With a slowing economy, escalating food prices and energy prices climbing ever higher, you might think that Republican presidential candidate John McCain would be hesitant to endorse a European Union-style carbon emission trading scheme that seems likely to result in less economic growth, higher energy prices and higher food prices from increased biofuel demand. But that’s because you don’t know him as well as his daughter, Meghan McCain, who says he’s totally freaking out over global warming.

“My dad was tortured in prison; he doesn’t overreact to things. So if he starts freaking out, you know it’s time to freak out,” the blonde, blogging McCain told the editors of GQ in a profile last month. “And I think he’s freaking out about the environment. He’s like, ‘I’m genuinely worried about climate change; it’s happening right now.’ ”

Today in Oregon, McCain—the former POW—announced his support for a “cap-and-trade” program for carbon emissions. Under “cap-and-trade” programs the government rations the right to emit certain pollutants and allows companies to sell unused portions of their ration or buy up excess rights from others.

The endorsement is meant to win over centrist voters who have been convinced that global warming results from man-made pollution. It is likely to be criticized by the right—which views going to Oregon to endorse environmentalist measures like Jane Fonda going to Hanoi to decry the Vietnam War (Oregon John, anyone?)—and the extreme greens, where carbon trading is seen as conceding a right to pollute. Energy traders, who largely see the credits as another commodity to trade, will likely welcome the plan.

McCain also promised to bring pressure on China and India to convince them to reduce their emissions.

China responded this morning by holding an earthquake. ("Pow! Take that, Earth!") India said it would gladly allow US companies to outsource their own carbon reductions in exchange for improving India’s environment. Vietnam responded by offering to sell rice to the Philippines at shockingly high prices.

McCain Woos Democrats on Environment [Wall Street Journal]

Hillary Clinton has been upping the ante with her populist rhetoric, bashing "greed" and swatting away economic critiques of her tax plans by saying "I'm not going to throw my lot in with economists." As is often the case, that kind of anti-intellectual politics is accompanied by Wall Street bashing. Julie Satow, who covers Wall Street for the New York Sun, reports on Clinton's latest swipes.

Yesterday, Mrs. Clinton's normally responsive camp took a full 24 hours to correct widely reported accounts that she had said in a speech during the Indiana Democratic Party's Jefferson-Jackson Day dinner: "Why don't we hold these Wall Street money-grubbers responsible for their role in this recession?" In fact, she said: "Wall Street money brokers."

Either way, the sentiment is the same, according to many on Wall Street.

Clinton Attacks Wall Street [New York Sun]

It’s official: Wall Street loves Barack Obama. In 2007, even before he became widely-recognized as the front-runner for the Democratic nomination, Obama pulled in a total of $1.7 million from employees at 12 major Wall Street firms, according to a survey by the McClatchy news agency. Those numbers included $288,835 from Goldman Sachs, $242,395 from UBS and $226,805 from Lehman Brothers. He’s reportedly doing even better now that he has pulled ahead of Hilary Clinton in most polls. Money from hedge funds and private equity funds is pouring into his campaign coffers.

Well it’s a good thing that Wall Street loves giving money to Obama because if he gets elected, employees at Wall Street firms will be sending much larger checks his way thanks to tax increases. Obama has promises to end the Bush tax cuts. “That is a 3% bump across the board to the bad old days when associates faced a marginal federal tax rate of 36%,” Ted Frank wrote on our sibling blog AboveTheLaw when he analyzed the tax effects of Obamanomics on law firm associates.

We decided to take Frank’s analysis and apply it to Wall Street. Specifically, we decided to look at the effect of Obamanomics on an associate at an investment bank in his first year out of business school. Let’s say that a first-year post-MBA associate is paid about market rates for a Wall Street firm, taking home $105,000 in salary and $175,000 in bonus. Like Frank, we’ll assume he’s generous, and gives $10,000 a year to charity.

