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ARE HEDGE FUNDS, QUEEN ISABELLA AND THE NOW-REPEALED GLASS-STEAGALL ACT RELATED? (PART I)

June 11, 2014

ARE HEDGE FUNDS, QUEEN ISABELLA AND THE NOW REPEALED GLASS-STEAGALL ACT RELATED? (PART I)
To be sure, the relationship between and among the three is tenuous and perhaps a bit of a stretch, but though they were unrelated in time (1492 for Isabella, 1933 for Glass-Steagall, and today’s hedge fund industry), there is a clear connection between and among the three that one can now make with the clarity of hindsight.
As pointed out in David Cay Johnston’s book, Free Lunch, the regal Christian couple Isabella and Ferdinand did more than expel the Moors from Spain and finance the expedition of Christopher Columbus; they were (like all European royalty) business people and business-like in financing the expedition that brought the New World to Europe with all its gold and silver, the “Spanish Main,” English privateers, imports of potatoes and tobacco etc. Queen Isabella was a shrewd business woman.
(You will not read the following in any of the romanticized versions of Columbus’s epic trip to the New World in 1492 or his October arrival there because it doesn’t accord with our myths, which are set in concrete.) Isabella did not sell her jewels to pay for Columbus’s expedition. She rather made the city of Palos provide for free the use of two ships for a year as tribute, and since Columbus was an Italian sailing for Spain (speaking of labor outsourcing), she borrowed money from Italian bankers (speaking of outsourcing capital) to help finance the trip in an exercise of spreading the risk (aka hedging).
I am unfamiliar with the terms of her agreement with the Italians, but it smacks of hedging her bets on the trip with borrowed money (now euphemistically called “leverage”), which is characteristic of how today’s hedge fund operators swell their investment capital for a throw of the dice. I will discuss how you and I are (for the most part) unknowingly involved and liable today in losing money in this crap game played by hedge funds and Wall Street banks due to repeal of Glass-Steagall and our failure to date to reenact this bill (and redefine and include hedge funds and other such investment pools within its terms) in Part II of this essay.
The trip to America was not one of high adventure (as we are led to believe); it was a business trip to India (or so “Round World” Columbus believed), and he failed to get there. The Western Hemisphere was a formidable obstacle to his further progress. His three-ship squadron barely made landfall. Columbus nonetheless called the local people he discovered there “Indians,” and the European designation stuck. (Magellan found a way around the New World to the Orient some 29 years later at a different latitude, one never traversed by Columbus in his subsequent expeditions to the New World.)
Isabella also made a deal with Columbus that would ultimately make him rich, but only after she got back her investment and the lion’s share of the profit. Even so, Columbus died a wealthy man, though he spent some time in chains before that in what the royal court described as “a little misunderstanding.” When money is at stake, then and now, there seems to be a lot of room for “misunderstanding.” Chains are out of vogue now, having been supplanted by debtors’ prisons of the Industrial Revolution (as described by Dickens) and, of course, slavery as practiced in this country up until some 150 years ago. We have different ways and means of enslaving the working class these days, e.g., chronic wage inequality, reductions in domestic pay due to competition with slave labor elsewhere via subsidizing of outsourcing, monolithic right to work laws via state legislatures etc. etc. etc.
The long ago deal Isabella cut with Columbus is believed by many to be the basis for the standard deal cut by hedge funds and their investors today, a so-called “2 and 20” deal. The modern version of such an arrangement is that the hedge fund charges a fee of 2% per year as a management fee and that the hedge fund retains 20% of profits made for the year (if any). Some charge more.
In Part II of this essay, I will zero in on the connection between public liability (read potential bailouts and other prospective debits to the public purse) and the devastating effects of the repeal of Glass-Steagall, which has as a result allowed underregulated and overleveraged hedge funds and other such giant investment pools of money to roam the globe looking for a quick buck in spot pricing gaps or other such anomalies in the market, exotic derivatives etc., and thanks to the repeal of Glass-Steagall, with our treasury as backstop.
America’s survival as a viable nation state is at great and continuing risk and no rational and unbought member of Congress irrespective of party could vote not to reinstate Glass-Steagall to remove such a risk to America’s financial markets and even those of the world (unless they would like to see a global deflation that would make the Great Depression look like a stroll in the park). I for one am opposed to the idea of leaving America’s future up to underregulated and overleveraged money changers and paper shufflers who, thanks to political chicanery and lack of public accountability, are virtually free to bankrupt America. How can such a situation continue, i.e., how can you and I be potentially liable but have no say in how to “hedge” our own exposure? Stay tuned for more specifics in Part II. GERALD E

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