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Financial Crisis: The Smoking Gun

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10/18/2008

During the fury and carnage of World War I, little thought was given to two shots fired from a small pistol on a leafy suburban street in Sarajevo that killed Archduke Ferdinand and his wife. Gavrilo Princip acquired fame as the man who started World War I only after the upheaval was over and historians had the leisure to trace causes from effects.

Years from now, when the tumult of World Depression II (what is known today as the Great Depression will, like the erstwhile Great War, acquire the number I) seems to lie in the past, an accurate account of its beginning will place the assassin's pistol in the hand of Charles Schumer, Democrat Senator from New York and Chairman of the Senate Banking Subcommittee. He fired the shots on June 26, 2008 in the form of a public letter he sent to the Federal Home Loan Bank Board of San Francisco and other regulators. His target was Indymac Bancorp of Pasadena, Cal. and, as must have been his intention, he killed it. After the largest bank run since the Thirties resulted from his stunt, federal regulators took the bank over and shut it down.

The world will wonder, as it long has concerning Princip, what were Schumer's motives in committing his crime against the world? An article buried on Page Three of a Saturday edition of the Wall Street Journal connects the dots, albeit in a manner that disguises a report of aggravated malfeasance as an issue of interparty rivalry as November's elections approach. Chuck Schumer was just trying to help out a group of big donors to the Democratic Senate Campaign Committee, which the article declined to actually name. The donors were Oaktree Capital Management LP (motto: "Involved in less efficient markets and alternative investments"), a Los Angeles "vulture fund" that specializes in investments in "distressed assets," along with likeminded firms Thomas H. Lee Partners, Ares Management LLC, Fortress Investment Group LLC.

The article details contributions from the firms and their senior officers to the DSCC and the senatorial campaigns of individual Democrats over the four years that Schumer has been chairman of the fundraising entity. In May, Oaktree's quest for financial carrion led it to the doors of Indymac Bancorp, to whom it sent a letter offering $1 billion in capital that the struggling thrift obviously needed very badly. Indymac let in a team of Oaktree's analysts to perform an investigation known in the investment community as "due diligence." This process yielded Oaktree detailed inside information concerning Indymac's holdings that were not public knowledge.

But Oaktree's management decided it wouldn't care to invest the billion after all. They departed Indymac's premises, their briefcases bulging with information about Indymac's assets, including those that would indeed attract them in the event Indymac was broken up under the extreme distress of a bank run and subsequent regulatory dissolution.

And it was four days later that Schumer publicized his letters to regulators about, of all the dozens of similarly stressed financial institutions in June 2008, Indymac Bancorp of Pasadena, Cal. We are invited to be grateful for the vigilance of the Senator from New York, searching whose Web site for the keyword "Indymac" yields nothing whatsoever. But Schumer's caper was nothing unusual, not for him, nor for other Senators, Congressmen, and campaign-fund raisers everywhere. This one just happened to bring down the house of cards that was the global financial system.

Could Schumer singlehandedly have precipitated today's financial crises by issuing a public letter about a shaky thrift completely across the United States from the state he represents? Of course not--no more than Princip could send the United States and Germany to war against each other by shooting the heir apparent to the throne of the Austro-Hungarian Empire. Were these tightly focused assaults the proximate causes of their respective debacles? Undeniably.

And the fallout is vastly more than either man could have imagined. Indeed, in denying any particular interest in the remnants of Indymac now being sold by the government for far less than they would have commanded at the time his analysts were searching Indymac's books for opportunities, Oaktree's chairman notes, "the rash of institutional failures has presented his firm with a rich smorgasbord of distressed assets." A rich enough smorgasbord to be sure, not only for all the vulture funds in the world, but for the extension of government power all over the world as well.

Being only 19 years old at the time of his crime, Gavrilo Princip was spared the death penalty and sentenced to twenty years' imprisonment. He died of tuberculosis in the third year of his imprisonment at Theresienstadt.

Chuck Schumer will celebrate his 58th birthday on November 23.

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