#supercommittee

Washington, D.C. – As their budget cutting duties are winding down with the recently announced and widely anticipated stalemate, sources close to the process are reporting that the Congressional Supercommittee is in advanced negotiations with a large investment management company, possibly Black Rock, to form a new investment vehicle directly managed by the Supercommittee itself. Tentatively named the Supercommittee High Yield Terran Equity Fund (SHYTE Fund), the fund structure would allow its Supercommittee managers to invest in any global asset or asset class where a Supercommittee member/member of Congress/SHYTE Fund investment manager has the ability to directly influence the performance of the asset or asset class through legislative action, or has privileged access to information regarding a particular asset or asset class that would constitute an iron-clad trading advantage.

Reactions on Wall Street have been surprisingly muted. One prominent industry fund manager agreeing to speak on condition of anonymity put the reason behind the relative silence on the Street this way: “It will likely be a long-short fund, which means they can sell an asset to profit from a decline in price just as easily as buying to profit from a rise. I don’t want my company in their crosshairs for a short. They can legislate me right out of existence and make money while they do it.”

Indeed rumors abound that all of the large money managers are now scrambling to onboard their own influential members of Congress as investment managers. Said one: “It used to be enough that the gang in D.C. could legally use material non-public information for their own investment accounts. And we would sweeten the pot with access to all of the hottest IPOs. Plus extra options. But that 60 Minutes piece may have sounded the death knell for Congressional self-dealing in the markets by raising public awareness. Once we get past the holidays, I expect your average folks are going to start getting pretty pissed. We probably have seen our last overt bail out in this cycle. And the industry stakes have gone way up with the Black Rock thing. A Congressionally managed fund will be a competitive juggernaut. This might be the last train leaving the station for a long, long time and I’m determined to be on it.”

Given the perpetual disarray in the Nation’s Capitol, casual observers often doubt the individual abilities of members of Congress beyond their obvious skill at self-promotion. However those in the know say the People’s Representatives are particularly adept in the investment realm and a vehicle such as the SHYTE Fund could dramatically reshape the investment fund landscape. We sat down with Wharton PhD candidate Evan Kinnunen who has studied the relative market performance of various groups & subgroups of investors. He states unequivocally that legislators are the top of the heap when it comes to risk-adjusted performance.

“When you compare year-over-year performance, it’s not even close. Obviously your individual investors as a group are at the bottom of the return pyramid. Perhaps more surprising is that the typical fund manager barely exceeds the returns of Joe Sixpack, and only if they religiously stick to an index fund approach. Some corporate insiders do well but generally they are a one trick pony; and as a group they too underperform. Then you’ve got your plunger group – big annual returns with the frequency of a comet, subsequently whittled to merely outperform as the intervening years between winners erode the big bet. It’s worth noting that occasionally a plunger will explode in the atmosphere – they mistake good timing for some special insight and essentially double down following a particular windfall. Your HFTs do well but my analysis of various ‘flash’ events suggests that they will shortly be returning to the mean, perhaps even a dramatic undershoot. And of course the trading desks of the big firms seem to do well on an outright performance basis, truly defying probability in terms of speculation. But this is merely misperception. They don’t actually speculate. Rather, the desks are essentially hi-tech bucket shops. They sit on top of an exchange’s incoming order pipe and merely front run the market scalping an order at a time. Members of Congress on the other hand, particularly members of the more significant committees, have an absolutely sick ROI. Analysis of their investment timing demonstrates an uncanny ability to anticipate major corporate announcements, influential regulatory edicts and even geopolitical happenings. Two and twenty would be a real bargain if my money was being run be an influential member of a Congressional subcommittee. “

