Crony Capitalism and the Eurozone Deal

4 | By Shah Gilani

Is it ironic that my new e-letter is titled Insights & Indictments, and in our very first week, along comes the actual indictment of former Goldman Sachs director Rajat Gupta?

Actually, no.

There’s nothing ironic about seeing the inevitable coming.

I would add that the six criminal counts levied against Mr. Gupta – also the former director of Proctor & Gamble and AMR Corp., and former managing director of consulting giant McKinsey & Co. – should more properly be termed an indictment of “crony capitalism.”

By the way, those five counts of securities fraud are a testament to what allegedly resulted from Mr. Gupta’s insider-tipping calls to convicted hedge fund billionaire Raj Rajaratnam.

But it’s the single conspiracy count that should be commanding the most attention.

Conspiracy is exactly what the Occupy Wall Street crowds should be protesting, because that’s what’s undermining America.

Crony capitalism is the manifestation of the conspiracy of powerful, moneyed insiders to manipulate information, trades, markets, and the economy for their own personal and corporate enrichment.

But I am getting well ahead of myself…

Mr. Gupta is innocent until proven guilty, and he very well may be exonerated. Frankly, I hope this is all a terrible misunderstanding and that these charges can all be sorted out and conspiracy theories debunked once and for all.

Then again, there are some odd coincidences that don’t really look like mere coincidences…

The First Person He Called (Twice)

According to the unsealed indictment in the case, Mr. Gupta allegedly telephoned Mr. Rajaratnam a mere 16 seconds after exiting the Goldman Sachs board meeting where Gupta learned Berkshire Hathaway was going to put $5 billion into the floundering Goldman.

Galleon Group, Rajarantnam’s hedge fund, allegedly pocketed a sweet $840,000, subsequently trading Goldman shares.

Then there was the 23 seconds that elapsed before Mr. Gupta made another call to Rajaratnam, after another Goldman board meeting where Gupta learned Goldman would post its first-ever quarterly loss as a public company.

Sure sounds like a “crony” relationship to me…

There are other specifics in the six-count indictment. And no doubt there will be many more particulars uncovered and argued over the course of the trial scheduled for the spring of 2012.

As far as criminality, conspiracies, and indictments are concerned, there’s a reason we decided to name this e-letter what we did. We’re going to see more and more indictments down the road, and there are going to be times where you’re going to hear about them here before they happen.

That’s because there’s no veil of secrecy here covering greedy, guilty co-conspirators.

Nor is there any hesitation here, on my part, to proffer my insights on the markets.

And, of course, that brings us to…

The Deal With Europe

Nothing happened Wednesday… even though something was supposed to happen.

Oh, sure, there was a deal struck, but you were probably sleeping. No worries – you didn’t miss much.

There’s almost too much to say about what a farce these meetings are. To me it’s political theater of the absurd. There is no solution, period. There are only schemes to “extend and pretend.”

For example, when Brazil was asked to pitch in to the European Financial Stability Facility (EFSF), they answered, “Pitch this.”

China, too, is being begged to pitch in. The head of the Stability Facility is headed there on Friday to meet with the People’s people.

Through the grapevine it’s being said that China might pony up something through the International Monetary Fund… but only if they can sell Christine Lagarde some fake Christian Louboutin shoes so they can walk in her old ones and take over the venerable IMF, which she now heads.

So, what is the deal?

There was an agreement to reduce Greece’s debt. The scheme calls for private banks to “voluntarily” cut Greek sovereign debt by 50%. That means they have to write down their balance sheet holdings by 50%, because they are forgiving the other half of the debt.

They figure if Greece only owes them half of what they owed them yesterday, maybe they’ll have a chance of getting paid back.

Too bad Greece owes more than €350 billion euros, and private creditors hold €210 billion of that. In other words, there’s no agreed reduction in the other €140 billion owed to other institutions, like the IMF.

(Now do you see why China might play ball through the IMF?)

The late-night leaders agreed to boost what they swear is in the Stability fund, some €440 billion, by leveraging it four or five times. Really, that’s what the communiqué says, “four or five times.” Good thing they have this figured out to the last cent. They said that should expand the bailout facility to between €800 billion and €1.3 trillion.

Far be it from me to ruin their hard summiting work by telling them that 4 times 440 is actually €1.76 trillion, and 5 times 440 is €2.2 trillion… Unless there really isn’t €440 billion in the fund to start with. Hmmmm?

And, of course, because all those generous banks are going to take big capital hits due the 50% haircuts they promised to take on their Greek debt holdings, they’ll need more Tier 1 capital immediately.

Thank goodness that the leaders announced they were going to make €106 billion available to the top 70 big banks on the Continent to shore up their capital. Only they didn’t say where that money would come from…

Details, details.

It looks to me like they wanted to get a deal done. It doesn’t matter that this is the most incomplete deal they could have possibly put forward – it just matters that today, there is a deal.

The markets should rally on that simple fact.

But, once the deal is discovered to be a raw deal, I suspect there will be selling on the news of the lack of details.

This is FAR from over.


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