protracted phone tag. I was getting the impression he was simply trying to string her along as long as possible. Given that Magnetar clearly knew at that point that ProPublica had a major story in the offing, this appears to be an effort to limit the number of critical articles that would come to light.

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Glen says:

April 13, 2010 at 9:17 pm

Yves,

Thanks for the excellent work. I suspect the MSM will never pick up this story so please work with Ms. Tkacik to ensure this story has maximum exposure (i.e don’t give Magnetar a prolonged opportunity to use delaying tactics to bury this story.)

Please at some point cross post this article to Huffpo, DailyKos, etc, all other non-MSM methods, along with linking previous posts on the excessive biasing Wall St linkages of other key government players such as Paulson, Geithner, etc. It’s only stories such as these exposing the current appalling corruption in our economic policy and regulation which can force real reform.

Once again, thanks.

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readerOfTeaLeaves says:

April 13, 2010 at 9:53 pm

Well, maybe the MSM won’t go with it, but I’ll bet that it does.

The MSM loves a good story.

This one is a doozy.

Money! Backroom Deals! Secrecy! Political Power! Captured Government!

Scandal! Suspicion! Major Money!

How can the MSM ignore that?

That’s like meth for the MSM.

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Mike Vronsky says:

April 13, 2010 at 10:42 pm

Except it goes against the hope/change story they already sold us.

attempter says:

April 14, 2010 at 1:59 am

She had it completed from her perspective, but as a matter of protocol wanted to give Magnetar the opportunity to comment before it was published. They had hired a high-powered PR person with a journalism background. Moe and he had at least one substantive conversation and then seemed to engage in protracted phone tag. I was getting the impression he was simply trying to string her along as long as possible. Given that Magnetar clearly knew at that point that ProPublica had a major story in the offing, this appears to be an effort to limit the number of critical articles that would come to light.

I admit I don’t understand this. It sounds like you thought there was a non-zero chance of a different result.

“A matter of protocol…” Well, maybe one of these days those who seek to act in the public interest will stop hobbling themselves by adhering to rules they know the enemy will never abide by.

Sorry if there’s something I missed, but these explanations sound like nothing but that.

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Yves Smith says:

April 14, 2010 at 3:38 am

I’m puzzled at your remark. ProPublica contacted Magnetar. Moe has a journalistic background. While it is normal for bloggers to opine without contacting the subject of a story, my understanding of journalism norms is that that behavior would be seen as unusual, maybe even unprofessional.

Re the PR guy, yes I was very puzzled at her indulging him to the degree she did, since everything in her piece was backed by third party sources. I asked her how long people like her normally allowed the subject of an article to provide a comment, since she seemed to have allowed more than enough time by any usual standard. She had indicated it often depended on how much of a hurry the journalist was in, and could be as little as 24 hours.

She had gotten very busy with other deadlines, this clearly affected her focus. And frankly, Rahm had been a hot topic before the health care bill passed, and seemed to die down. Moe may have thought this piece could wait.

I can only explain what happened from our perspective. I am not a mind reader.

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attempter says:

April 14, 2010 at 6:32 am

Sorry. I just meant it didn’t seem to explain why they’d take down the piece after posting it, if it’s clear by now that Magnetar was just stalling.

Regarding the journalistic protocols, I guess by now I think where the corporate media is so clearly waging ideological war on behalf of the rackets, what little public interest journalism is left needs to also take off the gloves to some extent. Offering them a chance to comment before publication, fine. But unless that’s with the expectation that they’ll only try to stall and obfuscate, and with a firm deadline, it really is extending courtesies they’d never extend back.

Esteban says:

April 13, 2010 at 6:06 pm

The idea of lending money which would never be seen again was originally a banking solution to government efforts at curbing red lining. I had a conversation with a (now deceased) major S&L officer way back in the early 1990s. I was told a couple of things: 1. it’s cheaper, and better advertising to build a bank building than it is to simply advertise; 2. “If you’re going to service prime areas, you have to make loans in less desirable areas as well. What the heck! The bank is going to make a certain percentage of bad loans no matter where they lend. Why not just allocate a certain portion of capital which would be lost anyway, and just lend in those government supported areas?! Brilliant, thought he. And, once one gets to talking in terms of ‘why not’s’ anything becomes possible. Why not securitize those loans and sell them off? Love it!! ‘Why not?’ people ask. Some say, ‘Let’s do it again, before someone who understands all this is elected!’ Losses are like rain. They come every Spring season.

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Frank Ohsen says:

April 13, 2010 at 6:12 pm

(Shoot originally meant to put this on this blurb.)

All these learned opinions from the expert brains. Which brings something to mind of late I’ve been pondering.

Who do you think is the smartest “economist-type” out there?

