KSTP-TV and North Metro TV, Republican candidate Barb Davis White and
Independence Party candidate Bill McGaughey (me) expressed opposition to the
Wall Street bailout legislation that passed Congress in late September. DFL
incumbent Keith Ellison, who voted for the legislation, supported it. The
reason he gave was that an administrator for an association of Minnesotaâs
private colleges had told him that college loans might not go through if the
legislation was not passed.
At the time of the bailout, I was not inclined to be critical of Ellisonâs vote
because the issue was difficult for us all. No one had good information as to
why taxpayer funds were needed to avert a credit squeeze or where the money
would go. There was just Henry Paulson, flanked by Democratic and Republican
Congressional leaders, telling us that the economy might collapse unless
bailout legislation passed - and we had to make a quick decision. I compared
this to decision making with a gun held to oneâs head.
Information has since come to light causing me to hold Keith Ellison to a
stricter standard:
First, Ellison serves on the Financial Services Committee in the House. He
therefore receives much privileged information in this area and ought to be
more knowledgeable about the financial-services industry than the average
member of Congress. His committee should have been more proactive in regards to
a crisis that was clearly building during his term of office.
Second, the financial crisis that we face today is due primarily to a lack of
regulatory structure - a structure which might have been created by
Congressional leaders in the House Financial Services Committee and other
pertinent committees. The problem was due to lack of regulatory oversight; and
that, in turn, was due to bad decisions made by Congress and the President,
starting in the Clinton administration and continuing to this day. Ellison, as
a member of the Financial Services committee, shares some of this blame.
Did anyone watch Sixty Minutes on CBS last evening? One segment had to do with
the so-called âcredit default swapsâ which are at the root of the financial
crisis. Credit default swaps are insurance-like contracts that, for instance,
allow investors in mortgage-backed securities to recover their loss if the
security becomes worthless. The inflated mortgages sold by banks to hapless
homeowners were repackaged into complex debt securities by Fannie Mae and
Freddy Mac which were then sold to investors around the world. Many of these
investors hedged their bet by buying credit default swaps which gave them the
right to recover the money lost in those investments if the housing market went
sour.
It gets worse. Unlike insurance, the sellers of credit default swaps were not
required to have financial reserves to pay the claims on these agreements. The
Wall Street sales reps typically made $50 million to $100 million a year in
this type of business. In 2008, the house of cards collapsed. Respected firms
such as Lehman Brothers, Bear Stearns, Citigroup, and AIG had insufficient
reserves to pay the claims for the credit default swaps. Paulson said the
taxpayer had to pump money into the banking system to maintain solvency; and
Congress agreed.
It gets worse still. The credit default swaps were not necessarily owned by
persons who had purchased the bad debt securities generated by the failing
housing market. Anyone well-connected to the banking system could place those
bets. And so Wall Street became a huge casino in which the major banking
firms, having insufficient reserves, sold contracts to protect the gamblers
against loss. The go-go salesmen and managers became fabulously rich from
bonuses and commissions while exposing shareholders in their firms to eventual
ruin.
Ultimately, however, it was the federal government that dropped the ball. In
the waning years of the Clinton administration, Congress passed and the
President signed the Commodities Futures Modernization Act of 2000, supported
by Wall Street, which legalized credit default swaps as a gambling device.
The Sixty Minutes feature pointed out that after a financial collapse in 1907,
state governments around the country had outlawed âbucket shopsâ where
investors openly gambled on various events - similar to the system we have had
in the last eight years. The Commodities Futures Modernization Act preempted
the state laws that restricted financial gambling. The federal government said
it was OK for Wall Street firms to do that. As a result, there are an
estimated $58 trillion (with a âtâ) in derivatives contracts, mostly credit
default swaps, linked to financial markets worldwide.
What would I have done, if elected to Congress, as an alternative to the
bailout legislation? I toy with the idea that credit default swaps are simply
contracts, and it is within the power of government to make certain types of
contracts illegal. Commercial law holds that gambling contracts are generally
unenforceable. Why not this? If legislation had been passed at an opportune
time, the federal government could have made this toxic debt disappear with the
stroke of a pen. No need for a taxpayer bailout - just declare that the debt
does not exist. Now I realize that certain legalities may stand in the way of
such a solution but this is the approach I would consider taking. In effect,
the taxpayer was asked to reimburse Wall Street for its gambling debts. Thatâs
unconscionable.
