The American Enterprise Institute, Crony Capitalism, and Research Integrity (Or How to Hit the Pause Button on Your Mission Statement)

  1. Unless they’re lying on twitter and their super patriotic website, the American Enterprise Institute or “AEI” cherishes 1) Freedom 2) The power of enterprise and 3) Opportunity for all.
  2. In 2003, Bruce Kovner was elected Chairman of the Board of AEI

3. Bruce Kovner founded Caxton Associates and through the success of his funds made billions.

4. And according to AEI’s 2008 form 990, Caxton Select was AEI’s largest investment (keep an eye on Eton Park too, that’ll be interesting a little further down)

5. On July 21, 2008, Hank Paulson gave Eton Park and other hedge fund managers a heads up on the impending GSE conservatorships. In contrast, he had been giving the market positive signals and FNMA’s share price had doubled…and GSE Credit Default Swaps were cheaper.

Search Paulson, Eton Park & enjoy a good read by Richard Teitelbaum

6. What happened to CDS when the GSEs were taken over? Well, the conservatorships = a credit event, triggering payment or delivery of the GSEs bonds…and it was the largest in the market’s history.

7. The International Swaps and Derivaties Association resorted to its CDS protocols in this “unprecedented” situation.

8. Oh, and guess who two of the entities adhering to the 2008 Fannie Mae and Freddie Mac CDS Protocol were? Caxton and Eton Park (or 50% of AEI’s 2008 other securities portfolio).

Here’s Caxton’s Adherence Letter
And here’s Eton Park’s adherence letter

9. Now let’s pause and take a look at the hitters on AEI’s payroll…Peter Wallison, Ed Pinto, Alex Pollock, and Timothy Carney (and let’s not forget Tim’s bro John Carney of the WSJ…though he has neither confirmed nor denied that he’s ever received any form of compensation from AEI). It would be hard to assemble a group that has collectively produced a more impressive body of anti-GSE work, especially under the auspices of independent thought. And why is this important?

10. Well, it appears that AEI has directly participated in the economic upside of bets designed to benefit from GSE turmoil, turmoil that AEI has directed a hefty slug of its “independent” research to catalyze. Which, in light of this gargantuan conflict of interest, seems pretty funny considering the section of AEI’s website devoted to research integrity.

“AEI is committed to the proposition that arguments concerning government policies and economic and social arrangements should be evaluated on their own terms and intrinsic merits. This is not an “ethics policy” — it is a precept of all of the Institute’s activities and ambitions for improving public dialogue. But it carries an important ethical implication: in striving to produce work that is lucid, precise, informative and wise, AEI hopes that the honesty and integrity of its work, also, can be judged on its face.”

OR the portion of its website devoted to policy advocacy…or lack thereof?

“As a tax-exempt educational organization governed by Section 501(c)(3) of the Internal Revenue Code, AEI is generally prohibited from attempting to influence legislation in the U.S. Congress or other legislative bodies. Legal requirements aside, AEI has important reasons of its own for abstaining from any form of policy advocacy as an institution.

Note: Perhaps Wallison’s “Eliminating the GSEs as Part of Comprehensive Housing Finance Reform” met an exception to the rule?

11. The former Chairman of AEI’s Board at the time of the GSE conservatorships was also the Chairman of AEI’s largest investment…and it appears his firm placed bets (GSE Credit Default Swaps) and perhaps continues to place bets (short selling anyone?) with upside directly tied to GSE financial harm. In addition, some of these bets may have benefitted from access to material non-public information (that means you Eton Park).

12. In light of AEI’s vociferous attacks on the GSEs, it’d be nice to know if AEI’s investments have benefitted (sure appears that way) or continue to benefit from AEI’s full throated and historically steady attempts to harm Fannie and Freddie. You know, in the interest of freedom, or the power of enterprise, or opportunity for all, or something along those lines.

Oh, and by the way, Caxton was up 13% in 2008, a bloodbath for most. The “The average hedge fund lost 18 percent of its value in 2008, the industry’s worst performance on record.” Wonder if those GSE bets helped?

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