After much perusing, listening, and lurking, I’m leaning towards Yves these days. Overall from micro to macro she’s just superb isn’t she? (No, this is not a brown nose manuever either you smart asses. Ok, ok, I know what you’re thinking. Maybe just a little rubbing is all. But hey it’s deserved rubbing.)

FO

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Frank Ohsen says:

April 13, 2010 at 6:19 pm

Oh and btw, did I mention her mind gives me a cerebral chubby?

FO

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Jim says:

April 13, 2010 at 6:37 pm

I on the ball: I wish you would reconsider your withdrawl from NC posting. We are probably only at the beginning of this crisis and we need as many dedicated souls as possible to figure a way out.

I’ve learned the hard way in my own life that I don’t have all the anwers (although I often like to think I do). A final closure on this issue of power an how it really operates may not be attainable. Wisdom, perhaps, comes from how we conduct the search not in the specific results we attain from it.

If one is able to engage in coversations with others, converting all of one’s partners into teachers as well as students then maybe one is on the right path.

Your insights have been of great benefit to me–lets continue the debate!

I would love to engage you more on the issue of who really controls things (i.e the exact nature of our present elites)

anyway

Take Care

Reply

VenusVictrix says:

April 14, 2010 at 2:26 am

Jim, I second that. I’m new here on NC, but I on the ball certainly caught my attention right away.

His comments are brilliant. Hope he won’t give up – he needs to know others are listening.

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steelhead23 says:

April 13, 2010 at 7:30 pm

I need to read more, but who provided the CDS to this scam? They were defrauded. Why no clawback lawsuits? Is it possible that the entire enterprise was a scam – that is – the officers of the reinsurance company (AIG?) were themselves bought off – or their compensation packages shaped in such a way that they were encouraged to defraud their own companies? If AIG paid off on Magnetar’s CDSs, wasn’t the U.S. government defrauded? What did Rahm know, and when did he know it?

This story places the issue in the White House. Are Yves and Moe ready to do Woodward and Bernstein redux? Am I the first to coin the term Magnetar-gate? Ladies, you are at the beginning of a HUGE story. I hope you stay with it.

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VenusVictrix says:

April 14, 2010 at 2:10 am

Here’s an excerpt from an 8-K filed by AIG on 3-17-0:

“On March 11, 2008, AIG also amended certain outstanding long-term incentive awards to shorten the vesting periods . .”

So, in response to your question were AIG officers bought off, I think you are absolutely correct. I suspect the officers and senior management all agreed to convert AIG into the toxic waste dump for garbage assets that couldn’t be sold without revealing the extent of the fraud committed in the creation of same.

I think that also explains the otherwise incomprehensible “retention bonuses” paid to AIG-FP employees. They couldn’t exactly disclose that the payments were really hush-money.

It may also be that AIG was already in deep trouble with some other still undisclosed scheme that threatened the company’s financial security anyway. Prior to their demise, AIG-FP was heavily promoting various commodity-linked ETFs on the London Stock Exchange. In fact, Joe Cassano headed up that project, but interestingly none of the reports mention this fact.

I think the omitted details are the most telling. But it would certainly make sense that with AIG’s long history of fraud and financial irregularities that they were caught in another of their scams, and offered a Get-Out-Of-Jail-Free pass, in exchange for a rather large favor.

Just a thought -

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VenusVictrix says:

April 14, 2010 at 2:11 am

Make that 3-17-08. Sorry.

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Yves Smith says:

April 14, 2010 at 3:42 am

The other side of the CDS was the CDO. The CDO was in effect the protection seller. See the post by Tom Adams today on the lack of much in the way of demand for ABS CDO tranches.

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Tom Crowl says:

April 13, 2010 at 8:05 pm

Food for thought:

“Institutions will try to preserve the problem to which they are the solution.” – Clay Shirky

and this:

“Transformative change happens when industries democratize, when they’re ripped from the sole domain of companies, governments and other institutions and handed over to regular folks.” – Chris Anderson

The technologies of credit creation and finance must be opened up. And it’s no use waiting for governments to do a decent job of it.

Technology, Development and the Social Energy Grid

http://culturalengineer.blogspot.com/2010/04/technology-human-development-and-social.html

Reply

prostratedragon says:

April 13, 2010 at 8:35 pm

A tangential glance at part of the problem:

Credit Default Swaps and the Credit Crisis

Currently published in J. Econ. Perspectives. Careful, that abstract almost made me cry. I wish I were kidding about that.

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fresno dan says:

April 14, 2010 at 6:22 am

Thanks for the link – always like to read both sides.