The biggest tax effect comes from Obama's plans to end the social-security tax cap. Current law caps social security taxes at $102,000. Obama plans to abolish this, meaning the full salary and bonus will be subject to social security taxes. That adds several thousands of dollars to the associate's tax bill.

As Frank notes, that’s not the only place associates will feel the higher tax bill. They’ll likely feel it in smaller bonuses as well. Social-security taxes are not only on employees. The government also charges 6.2% to employers that employees never see on their W-2s. But, of course, their employers noticed this hit and it shows up in compensation costs on balance sheets that shareholders will see too. Even if we assume that employers are willing to swallow half of the extra cost of uncapped social security taxes, the bonus for the associate will decline by around $5000.

The overall effect of Obama's tax hikes is breathtaking. The first year associate’s marginal tax rate goes up from an already ridiculous 42.5% to 51.4%—not including the new 6.2% marginal tax on the employer. Add in the effects on the bonus, and the associate is losing nearly $20,000/year in take-home pay.

Frank has helpfully added a third column to his chart: how big a pay cut would you have to take to receive the same take-home income? The answer is that Obama’s tax increases have a bigger effect on your income than a Wall Street firm cutting New York salaries by $34,000.

See the effect charted after the jump.

College isn’t worth it and you should stay out of corporate America, Michelle Obama, the Princeton graduate who went to Harvard Law School before joining the white shoe Chicago law firm Sidley & Austin, told an audience of working mothers at a daycare center in Zanesville, Ohio.

After speaking of the burdens of student loans from her upper-crust education, the wife of Democratic presidential hopeful Barak Obama told the women at the day-care center that she’d prefer they not follow in her upwardly mobile footsteps. Better if they stay in their place, back in “the community.”

“We left corporate America, which is a lot of what we’re asking young people to do,” Byron York reports Michelle told the women. “Don’t go into corporate America. You know, become teachers. Work for the community. Be social workers. Be a nurse. Those are the careers that we need, and we’re encouraging our young people to do that. But if you make that choice, as we did, to move out of the money-making industry into the helping industry, then your salaries respond.” Faced with that reality, she adds, “many of our bright stars are going into corporate law or hedge-fund management.”

York points out that spending too much on college and getting too involved with bank-account enriching and presumably soul-sucking corporate America is not too much of a problem for the people of Zanesville. “According to the U.S. Census, Muskingum County, where Zanesville is located, had a median household income of $37,192 in 2004, below both the Ohio and national averages. Just 12.2 percent of adults in the county have a bachelor's degree or higher, also well below the state and national averages. About 20 percent don't have a high school degree,” York writes.

Well, at least she wasn't telling grade school kids in the Bronx that they were studying too hard.

Michelle Obama: "Don't Go Into Corporate America" [The Corner]

Yesterday a cameraman for the Free Press caught two members of the audience napping during an FCC hearing on net neutrality at Harvard Law School. Now we don’t blame them for snoozing through a meeting about net neutrality—our eyes glaze over just thinking about it—but it does raise the question: why would you go to an FCC hearing if you are bored by that type of thing?

Portfolio’s Sam Gustin has answered the question: they were there because cable giant Comcast paid them to be there. Comcast had planned to pack the meeting with its local employees, and had paid some people off the street to show-up early and hold places in the line for the employees.

“Some of those placeholders, however, did more than wait in line: they filled many of the seats at the meeting, according to eyewitnesses,” Gustin reports. “As a result, scores of Comcast critics and other members of the public were denied entry because the room filled up well before the beginning of the hearing.”

Money can't buy you love, but it can buy you napping bodies to keep your critics at bay.

Comcast Astroturfs the Old-Fashioned Way [Portfolio.com]

How bad must things be up in Armonk?

It’s usually a sure sign of deep trouble when a company blames short-sellers or runs crying to lawmakers for protection. MBIA has announced plans to do both. It’s asking lawmakers to investigate or curtail “the unscrupulous and dangerous market manipulation activities of short sellers," according to a written copy of testimony it plans to give to the U.S. House Committee on Financial Services that Reuters obtained.

