Reason.com

Free Minds & Free Markets

Obama's Crony Capitalism

Obama’s economic policy: insult "fat cats" and then grant special access to a favored few.

On the Friday before Christmas, President Obama announced that he was appointing Mohamed A. El-Erian, the CEO of Pacific Investment Management Company, as the chairman of his Global Development Council.

The announcement didn’t get much attention, but it should. It exemplifies what’s wrong with Obama’s approach to economic policy, which amounts to: insult rich people as “fat cats,” raise their taxes, and then choose a favored few of them for special access.

If you’re not familiar with El-Erian, you must not be watching CNBC or attending the World Economic Forum at Davos. The son of an Egyptian ambassador to France and a French mother, El-Erian worked for 15 years, from 1983 to 1997, on the staff of the International Monetary Fund. In 1999 he joined Pimco, a California-based manager of bond funds.

El-Erian’s reputation as a money manager is not without its blemishes. He did a brief tour—parts of 2006 and 2007—as the manager of Harvard University’s endowment, leaving it ill-prepared for the economic downturn that ensued shortly thereafter.

In October 2009, with Pimco colleague Bill Gross, El-Erian forecast a “new normal” of asset returns of half what they were in previous decades. That turned out, at least so far, to have been spectacularly wrong, at least when it comes to U.S. stocks, which were up about 17 percent in 2010 and 16 percent in 2012. A New York Times article published in July 2012 reported that El-Erian had been paid $100 million by Pimco in 2011, a year in which Pimco’s flagship Total Return fund was in the bottom 10 percent of bond funds. Pimco, a unit of the German company Allianz, disputes the pay figures, though it won’t say how much El-Erian actually was paid, and The New York Times has not issued a correction.

The former Federal Reserve chairman, Alan Greenspan; George W. Bush’s chief of staff Joshua Bolten; and a Bush administration Treasury official, Neel Kashkari, all have consulted to or worked for Pimco in recent years. Meanwhile, the firm, which manages more than $1 trillion for investors who include state governments and foreign sovereign funds, has reportedly been trying to avoid being designated as a “systemically important financial institution” under the Dodd-Frank law governing financial regulation.

Now, maybe Pimco’s El-Erian has agreed to volunteer as chairman of President Obama’s Global Development Council entirely out of an altruistic concern for the people of the developing world. And maybe the CEO of GE, Jeffrey Immelt, volunteered to head Obama’s Council on Jobs and Competitiveness entirely out of patriotic concern for jobless Americans.

But you don’t have to be either a skeptic or a cynic to see the presidential appointment as just the latest piece of a business strategy that relies on closeness to the government as an edge. Fortune described it well in a 2009 article: “Pimco’s success stems from shrewd bets on government intervention.”

The Fortune article went on, “For example, in 2008 Gross shifted from Treasuries and corporate bonds into mortgage debt backed by Fannie and Freddie because he believed that the government would ultimately keep those government-sponsored enterprises (GSEs) afloat. By May, Gross had moved 60 percent of Total Return into GSE-backed bonds, up from 20 percent the year before. ‘In a way, we’ve partnered with the government,’ says El-Erian. ‘We looked for assets that we felt the government would eventually have to own or support.’”

El-Erian’s new job as chairman of the Global Development Council—which he will do as a volunteer while remaining CEO of Pimco—puts him at the head of a group that the White House says “will inform and provide advice to the President and other senior U.S. officials on U.S. global development policies and practices, support new and existing public-private partnerships, and increase awareness and action in support of development by soliciting public input on current and emerging issues in the field of global development.”

Or, to put it another way, it takes Pimco’s partnership with the government to a whole new level.

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • Tulpa (LAOL-PA)||

    Barf.

  • GILMORE||

    ^^THAT

    generally 100% correct. Every asset manager is a salesman, which is why Schiff is always flogging gold and doom, Bob Doll is pro large-cap US equity, Gross is always hyping bonds, etc etc.

    The financial news (CNBC, Bloomberg and the like) is really one 24-hour long advertisement when it comes down to it.

  • Hollywood||

    Schiff is certainly a salesman, I think his theories are sound and he certainly isn't in bed with the DC Top Men.

  • Danno||

    Schiff has a mark on his back just like his Dad. The insiders will screw him and laugh. I would rather manage my own money and know directly the insiders will screw me. There is nothing to invest in only stuff to roll the rigged dice on. Goldman Sachs must be making a killing playing against there customers in this casino environment. Remember what GS did to Greece and the EU.