Baseline Scenario has a differing point of view – that CDS are not an accurate pricing mechanism

http://baselinescenario.com/2010/04/13/michael-lewis-big-short/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+BaselineScenario+%28The+Baseline+Scenario%29

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MichaelC says:

April 13, 2010 at 8:36 pm

And in related (to your negative basis trade point) news.

At the end of 2009, AIG still had credit-default swaps on $180 billion in CDOs and other asset pools, of which $150 billion were with European banks that bought them for regulatory capital benefits

(from the 4/12 WSJ article AIG, Goldman Unwind Soured Trades )http://online.wsj.com/article/SB10001424052702304846504575177953123007536.html?mod=WSJ_hpp_MIDDLENexttoWhatsNewsThird

This may be an investigation for another day, but it would be interesting if any of the GS partnered Magnetar deals found themselves in the negative basis books of these counterparties through the dynamic management process used in the Davis Square deals.

Recall the Davis Sq deals ended up with replacement drek guaranteed by AIG,and that the Davis SQ deals ended up in negative basis (or as AIG described them Reg arb) books at the Euro banks.

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Capricorn says:

April 13, 2010 at 9:18 pm

Yves, I am a great fan of NC, and “ECONned” is great.

But several things worry me about this story.

Magnetar’s total contributions to Emanuel et al seem to be less than $100,000 total over 3 years. A lot of people backed the Obama campaign, including, I think, Soros. Compared to the millions the campaign would have cost, $100K doesn’t seem an awful lot, which casts some doubt on the implication of direct political influence by Magnetar.

I have no doubt that the Financial Services sector is working very hard to influence policy, and to minimize any “blame” for the GFC.

Moe Tkacik going incommunicado is a concern. It is possible that ProPublica management have pulled the story, which could leave her in a very awkward position.

It is also possible that NC is being set up here, so I think NC needs to be extremely cautious. Sitting on the story until now seems to indicate that you are.

The bottom line is still that, even if Magnetar didn’t “do it”, it could have been done, by Magnetar, other Hedge Funds or the Investment Banks. In the interests of Financial stability, that possibility needs to be closed off by appropriate regulation.

Thanks for the good work.

On another subject, I’m looking forward to seeing output from INET @ Kings. Their Web Site does not seem to report much, and has technical problems.

Reply

Sid Finster says:

April 14, 2010 at 4:04 am

This is also something like my concern. Lots of people give money to congresscreeps, especially when the congresscreep in question is the Nr. 4 ranking House Democrat and a hometown boy.

As far as “Magnetar-Gate” goes, it won’t fly, because it is too technical. If we have seen anything from recent coroporate fraud prosecutions, it is that the public does not have the patience or background to get “technical” stuff.

They need a simple story, one adapted to a short attention span or another scandal or celebrity wedding or disaster or something will come along, the masses will get distracted and move on. The 24-hour news cycle is of no help in this matter.

Then things really hit the ceiling fan and the masses start looking for scapegoats, frequently marginally connected to the real source of the problem. So it ever was.

Reply

Tim says:

April 13, 2010 at 9:56 pm

Great work Yves. Except the part where I’ve felt sick since reading it soon after it was posted.

That being said, does anyone know of any connection with “Bernstein, Litowitz et al”

Sunlight Foundation as a great site entitled http://www.TransparencyData.com.

That firm came up when filtering for Litowitz.

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EmilianoZ says:

April 13, 2010 at 10:07 pm

Litowitz is a very savvy businessman. Most of the American people don’t begrudge people success or wealth.

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Peter T says:

April 13, 2010 at 10:45 pm

Has Rahm Emanuel used his (considerable) influence as House Democrat #3 in 2006-2008 to block moves against Magnetars interests? If we can’t show any action of his in this direction, he seems to be not worse than other people in congress who need campaign donations, i.e. all.

To Magnetar’s trade: It’s like taking an insurance on your neighbor’s house and giving your neighbor bad advice how to protect against fire that you know will come. Illegal, no; immoral, yes, except that Magentar’s neighbor’s were supposed to be sophisticated about fires themselves. As long as they Magnetar didn’t break any laws, I partly admire their trading to exploit the housing bubble. The prosecutors should go after the CDO manager’s instead to see if they violated their fiduciary duty towards investors, among them their own institutions, all for raking in more fees.

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mitchw says:

April 13, 2010 at 11:45 pm

How could Magnetar not have anything to do with the CDO managers not acting as a proper fiduciary? I hope the govt is squeezing the manager to find out if Magnetar oiled them up.

What I am still not clear on is who was selling the CDS. Was it the purchasers of the CDOs signing up to receive the insurance payments, and counting it as yield? Lost here and the ProPublica piece didn’t help with this part of the trade.

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mitchw says:

April 13, 2010 at 11:49 pm

If Litowoitz came from Citadel, how much of Magnetar’s working Capital came from there?

