Last Friday when Elliott Management founder Paul Singer tagged Republican presidential candidate Marco Rubio with his sought after support, a signal was sent that an anointed establishment candidate had been knighted to slay the Donald Trump dragon. Now with a week of distance in the rear view mirror, Rubio is being treated inside powerful financial circles as the establishment front runner as big bank favorite Jeb Bush appears nudged aside, a clear loser in the Singer support sweepstakes.
Bush and his subordinates had actively courted Singer, the hedge fund man behind the curtain who The New York Times noted had frequent Republican presidential aspirant guests at his dinner table who were reported to have waged a hard fought “battle” for support. Who is this powerful man and what are his views on current political issues? ValueWalk considers Paul Singer based on numerous confidential investor letters and past conversations with institutional investors who paint a picture of a man who at times himself likes to confront the establishment and defies simple stereotyping.
Singer critics view his hedge fund activities as “vulture” like
Singer is often the target of criticism, to be sure. He is painted by advocates of the poor as a “wealthy Republican” who pulls strings as a “vulture hedge fund manager” who squeezes struggling sovereign governments such as Argentina, having his NML Capital invest in sovereign bonds at a discount, then demanding payment in full on $1.6 billion. When Argentina refused to pay, Singer evoked debt collection practices with sovereign governments that have been diplomatically characterized as “heavy handed” and “intentionally embarrassing.” They include having a private force seize control of an Argentine naval vessel as collateral on a loan, but where he would later voluntarily relinquished control. In what might make one of the more interesting episodes of the reality TV show Airplane Repo, a Singer-backed force attempted to seize the Argentine presidential airplane – all while the besieged president was sitting inside on a foreign runway while the plane refueled. Argentina’s fashionable leader, President Cristina Fernández de Kirchner, who called Singer a “financial terrorist,” remained mostly unharmed with the exception of a broken diplomatic ego that comes from being forced to rent private planes thereafter to avoid similar future repossession entanglements. But perhaps his most effective tactic was threatening to expose off-shore bank accounts of Argentine elites who at the time were refusing to negotiate with him over defaulted Argentine bonds where he was demanding full payment after other creditors agreed to accept a discount of 65 percent.
Singer supporters point out that when a government makes promises to bond investors, those promises should be met and their default actions should have consequences beyond damage to their credit rating. While they don’t go as far as to advocate debtor’s prisons, they believe a loan represents a promise to repay that should not be easily forgiven. Ultimately Singer’s political connections are likely to benefit the fund’s exposure to Argentina’s sovereign debt, but in many ways his political lobbying doesn’t always conform to the Wall Street stereotype. Inside the financial services industry, Singer is viewed as a force willing to challenge powerful banks, a mission seldom accepted by other powerful forces on Wall Street and something for which financial reformers seldom give him credit.
Central bank critic on quantitative easing often challenges the big bank Wall Street narrative
The easy categorization of Singer is that of the evil, greedy Wall Street conservative operative. But a consistent theme the hedge fund manager addresses in his influential letters is the income inequality created by U.S. Federal Reserve quantitative easing. Not only does he argue the practice of Fed stimulus artificially repressing interest rates will ultimately lead to unwanted market volatility, but his consistent appeal heard in powerful quarters is that inequality is not good for anyone, including elites.
“It appears that pumping up the wealth of the affluent is the principal goal of state policy throughout the developed world,” he wrote in the third quarter letter to investors reviewed by ValueWalk. He openly questions those who castigate wealthy individuals when it is the policies created by central bankers that benefit the wealthy who should be the target. In providing critique of the U.S. Federal Reserve, Singer is in part questioning the banking establishment, a consistent theme in his work and a feat seldom attempted in public. Singer points to Fed policy from the standpoint of jump-starting the economy and claims it “has failed” and then muses if the goal of an “attack the wealthy campaign is to stir up resentment against the prosperous and enable the populists to get elected… then the policy mix is diabolical.” Harsh words from the man whose influence is likely to be felt by whoever wins the Republican presidential nomination.
Singer again accuses the central bank of market manipulation as Fed “independence” is a relative concept
In his letters Singer often addresses inside economic issues critical to the economy but seldom discussed in the mainstream. One of these issues, most often spoken in hushed terms, is the U.S. Federal Reserve manipulating “free markets” to pump asset prices higher, an issue Singer has consistently touched on but has yet to provide documentation as to his charges. (Derivatives industry sources have claimed documentation as to the Fed’s extensive market activity exists, but none has seen the light of day to this point.) In this regard his third quarter letter is perhaps his most aggressive yet as he also tackles the sacred cow of Fed “independence”:
Since the Fed is the largest trader of securities in the world, the question becomes: Would any investment professional still have his or her job after seven straight years of failure? It would be inexplicable if the world desperately, childishly, hung on this failed trader’s every word. Furthermore, it is preposterous to think that any such trader who, with no apparent cost of money or constraint on the quantity of purchases, would be allowed to keep buying and buying trillions of dollars of securities and then be congratulated for the prices of those securities going rip! Oh yes, now we remember: The central banks are supposedly independent! But you might observe that fiscal policy. as well as the allocation of credit, has been delegated to them. Thus, this notion of “central bank independence,” once thought to be necessary to preserving the integrity of money and keeping it from being dominated by political needs rather than stability and widespread and long-range acceptance, is something of a fig leaf.