What really has MBIA’s knickers in a twist is that scheduled appearance of Bill Ackman before the committee.

"MBIA notes that Mr. William Ackman is appearing on the hearing on February 14th as an 'industry expert.' Mr. Ackman is in fact not involved in the industry in any capacity except as that of a short-seller, and, accordingly, MBIA questions the characterization of Mr. Ackman's expertise," the testimony says.

Scandalous. Everyone knows that short sellers cannot be experts. Only corporate management count as experts. Just ask Enron. That damned Jim Chanos guy got up in their face, and he wasn’t even in the energy trading business. They really showed him.

MBIA to urge curtailing short sellers [Reuters]

The best-known employee of Avenue Capital announced that she isn’t happy with their health care plan yesterday. Chelsea Clinton, who works for the hedge fund, mentioned that she had problems with Avenue Capital’s health care plan on a MSNBC appearance broadcast from Milwaukee.

"If you have health care and you're not happy with it -- like me who has employer provided health care, but I'm not happy with it -- and if you are one of the 100 million who are uninsured at some point throughout the year... you'll be able to buy into a Congressional health plan," Chelsea Clinton said, according to the Politico blog.

Ouch. You employ the daughter of a former and a prospective president, and this is the thanks you get?

Note to Avenue Capital [Politico]

Political contributions are one of the big mysteries in American politics. Why would anyone give to their favored candidate or political party when they could simply free-ride on the donations of others? It’s even more of a mystery than voting, which strikes most political scientists as irrational since the chance of any one vote making a difference is minuscule. Big donors are making an even larger sacrifice than voters, yet the chance of any individual donor’s contribution making a difference is probably just as minuscule.

The most likely answer is that political giving isn’t like voting—whereas voting is anonymous, giving is disclosed. This means political giving can have effects that voting cannot, such as winning favor with politicians receiving the contributions. This, in turn, suggests that giving patterns should differ from voting patterns because the two actions are differently motivated. Voting is a symbolic act whereby voters express a political preference and engage in solidarity with other citizens. You don’t get points for voting for winners or losers (unless it just makes you feel good to have voted for a winner). Giving is a self-serving act—so it makes a lot more sense to give to winners than losers. Think of it this way: voting is like praying or hoping; giving is like betting. Or investing.

And this year hedge funds and private equity firms have been piling into the same trade they did in 2004 and 2006: betting on the Democrats. Hedge fund and private equity donations totaled $6.4 million in 2007 for presidential candidates, with the Democrats getting 59.7 percent of the loot and 40.3 percent going to the Republicans.
These numbers are heavily skewed by the Democratic Senator Christopher Dodd’s role in the presidential race.

Although a little known candidate that few believed had a realistic chance of becoming his party’s nominee, Dodd garnered as much support from the alternative investment category as one-time Republican front-runner Mitt Romney. Dodd is widely believed to have a fund raising advantage as the Senator from Connecticut, where many funds have offices. If we net out contributions to Dodd, the fund raising contest narrows dramatically. Democrats retain an edge over Republicans of just 50.6% to 49.4%.

So hedge funds may have "elected" the Democrats in 2007, as the headline says, but the contest looks a lot more like the closely contested elections of 2000 and 2004 when you take away the Dodd factor.

Hedge Funds 'Elect' Democrats in '08 Race [International Business Times]

Wall Street may not have its own primary but then again voting is not necessarily the best indicator of support and enthusiasm for a candidate. After all, the apathetic and uninformed get equal votes with the committed and knowledgeable. The best primary for Wall Street probably wouldn't be a voting primary at all. It would be a money primary, where Wall Streeters would vote with something much more valued than votes--cash--and candidates would report quarterly results. Not surprisingly, that's very close to what we have.