  • Raston Bot||

    ^Yep. A reason El-Erian and not Gross was chosen might be b/c we're all used to Gross talking his book and pumping for govt intervention. El-Erian's cronyism is relatively new to the public stage.

  • Libertarius||

    Yes PIMCO is a (big) bond company, but Bill Gross is no fool. He's bullish on gold, which means that despite his involvement as a "mere bond salesman", he doesn't have to be shown the writing on the wall.

    Maybe Obozo brought El-Erian onboard with the aside, "Hey think you could convince your boss to buy more Treasuries and stop making unpatriotic comparisons between fiat dollarz and gold?" lolz

  • Sevo||

    [E-Erian's group will]"support new and existing public-private partnerships,"

    Not a chance he'd use the position to stick his hand in the taxpayers' pockets, right?

  • ||

    Not a chance he'd use the position to stick his hand in the taxpayers' pockets, right?

    He would never do that. He must be serving at the pleasure of the President and Mr. Obama has one single overriding goal: to increase social justice.

  • Yungjihan||

  • cthorm||

    Nice hit piece. So bond managers' pessimism makes them crony capitalists now? And we're taking a Presidential special counsel seriously?

  • PM||

    I think the whole cozying up with government officials and living large on government bailouts was the "crony capitalist" part. Seriously, did you even read the piece before posting?

  • db||

    [I]nsult rich people as “fat cats,” raise their taxes, and then choose a favored few of them for special access.

    The history of this era will be just a retelling of Atlas Shrugged.

  • waaminn||

    Sounds like one heck of a crazy idea to me dude. Wow.

    www.AnonMix.tk

  • Libertarius||

    You guys have it bass-ackwards: Obozo is a government bond salesman, while Bill Gross is one of the richest and most successful asset managers in the country.

  • sasob||

    Damn! And all this time I thought Obozo was a health insurance salesman.

  • ThisHorse||

    So I don't fully understand what Pimco is or how large it is. It gives off the vibe, to me at least, that it is like the federal reserve on a lesser scale where it lives off of the government.

  • freeAgent||

    PIMCO is massive. Their Total Return Fund is the largest mutual fund in the world, and they have about $2 trillion in assets under management according to Wikipedia. In the bond world, PIMCO is king.

  • Bill Dalasio||

    Watch for PIMCO to boost its outlook on Treasuries significantly in 2013. In the short-term, this may not be a terrible call, as a slowing economy pushes investors into Treasuries in a flight to liquidity and "safety". Of course, you can count on El Arian and Gross to dump Treasuries after any appreciation (quite justifiably).

  • Bill Dalasio||

    In October 2009, with Pimco colleague Bill Gross, El-Erian forecast a “new normal” of asset returns of half what they were in previous decades. That turned out, at least so far, to have been spectacularly wrong, at least when it comes to U.S. stocks, which were up about 17 percent in 2010 and 16 percent in 2012.

    To be fair to Messrs. Gross and El Arian, that ignores the 0.0% return in 2011. Moreover, I think the massive returns hold a lot more to do with the Fed pushing money out of cash with ultra-low rates to reinflate the asset bubble than a realistic assessment of economic performance. The real sector doesn't look too different from what one would expect from a "New Normal" scenario.

  • Danno||

    Inflation will get everyone in the end except front run companies like Henkele in Germany during 1920's.

  • Alex619||

    The announcement didn’t get much attention, but it should. It exemplifies what’s iphone 6 price in india wrong with Obama’s apple iphone approach to economic policy

  • Pabrik Baja||

    liked your article post keep working splendid job really like and appreciate your blog

  • Plat Kapal||

    this actually answered my drawback thanks this article just what i was looking for saved to bookmarks

  • gudangbesibaja.com||

    great delivery topic thanks very interesting assisted me a lot

  • besi beton||

    some great article cool you made some clear points there

  • jualbesibajamurah.com||

    you made some clear points there i find it amazing that you give this information for free continue the good work

  • pusatbesibaja.com||

    much thanks prime articles on this website incredible points sound arguments

  • Harga Besi Wf||

    perfectly quality content much thanks i truly appreciate this article

  • Harga Besi Wf Jakarta||

    your have good competence some genuinely nice stuff on this internet site you have mentioned appreciate it for posting

  • Harga Besi Wf Baja||

    its very nice to read continue the good work keep it up

  • lokerjobindo.com||

    You guys have it bass-ackwards: Obozo is a government bond salesman, while Bill Gross is one of the richest and most successful asset managers in the country.

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online