Saturday, July 19, 2008

Chuck Schumer: a hedge fund manager's useful idiot?

"Mick Danger" -- one of Donald Luskin's contacts -- wonders about Chuck Schumer's relationships with certain hedge fund operators. You may recall that Schumer touched off a bank run at IndyMac by releasing a letter that questioned the viability of the bank.

The director of the OTS noted that the letter frightened depositors, who withdrew funds at a catastrophic clip: "In the ...11 business days [following Schumer's letter], depositors withdrew more than $1.3 billion from their accounts." This Schumer-induced run proved fatal for the bank.

The SEC is investigating hedge funds to see if they circulate rumors, knowing they are false, and trade on them, manipulating the market... Someone -- with an interest -- brought Schumer information on IndyMac. Who? When? Why? What are the chances that Schumer was looking into irregularities into IndyMac because some hedgie with a big short position turned him onto it?

Well, they ain't zero.

What are the chances Schumer was "investigating" IndyMac because the Senate Banking Committee assigned that case to him? Zero.

What are the chances the SEC enforcement guys will get very shy, very fast if they pick up a trail leading up the Hill? Close to 100%. (Note, Senators have a constitutional shield against certain prosecutions of actions taken in the course of their work as Members of Congress.)

Most likely result? The SEC staff will pluck a few hapless hedgies out of the middle ranks and shoot them in the public square.

Is Schumer correct? Or did Schumer break a law by leaking his letter? What if he were a research director at a hedge fund and told people what he suspected? Would that be the kind of rumor the SEC is hunting?

Think there might be a clever hedge fund which might use Schumer to leak info so they can trade on it without fear of prosecution? Uh, yeah.

Jerry Bowyer also has a take on "how Schumer set off a bank panic":

Well, they went after Indymac, and the result is the second largest bank failure in US history. Of course, we’ll hear a lot about ‘greed’ this week, and we should. But whose greed? Schumer’s greed for power? Community activists' greed for shakedown money? Trial lawyers greedy for huge class action settlements?

Hedge fund managers who write big checks to these groups and the Democratic Party (including Schumer’s Democratic Senatorial Campaign Committee) and then turn around and make mountains of money shorting mortgage paper? No, we’ll hear about none of the above from most in the media. The real culprits will have gotten away with it, and the victims will bear the blame.

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