In today’s Exponential Investor:

  • The biggest fine in Ohio’s history – how much?
  • Yet another trading scandal at the Fed – surrounding whom?
  • Fossil fool continues to block climate bill – but why?

My colleague John Butler, the new editor at Southbank Investment Research’s The Fleet Street Letter Monthly Alert, likes to speak of what he calls a bear market in trust.

He argues that people’s trust in governments, politicians, the media, institutions and business in general is much lower than it was, say, five years ago.

This is partly because of the Covid-19 pandemic and official responses to (and widely distributed comments on) it.

The bear market in trust means that the way in which people look – and should look – at financial markets has changed profoundly.

Several recent scandals, which you may or may not have heard about, highlight how the bear market in trust is real and global.

Of course we’ve had our fair share of trust-damaging scandals in the UK too, such as the parties that took place in Downing Street during the first Covid lockdown, in direct contradiction of public mandates that politicians choose to ignore.

But across the pond, three recent cases of cronyism and corruption make the UK’s problems look like small fry.  

One of these has been described by the former US Attorney David M. DeVillers as “likely the largest bribery, money laundering scheme ever perpetrated against the people of the state of Ohio”…

Nuclear bribery

It began in July 2019, when the Ohio House passed House Bill 6, which increased electricity rates.

The money this raised became a $150 million yearly subsidy for two failing nuclear power plants, Perry and Davis-Besse, and also subsidised several coal-fired power plants… all while reducing subsidies for renewable energy and energy efficiency.

The bill was clearly not a giant leap in the direction of decarbonisation. So, how did it come to pass?

In 2020, the electric utility company that controls the two nuclear plants, FirstEnergy, paid nearly $60 million to Generation Now, an organisation controlled by Speaker of the Ohio House of Representatives Larry Householder, in exchange for passing a $1.3 billion bailout for the struggling nuclear power operator.

As DeVillers said, “this was bribery, plain and simple. This was a quid pro quo. This was pay to play.”

The prosecution alleges that the payments were tantamount to “bags of cash” that went unregulated and unreported.

It turns out that FirstEnergy paid Generation Now prior to the passing of House Bill 6, which bailed out the latter company in 2020. Householder has since been removed from office and has received a fine of $230 million – the largest ever recorded in the state of Ohio.

Clari(da)fying the situation

The next scandal is a continuation and an extension of the insider trading scandal which briefly consumed the Federal Reserve (the Fed – the US central bank).

Last year, the head of two Federal Reserve Banks stepped down in disgrace after being found to have bought a number of stocks and derivatives at the onset of the pandemic. Both of these officials were instrumental in formulating the Fed’s response to the pandemic, which had an enormous impact on markets.

Now, Richard Clarida, vice chair of the Fed, has also been implicated. Previously, Clarida had explained away suspicion over his actions, dismissing them as simply being part of a pre-determined strategy which scheduled trades well ahead of time.

But last week it came to light that he had moved between one and five million dollars’ worth of bonds into stocks – just days before voting through huge stimulus measures that helped the stock market to double within a year.

What was previously suspicious has become downright incriminating: Clarida had hidden the trades that apparently depended on the use of insider information.

The claim that the trades were “pre-planned portfolio rebalancing” look a lot less convincing now we know that Clarida was buying and selling stocks in huge volumes within just a few days.

All of this is contributing to a sense that those in power are using their privileged position to profit from upcoming changes to monetary or fiscal policy.

This episode does nothing to enhance the Fed’s reputation and deepens the bear market in trust.

Coal stocks in your stocking, Mr Manchin?

The most important man in US politics right now could well be Joe Manchin.

He is the Democratic senator who has blocked President Joe Biden’s Build Back Better Bill from passing into law. One climate activist group, the Sunrise Movement, has dubbed him the “final villain”.

Manchin argues that he has tried everything to get to a position to support the bill. But he claims that he cannot sign a bill that includes a provision to pay for the shutdown of coal plants and the shift to renewables – something which is happening anyway.

Biden would give him almost anything to get this through.

Manchin represents West Virginia, a heavily coal dependent state. Moreover, he has built a net worth of upwards of $12 million, almost entirely from coal.

However, the $500,000 that Manchin earns from taxpayer subsidies paid to coal plants that he brokers energy for, through a company he owns and which is run by his son, would dry up if the bill passed.

As the Rolling Stone magazine reports,

Virginia Canter, who was ethics counsel to Presidents Obama and Clinton, unabashedly calls Manchin’s business operations ‘a grift.’

Manchin is effectively taking money right out of the pockets of West Virginians when they pay their electric bills. They have no say in it. ‘It’s one of the most egregious conflicts of interest I’ve ever seen.’

The bear market in trust is being driven by events which put “have-nots” at a greater disadvantage relative to the “haves”. Unfortunately, the bear market still has some way to run.

Kit Winder
Co-editor, Exponential Investor

PS It has long been an argument by the builders and supporters of blockchain-based cryptocurrencies that the transparency of these networks helps redress the balance between the “haves” and the “have-nots”, and that it will reduce the ability of people to commit secretive and fraudulent financial transactions, as they are peer reviewed by all members of the network.

Could blockchain help to end instances like the three we’ve seen today?

What else could it do? To find out, click here.