The Fed’s “independence” has often been viewed as being “independent” from accountability but under the influence of the major banks, which also control most of the non-cleared derivatives that underlie the financial system. While some argue that under current Fed Chair Janet Yellen policies have changed, particularly with regard to dangerous derivatives which are for the first time subject to more stringent Fed rules, it is here, in the area of derivatives, where Singer’s contribution to society as a whole can most importantly be found.
Uncleared derivatives that put the world economy at risk again questioned by Singer… again
Warning on the current derivatives “issues,” much like overlooked warnings that preceded the 2008 crisis, are difficult to find in the public domain – but they exist. The behind the scenes battle with derivatives insurance underwriters to provide adequate transparency and use margin standards more common in the cleared derivatives industry has, at times, seemed like an epic battle befitting a Star Wars-like narrative between good and evil forces who risk the world economic structure and as recently as one year ago requested government backing if their bets fail.
Singer is not alone in his concern for the safety of the world economy, as we have reported in ValueWalk. Raising the derivatives issue is most often done based on the “opacity,” but in his third quarter letter Singer touches on this issue but also reflects “on the societal impact” of financial “innovation,” which is also accompanied by often unnecessary “complexity and connectivity,” issues that, in derivatives, can lead to trading opportunity but also “interconnected implosion issues” that can put the world at risk. Singer notes that, “in the realm of finance… traders appreciate the opportunity to unpack and trade complexity in securities, structures and markets,” but that for the impact on the broader market structure beyond just uncleared derivatives should be considered. “We wonder if the overall impact of financial innovation, including derivatives, structured products, high frequency trading and communication advances, is net negative, albeit with a possibly long delay before the drawbacks become visible.”
Singer starts by noting that uncleared derivatives “effectively represent borrowing and lending with much lower margin requirements than those applied to the underlying assets, thereby allowing players to hold much bigger positions (and risks) in financial assets than was ever permitted in the past.” The margin benefits that uncleared derivatives receive relative to cleared derivatives appears to be a recent focus of the FDIC and Fed, who are both addressing the national security issue, but the nature of the risk is in part based on uncertainty. “Since the real exposures of derivatives are largely obscure (if not opaque), the real levels of leverage and risk outstanding in the world are not discernible under current regulations and accounting standards.” Challenging the bank’s primacy is an odd cause to champion for an influential member of ISDA, the derivatives-based association who often determines when a default event is triggered write.
Singer openly advocates for Glass-Steagall inside Wall Street, which doesn’t make bank friends
Singer has been a powerful voice among elites who advocates for what is best for society, with his stand on derivatives that is at times at odds with his financial interests. The same is true of his support for a “new Glass-Steagall,” a practical stand that puts Singer on the same side of the political debate with progressive Sen. Elizabeth Warren (D-MA), with whom he also shares views on same sex marriage and equality. In other words, the simple categorization of Singer as the prototypical evil “conservative” doesn’t always meet all check boxes.
In the recent New York Times article, Maggie Haberman and Nicholas Confessore described Singer as “one of the wealthiest and most influential Republican donors” who does not believe a litmus test as many of his fellow Republican supporters of Israel do. As the Saudis — who arguably know more about radical Islamic extremism more than most in the U.S. — publicly state that the masses of healthy males fleeing their embattled Syrian homeland for Europe and the U.S. have ISIS plants inside their ranks, Singer outlines what he feels are the root causes of concern in the region: “The combination of messianic, apocalyptic religious movements plus access to large amounts of money and locales to gather and train is of real danger to global civilization,” as he calls for consistency in policy and challenges the current Democratic administration on results in the region.
As Marco Rubio moves to confront Donald Trump, and is backed by Singer who has a history of questioning the bank establishment and distinguishing his arguments based on what is best for the economy and society, it is likely his powerful economic influence could be felt in any Republican White House administration — and that influence could be wide ranging from economic to foreign policy issues.
The post As Paul Singer Anoints Rubio, Republican King Maker’s Politics Come Into Focus appeared first on ValueWalk.
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