With this post, I may very well burn to ashes half the friendships I have made in the blogosphere. The Gilmore-Marshall Senate race has lead to many arguments (not a bad things), a lot of snark (which need not be bad either), and a good deal of informed discussion. It has been largeyl focused on issues, as it should be. I would like nothing more but for it to stay there. Unfortunately, Jim Gilmore’s association with Everquest Financial has forced the debate to move to personal reputation – or to put it another way, Gilmore’s position as Chairman of Everquest means he cannot be the nominated this May, or the party will suffer incalculable and perhaps irreparable damage.
To understand why, we have to go back a year – to early 2007, when Everquest was preparing for its Initial Public Offering (sale of stock shares). At the time, it was basically a holding company for a bunch of Collateralized Debt Obligations (CDOs), which is a fancy name for an asset group made up of a bunch of loans. The trouble is, the CDOs Everquest had were largely based on subprime mortgages, the very mortgages that at the time were driving Wall Street crazy because they were providing default notices instead of investment returns.
How and why did Everquest come by the subprime mortgages? Here’s where it gets worse: Bear Stearns’ riskiest and most subprime-exposed hedge funds sold them to Everquest in exchange for stock in the company (Securities and Exchange Commission)- stock which when sold to the public would have effectively transferred all of the risk from Bear to unwitting stickholders.
Now, some will say that no one really knew just how bad things were in the subprime market back then. Well, they’d be wrong. Check out what Business Week thought of the Everquest adventure:
Never underestimate the ability of a Wall Street investment firm to find a new way to pawn off risky assets onto retail investors. The latest example? The initial public offering for Everquest Financial. Everquest is a fledgling financial-services company that has been buying up equity interests in risky bonds backed by subprime mortgages from hedge funds managed by Bear Stearns . . .
Even worse, Everquest admitted that the sale of these CDOs were “not negotiated at arm’s length,” which as BW noted, ” is an indication of just how beholden the company is to the interests of Bear Stearns.”
In fact, as noted in the SEC documentation, one of Everquest’s co-Chief Executive Officers was none other than Ralph Cioffi, who just happened to manage to two Bear Stearns hedge funds that sold most of the CDOs to Everquest and owned a majority of the firm’s stock between them.
It took roughly a month for all of Wall Street to wise up on this little farce (as you can see above, some were already on to this), and the IPO was withdrawn, but that didn’t stop Time from listing it on the Top 10 Worst Business Deals of 2007. Bill Saporito’s summary is as accurate as it is devastating (emphasis added):
Call it the IP-No. When the market for collateralized debt obligations (CDOs) began to melt down in the spring, Bear Stearns found itself sitting on billions of dollars of the stuff. What to do? How about this: Package the toxic, untradeable CDOs (securities backed by subprime mortgages) into a public company — Everquest Financial — and unload it on the usual chumps. That had been the plan all along, but by the time Bear tried to float this lead balloon in June you had to be living under a rock in Siberia not to know this junk wasn’t sellable. The IPO was withdrawn.
Naturally, such a move required a fresh face to make it all look above board. Who better than a presidential candidate? Which presidential candidate, you ask? Why, none other than Jim Gilmore (SEC).
If Gilmore had quit Everquest, admitted that he had learned a lesson, and moved 0n, I wouldn’t be so worried. It would still be a problem, but not as large. Instead, he is not only still the Chairman, but he actually tried to defend this. Each of his five points, in fact, conceal more than they reveal, as I’ll explain in a later post.
What we have, then, is a candidate who will become the poster-boy for the subprime crises – not because he made a subprime loan (he didn’t), not because he broke any law (he didn’t), but because he became the de facto front man for what is now a bailed-out firm’s hedge funds in their attempts to spin off their riskiest assets on unwitting investors (that, he did). The Democratic ads practically write themselves.
Moreover, if the GOP nominates Jim Gilmore, he will force every Virginia Republican candidate to face questions on this. McCain and his running mate will end up avoiding him like the plague. Not only would this pave the way for mark Warner, it would also put Frank Wolf and Thelma Drake at risk, ensure the Dems take the 11th, and even give them a good shot at our presidential electors.
In other words, Jim Gilmore could make Virginia bluer than a medieval Scotsman at war. Odds are it wouldn’t end there, either. Democrats around the country will be able to tell their voters that their Republican opponent belongs to “the party of Jim Gilmore, the party of Everquest, the party of Bear Stearns.” This is a disaster waiting to happen.
This is why the lefty blogs have been completely silent on this, despite mentions from Shaun Kenney and Brandon Bell. The leftosphere knows full well what a gold mine this is, if Gilmore gets the nomination.
We can’t let that happen. I know many in the blogosphere do not agree with me on the merits of Bob Marshall, but this is the inescapable fact – Bob Marshall is the only thing standing between the Republican Party of Virginia and certain disaster.
Next post: Gilmores’ responses, and why they don’t say much.