So who is winning the Wall Street money primary? Hillary Clinton took garnered the most dollars in the fourth quarter, taking $388,391 from employees of the top 10 underwriters of U.S. stock offerings. Mitt Romney came in a distant second, with just $293,750 from that group. Democrat Barack Obama trailed close on his heels with with $251,860.

Clinton Tops Romney, Obama in Fourth-Quarter Wall Street Cash [Bloomberg]

We’ve been on a bit of a tear today about the politics of regulation. So why quit when we’re having so much fun with it? As we noted today, calls for additional regulation often depend on a double standard under which market process are characterized by imperfect information and dominated by self-interest while regulatory processes are somehow viewed as well-informed and public-minded. Why are people so attracted to regulatory solutions when despite the lack of evidence for concrete benefits?

David Hirshleifer has a delightful paper that sees through one prominent anti-market double standard and suggests an answer—several in fact—about why regulation is unduly attractive. His approach is simple. He points out that the findings of behavioral psychology—that people are often irrational, biased and ill-informed—apply to regulators as well as investors and consumers.

“The psychological attraction theory of regulation holds that regulation is the result of psychological biases on the part of political participants and regulators, and the evolution of regulatory ideologies that exploit these biases,” he writes.

The cumulative effect of these biases is overregulation. “[Since the universe of possible tempting regulations is unlimited, the theory predicts a general tendency for overregulation, and for rules to accrete over time like barnacles, impeding economic progress. The theory also predicts occasional drastic increases in regulation in response to market downturns or disruption.”

You can download the paper here. (Hat tip to Ribstein.)

As it turns out, Wall Street gave heavily to the Presidential campaigns last year, proving once again the axiom: "Make money in good times, make friends in bad."

Leading all corporate donors in campaign donations as of the end of last year was investment banking giant Goldman Sachs, based on an analysis of Federal Election Commission records, the Center for Responsive Politics said.

The next four largest corporate donors were Citigroup, Morgan Stanley, Lehman Brothers and Merrill Lynch, according to the center's fourth-quarter preliminary analysis, which is subject to revision.

The total of Wall Street’s giving for this presidential race has hit almost $34 million. And who are the new friends of Wall Street? Democratic leaders Hillary Clinton and Barack Obama have been the biggest beneficiaries of this cash, each collecting for than $5 million. As always, it's unclear whether this is because Wall Street favors their policies or simply likes to bet on winners.

Corporate U.S. presidential campaign giving surges [Reuters via Guardian]

The first time we heard the term market failure we assumed the term referred to the occasional inability of market processes to withstand government interference. Later a good friend who was majoring in economics explained to us that this was not the standard understanding of the term. It was another case of our own conceptual dyslexia, where we learn last the simple things and never quite grasp by instinct what strikes everyone as obvious. But we’re stubborn and our initial impression has always colored the way we look at these things.

So the same thing happened later when someone used the term “systemic risk” in a discussion of hedge funds. We assumed they were talking about the risk posed to alternative investments by busybody regulators hungry for campaign donations. It turns out that the systemic risk wasn’t to hedge funds at all—it was a risk allegedly created by hedge funds to everyone else. Who would have thunk it?

We’re still not sure we had it wrong. With many hedge funds having been brutalized by the credit markets in recent months, it does seem that we were at least half right. The systemic risk in the financial system wasn’t being created by hedge funds, it was being absorbed by them. Without a doubt, their appetite for risk may have added to overall risk in the market. The appetite for mortgage backed derivatives, for instance, surely contributed to the mortgage bubble.

[More after the jump.]

What a wild ride we’ve had with Countrywide today. Shares of the home lending behemoth dropped following reports this morning from the Los Angeles Times that the company was on the verge of bankruptcy. And they shot back up this afternoon as word leaked that Bank of America is in talks to buy Countrywide. (Careful DealBreaker readers read it here first, and now the Wall Street Journal is reporting it.)