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decora says:

April 13, 2010 at 11:55 pm

lulz, magnetar linked to michael milken.

http://www.deepcapture.com/tag/bam-capital/

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Thomasina Jefferson says:

April 14, 2010 at 2:40 am

Amazing and scary. In consequence there could be a Milken-Rahm/Obama link then.

So organised crime is running the government of the US.

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ndk says:

April 14, 2010 at 3:50 am

That’s an inappropriately pessimistic view of affairs, Thomasina. Consider the much sunnier converse: the United States Government finally found a way to control organized crime.

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Skippy says:

April 14, 2010 at 4:35 am

Indistinguishable

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Skippy says:

April 14, 2010 at 4:44 am

I would add that most of the larger corporations have been in fact criminal enterprises for before the ink was dry on the peoples hand towel aka the constitution.

Thomasina Jefferson says:

April 14, 2010 at 4:58 am

By joining it?

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ndk says:

April 14, 2010 at 5:16 am

Doesn’t the old saying go, “if you can’t beat them, join them”?

ndk says:

April 14, 2010 at 5:21 am

Despicable though that is if true — and I imagine there is more nuance and a separate point of view than that captured in the linked article — I don’t think it’s terribly relevant to this particular scandal. The issues are arcane enough and modern finance sufficiently full of abominable behavior that I don’t want to see detractions from the scandal at hand.

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fresno dan says:

April 14, 2010 at 6:11 am

“…through the first quarter of 2008, when the trade would have started to pay out handsomely. The Litowitzs gave a total of $8,000 to Emanuel and $10,000 to his Our Common Values PAC in May 2005. In 2006 and 2007…”

Gee, I don’t know which is worse – the corruption, or Rahm selling his favors sooooo cheaply (maybe he’s not as smart as they say).

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Cynthia says:

April 14, 2010 at 7:54 am

Remind me why Obama hired an bankster enabler to be his right-hand man? Is it the same reason why he hired a bankster enabler to be his Treasury Secretary? If it is, Rahm Emanuel, Tim Geithner and our good-for-nothing president should all be hauled off to the poorhouse to live powerless and penniless for the rest of their sorry lives!

Reply. Patrick says (April 14, 2010 at 8:19 am)

A lot of people are touting ProPublica for this piece as if it were some breaking investigative news. The fact remains that this story was covered by the WSJ and several bloggers back in late 2007 and early 2008. Interestingly they made no mention of this in the piece. In fact they stated that it was one of the great untold stories of the crisis. Only to their readers apparently.

Something smells here. This story has been planted for a reason. The only new news is the Rahm issue I’m reading about here. I get the part about feeding populist frenzies but there seems to be a current of “if it were not for Magnetar” none of this would have happened or at best if would have been relatively mild. It’s not our fault, it’s Magnetar’s! Party on dude.

Alec Litowitz was extremely bearish on the housing bubble long before he figured out how to straddle it. I find it as interesting that the Sandlers are funding the “non profit” ProPublica–the same people who made billions on the real estate bubble in California and who to their great fortune sold out right at the top. When you start dressing up old news something is up.



Comments:

April 16, 2010 at 11:27 PM

By: Jim Vail

Emmanuel, Emmanuel

Here's another about Rahm - while in Congress he wrote an op-ed piece in the Wall Street Journal in which he lambasted American companies that re-locate overseas to avoid paying taxes. Then he did a complete "turnaround" (visions of Obama and his support of unions?) and voted for a bill that allowed companies that off-shored to still be elgible to receive US govern. contracts.

September 23, 2011 at 1:58 PM

By: Neil Flanigan

Magnetar revisited? Rahm's Wall Street days deserve another look

After reading the latest hagiography in Chicago magazine about Rahm Emanuel, I was reminded of the old story about the widow at the funeral of her late husband. After hearing all the eulogies about what a great guy he had been, she went up to the casket one last time before things were closed. "Are you sharing one last moment with him?" asked a friend. "No, she replied. I was just checking to see if you all were talking about the same guy I was married to..."

Chicago has always been ready for the latest sucker punch, and anyone who's been paying attention can remember back in history to the days of Samuel Insull and coming all the way forward to the times of Flip Filipowski's Goose Island "tech incubator" (for which he got millions of dollars from the Daley administration). The difference between the hucksters who took Daley and the ones poised today is that they are one and the same person, Chicago's mayor.

It's possible that after Solyndra, the Obama administration will be forced to do a little more due diligence on its own people, indict a few bankers, and take a closer look at the kind of crony capitalism it pushed instead of alternative programs (like "single payer") that might have helped get the USA out of this crisis.

If that closer look ever happens, then the former "relationship banker" (and former White House Chief of Staff) who is now Chicago's mayor will deserve a very very close look.

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