A senior Congressional staffer sat down with us to discuss off-the-record the potential ramifications of the SHYTE fund and the resulting fears of a new Wall Street arms race as the Industry repositions for the evolving role of legislators in investment management. “The SHYTE Fund, when it happens, and I say ‘when’ as I see it as the very natural evolution of an advanced capitalistic system – it's the deployment of capital to its most productive use – will put investment resources into the hands of the people most able optimize the returns on those resources. It’s obvious. Legislators make the rules so why not benefit investors directly with that authority?” We asked if that wouldn’t provide a perverse incentive, investment returns as a driver of legislation, as opposed to a more strategic view of outcomes for the legislative process. “What's more strategic than making money? But at the end of the day it’s all about growth. And the SHYTE Fund with the Supercommittee behind it can really grow – majorly, all caps. Let’s face it. There’s nothing Congress can do about the economy. Or rather, nothing they will do anyways. So why not let them focus on what they do best? Make money. This is the obvious next step. And this will actually make the legislative process more transparent. At least until the SEC-managed fund I’ve been hearing about launches in the spring. THAT will truly be The Sh*t!” (expletive deleted)

GOP Super Committee Co-Chair: Lawmakers Failed Because Democrats Refused To Privatize Medicare

By Igor Volsky on Nov 22, 2011 at 10:54 am

Rep. Jeb Hensarling (R-TX) faults the Democrats’ refusal to accept partial Medicare privatization for the super committee’s inability to come up with a bipartisan plan to lower spending in today’s Wall Street Journal. He writes, “Democrats on the committee made it clear that the new spending called for in the president’s health law was off the table” and pretends that the spending in the Affordable Care Act added to the deficit (it actually reduces it). “Republicans offered to negotiate a plan on the other two health-care entitlements—Medicare and Medicaid—based upon the reforms included in the budget the House passed earlier this year,” he continues and lays out the premium support proposal offered by Alice Rivlin and Pete Domenici:

The Medicare reforms would make no changes for those in or near retirement. Beginning in 2022, beneficiaries would be guaranteed a choice of Medicare-approved private health coverage options and guaranteed a premium-support payment to help pay for the plan they choose….These seniors would be able to choose from a list of Medicare-guaranteed coverage options, similar to the House budget’s approach—except that Rivlin-Domenici would continue to include a traditional Medicare fee-for-service plan among the options.

This approach was also rejected by committee Democrats.

The Congressional Budget Office, the Medicare trustees, and the Government Accountability Office have each repeatedly said that our health-care entitlements are unsustainable. Committee Democrats offered modest adjustments to these programs, but they were far from sufficient to meet the challenge. And even their modest changes were made contingent upon a minimum of $1 trillion in higher taxes—a move sure to stifle job creation during the worst economy in recent memory.

Hensarling doesn’t mention that the Rivlin-Domenici premium-support proposal doesn’t so much lower national health care spending as it shifts it to the beneficiary. The plan reduces the federal contribution to Medicare by capping costs for each beneficiary and offering premium support credits that won’t keep up with actual health care spending. The federal government spends less, but seniors will pay more out of pocket for health care benefits every year. The proposal also breaks up the market clout of traditional Medicare and rather than ratcheting up some of efficiencies and payment reforms in the Affordable Care Act, it sets the nation on an untested path of private competition — leaving seniors vulnerable to the manipulations of for-profit health insurers.

Democrats, for their part, offered rather substantial concessions on Medicare spending. As the Center on Budget and Policy Priorities argued, the Democrats’ $3 trillion deficit proposal to the super committee “stands well to the right of plans by the co-chairs of the bipartisan Bowles-Simpson commission and the Senate’s ‘Gang of Six,’ and even further to the right of the plan by the bipartisan Rivlin-Domenici commission.” The plan contained “substantially smaller revenue increases than those bipartisan proposals while, for example, containing significantly deeper cuts in Medicare and Medicaid than the Bowles-Simpson plan.” For instance, Bowles-Simpson offered $383 billion in Medicare and Medicaid, while Democrats put $475 billion on the table.

President Obama introduced $320 billion in health care savings, mostly from the pharmaceutical industry and other providers, including rural hospitals, teaching hospitals, and biotechnology firms. But the plan even incorporated the GOP’s push for greater means testing in Medicare, asking some wealthier beneficiaries to pay more for coverage and sought to give beneficiaries “skin in the game” — as the GOP puts it — to discourage over treatment.

All of these are significant concessions — as are the health cuts included in the trigger mechanism — but Hensarling and Republicans aren’t interested in bipartisan agreement. They’re not accepting anything short of Medicare privatization.