Even earlier today, CNBC’s Charlie Gasparino—shirt sleeves deceptively intact—was reporting on the “governing philosophy” that created the mortgage mania which in turn birthed our mortgage meltdown and, at the very least, exacerbated the broader credit crunch. He had discovered that back in 2003 Countrywide Angelo Mozilo had given an speech to the Harvard Joint Center for Housing Studies and the National Housing Endowment calling for loosened credit ratings standards and a reduction, or perhaps an end, to downpayment requirements for homebuyers. This was the speech, of course, that informed the front page National Mortgage News story we unearthed for you last Friday.

But don’t blame Mozilo. He was only responding rationally to the incentives created by that all to compassionate monster, the state. Long before the Bush administration attempted to rebuild Iraqi society, it set out to rebuild American society. Although it went under the banner of “compassionate conservativism,” the Bush adminsitration’s call for an “Ownership Society” was, at its core, central economic planning on a colossal scale. The market had failed to make enough Americans homeowners, and so the Bush administration set out to “expand homeownership.”

More after the jump.

We don’t spend too much time on politics unless it is happening in a far-away land. For instance, we’ve been studying up on the nineteen-year-old successor to the murdered Pakistani opposition leader but couldn’t tell you anything about how Hillary Clinton’s plans to separate people from their money from Barack Obama’s. Or whether John McCain’s plans to rollback allegedly rogue regimes are any more realistic than those of Rudolph Giuliani (who is somehow still running for president). Mitt Romney worked for Bain once but appears to be the worst campaigning politician in recent memory who is not a Greek from Massachusetts.

Our political friends tell us that McCain will win tonight in New Hampshire, and Obama will thoroughly trounce Clinton. (Although too strong a showing among independents by Obama could hurt McCain's chances.) Neither of these gentlemen is especially a friend of Wall Street. Both can be expected to sign into law the tax hikes sure to be passed by the Democrat controlled houses on Capitol Hill. Both can be expected to support more regulation and bureaucracy, and less political and economic liberty. If we made little progress against the rapid growth of government during the Bush years, we can expect even less under either of these gentlemen.

But its also likely that the doomsday scenarios emanating from some pundits are over-wrought. The Greenspan era policies of low-interest rates and the Republican Congress encouraged government spending growth probably did more damage to the economic health of the Republic than any Clinton tax-hike ever did. There may not be too much good news for investors and Wall Street coming from New Hampshire tonight except for this: this too shall pass.

Moments after former Pakistani Prime Minister Benazir Bhutto's horrific assassination was announced, equities futures began to move downward. People at trading desks immediately began to guess what this would mean across a variety of markets. We started getting e-mails from traders, market watchers and even a few readers who are in Pakistan now.

Reminders that we live in an unpredictable and dangerous world tend to unsettle equities markets, so the moves in the major indexes that followed were, well, highly predictable. But some readers wanted to know why this assassination should be viewed as bad news. It sounds cold hearted and ill-mannered to mention it but isn't it possible that the death of the opposition leader in Pakistan could stabilize the country by eliminating a challenger to Pervez Musharraf? Isn't Musharraf our man over there? As one reader put it, shouldn't this be up arrow news?

The reason it's terrible news is that Bhutto was actually a source of stability for the country. She was a reasonable and relatively US-friendly alternative to Musharraf. With her out of the picture, it's unclear what direction the opposition to Musharraf will take. But what is clear is that the opposition will most likely strengthen and act with a greater sense of urgency. The world is slightly more dangerous this afternoon than it was when we went to bed last night.

Tim Carney spends way too much of his time sounding the same theme over and over again: big business loves big government, even though both sides find it convenient to hide the love affair. It’s a shame because his talents* would be much better used if he could focus on a wider array of subjects. Unfortunately, the love affair continues in its not quite open and not nearly notorious enough manner, so he’s stuck with his beat.