Itâs important to realize, however, that for every loser in a gambling
transaction thereâs a winner. There were plenty of winners in the financial
meltdown - persons who purchased the credit default swaps from the Wall Street
firms leveraging their investment 30 to 50 times. Hedge fund managers at
Pershing Square Capital Management and other such firms were among the big
winners. There were more than a few instant billionaires who had placed smart
investments in this game but who remain mostly anonymous.
What I want to know is this: Did Avista Capital Partners, owner of the Star
Tribune newspaper, invest in credit swap defaults? It sure looks like it,
judging from the Star Tribuneâs coverage of the recent financial crisis and of
political candidates on both sides of the issue.
Yesterday, the Star Tribune editorial board endorsed Norm Coleman for U.S.
Senate - the first time this newspaper had endorsed a Republican Senatorial
candidate since 1988. The editorial said of Coleman: âHe showed good judgment
most recently when, despite a tide of constituent opposition, he voted to
authorize spending $700 billion to inject capital into banks and thaw a credit
squeeze.â Among its reasons for not supporting Al Franken was âwe consider his
recommendation for a ânoâ vote on the economic bailout package the wrong call
at the wrong time.â
Barack Obama and John McCain both supported the bailout legislation so there
was no difference here in this issue of critical concern to Star Tribune
editors: The newspaper endorsed Obama for President.
In late September, during the time of the bailout deliberation, the Star
Tribune printed a length article, beginning on Page One, which subjected the
four members of Minnesotaâs Congressional delegation who had opposed the
bailout package - Jim Ramstad, Michele Bachmann, Tim Walz, and Colin Peterson -
to unusual scrutiny. It were as if constituents were questioning whether these
members of Congress had lost their minds. The pro-bailout reporting was
accompanied by editorials to the same effect.
Keith Ellison, Congressman in the Fifth District, supported the bailout
legislation. Rep. Ellison is also a member of the House Financial Services
Committee, in a position to influence legislation of interest to Avista Capital
Partners (whose CEO sits on the Star Tribune board of directors). Therefore,
by my calculation, heâs in line for a double dose of favorable treatment by
Star Tribune editors and reporters.
Since the filing deadline, the Republican Congressional candidate in the 5th
district, Barb Davis White, and I (representing the Independence Party) were
mentioned twice in Star Tribune articles in the next three months - once before
and once after we were unopposed candidates in the primary - while there were
more than forty references, mostly favorable, to Keith Ellison in its articles
during the same period. There was no general article covering the 5th district
race until today. You can see for yourself in the Metro Section today, October
27, whether this article, titled âEllison has fewer foes and a far easier path
to victory than he did two years agoâ, is balanced and fair.
As most observers of the Twin Cities political scene know, Star Tribune editors
and reporters are quite opinionated. Itâs almost impossible to argue with them,
and you canât make them retire. So weâre stuck indefinitely with this âfourth
branch of governmentâ that has failed the community so pervasively for such a
long time.
I do, however, want to raise an issue concerning the new element in this yearâs
political coverage: Avista Capital Partnersâ interest in the bailout
legislation and its possible influence over Star Tribune reporting and
editorial policy. I know that the Star Tribune wonât print this, but I want
you to know that I am sending Star Tribune editors the following Letter to the
Editor today:
âDear Editor:
I have noticed that your newspaper, both in its editorials and news reporting,
has strongly supported the recent federal bailout legislation. You have also
generally supported political candidates who voted for or supported this
legislation while you have generally opposed political candidates (such as
myself) on the other side of the question.
I am concerned about a possible conflict of interest between the Star Tribune
and its parent company, Avista Capital Partners. In that regard, I am asking
two questions:
First, did Avista Capital Partners have a financial interest in the federal
bailout legislation? Specifically, did this firm purchase credit default
swaps? If so, what is the extent of its investment in those instruments?
Second, how can you assure your readers that the Star Tribuneâs editorial and
reporting policies are independent of its ownerâs (Avista Capital Partnersâ)
financial interests?
I believe that the integrity of our electoral system is at stake and would
appreciate your answering those questions.
Sincerely,
Bill McGaughey
candidate for U.S. Congress in the 5th district representing the Independence
Party of Minnesotaâ