Why Wall Street Gives Millions To Hillary

Wall Street 

  Raghuram Rajan, now the head of India's central bank, once wrote an academic paper blaming the financial crisis on poor people. Just yesterday, Bill Clinton placed blame for the crisis on our government. Anyone who has seen the Oscar-winning documentary Inside Job knows full well that the crisis was caused by our banks.

Banks lent trillions of dollars to home buyers on too loose of terms knowing that they could turn the resulting junk mortgages into AAA securities through the alchemy of CDOs and securitization and thus generate hundreds of billions of profit and leave the resulting mortgage mess to their investing clients.

But the financial crisis is behind us, right? Why would Wall Street shower Hillary Clinton with millions of dollars in speaking fees and tens of millions in campaign contributions?

I think it is an insurance policy. Wall Street wants a friend in the White House to protect the status quo, and if they can't get a Republican elected, Hillary is the next best thing. I think they need a friend in government because the industry could not survive an investigation into how they actually make their profits.

Wall Street doesn't want you to know how they make their money. A brief review of how Wall Street bankers earn their outrageous fees and bonuses will highlight why they don't want to see a reformer like Bernie Sanders succeed.



Advising people on where they invest their money is one of Wall Street's biggest businesses. Actively managed mutual funds can charge 2% per year for this advice. But, Nobel Prize winner Eugene Fama has shown empirically that these mutual funds do no better with their stock picking than throwing darts at a stock page.

If you pay your Wall Street advisor 2 percent per year for fairly worthless advice, by the time you retire in 30 years, he will end up with almost half of your savings. No wonder the bankers' boats are bigger than the clients' boats in Sag Harbor.

Or you can give your money to a hedge fund that typically charges even more, 1.5 percent per year plus 20 percent of the upside. Again, empirical academic studies have shown that on average, hedge funds do not outperform the general market.

Of course, each year, some hedge funds report unusually good performance. This might be due to luck, but the fact that the same hedge fund names keep showing up at the top of the rankings suggests something else is going on.

The top 25 superstar hedge fund managers earn about $1 billion per year each personally. And, thanks to the carried interest rule, they pay lower tax rates on this windfall than a teacher making $30,000 a year.

Americans like to think that we are a meritocracy and if someone can create billions of profits they deserve a big pay day.

But that presumes these hedge fund managers are playing fairly and by the rules. Their very performance violates everything modern finance professionals know about the efficiency of markets. How do they do it? I think it is a combination of insider trading, market manipulation and high frequency or very fast trading that allows them to see your orders before placing theirs.

I say "I think" because I can't prove it. Why? Because these folks have contributed millions to your congressmen to make sure that hedge funds remain unregulated and do not have to file detailed financial reports with the SEC.

Another Wall Street business that remains highly unregulated is the $690 trillion derivatives market. Bankers believe that the derivatives market makes the world safer because it allows people to share risk. What they don't see is the enormous domino effect caused by interlocking derivatives as one side of each derivative contract fails during a financial crisis. Interlocking derivatives assures that when one major bank gets in trouble, the entire global financial system is threatened.

Anyone, like Hillary Clinton, who thinks Dodd-Frank solved all the problems of the last financial crisis has a big surprise coming.