This week he’s taking on the pose of John Edwards, the man famous for a very expensive haircut and making speeches about “two Americas.” The gist of his stump speech is that he is a man of the people armed with policies to repair our broken Republic if only the evil forces of business can be overcome. But is big business really so opposed to Edwards’ favorite policies?

Tim reports. You can deride.
• The policy: Addressing global warming. His corporate ally: General Electric.
• The policy: Universal health care. His corporate allies: Basically, the entire health care sector.

“These big businesses and their lobbyists are backing government takeovers of our energy and health sectors not out of “cowardice” or good will, but out of the profit motive. They have positioned themselves to benefit from big government, and their lobbying is just part of the investment,” Carney writes. “But John Edwards needs to maintain his class-warfare narrative in order to rile the crowds. As long as his supporters and the media don’t check his facts, it might just work.”

Edwardian Reality [National Review]

*Tim Carney is still the brother of John Carney, DealBreaker’s editor.

We give Loathsome Eliot Spitzer a hard time around here for the bully boy tactics both he and his staff reportedly practiced when he was New York's attorney general, tactics that he apparently kept practicing once elected governor. But it's worth remembering that Spitzer hardly invented the role of the aggressive prosecutor who builds his reputation by going after Wall Street and attacks his opponents with leaks to the press. Credit there probably belongs to Rudolph Giuliani. Yesterday the New York Times ran a healthy reminder of the Giuliani we knew before he became New York's mayor, and long before he became September 11ths mayor.

"Mr. Giuliani, who was 38 when he became United States attorney in 1983, threatened his targets with long prison sentences, and he infuriated judges with leaks of grand jury testimony to the press," Michael Powell writes. "His agents handcuffed Wall Street arbitrageurs before prosecutors investigated them. Apology was weakness; skeptics were 'jerks.'

Powell mentions the case of Princeton/Newport Partners, which was shut down in a raid by 50 armed marshals. They were charged with racketeering, a crime created to prosecute organized crime but which later became a regular feature of financial prosecutions thanks to the zealous creativity of prosecutors, including Giuliani, who realized that just because financiers weren't mobsters didn't mean they couldn't be treated as if they were. Although a federal appeals court later overturned the convictions, Princeton/Newport was ruined.

The prosecution of Michael Milken and the destruction of Drexel Lambert stand out in public memory but its worth remembering that Giuliani's career as a Wall Street foe hardly began or ended there. Executives from Kidder Peabody to those at Goldman Sachs were led out of their offices in handcuffs. There's a good case to be made that Giuliani's aggressiveness retarded financial innovation for years, as many were afraid that any unorthodox financial strategies or products might be deemed criminal by the US attorney's office.

“He was very creative about wielding power.” Those of the words one law professor uses to describe Giuliani, and we can't imagine a more fitting epitaph. Except that they were written too early, and Giuliani quite obviously has no intention of vanishing from the scene any time soon. We may yet have to write more about the way Giuliani wields power.

(More on this article from Tom Kirkendall and Larry Ribstein.)

Crime Buster With Eye on the Future [New York Times]

In the latest Business Week, Maria Bartiromo interviews Ron Paul.

Do you consider yourself a friend or a foe of Wall Street?

If they believe in freedom, free markets, and sound money, they'll love me. But if they like creating credit out of thin air, they'll see me as a threat. I was one of three people who voted against Sarbanes-Oxley because I thought it was detrimental to Wall Street. I'd repeal it.

After the jump, take a reader poll on whether Ron Paul is a friend or foe.

One of the great things about having Ron Paul running for president is the attention he brings to economic issues other than the usual tax and spend debates between the Republicans and the Democrats. This video isn't all that fresh (it's weeks if not months old, actually) but it is refreshing.

Over the weekend, the Wall Street Journal's editorial board ran its report on their interview with Mitt Romney. Titled "Consultant In Chief," the essay describes the former Bain executive's love of data and his approach to governing. Our Monday morning poll wants to know whether reading this interview makes you more or less liekly to vote for Romney for president.