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The Treasury Department’s Racial Favoritism

The Treasury Department this morning announced plans to sell another 1.5 billion shares of Citigroup common stock: “Treasury currently owns approximately 3.6 billion shares of Citigroup common stock and expects to continue selling its shares in the market in an orderly fashion. The sale of 1.5 billion additional shares of Citigroup common stock, as authorized pursuant to the fourth trading plan, would bring Treasury’s holdings of Citigroup common stock to approximately 7 percent of total shares outstanding — down from a high of approximately 27 percent.”

What caught my eye in the bottom of the press release, though, was the news that “As part of the disposition program, Morgan Stanley agreed to provide opportunities for involvement by small broker-dealers, including minority- and women-owned broker-dealers. Morgan Stanley has entered into agreements with the following 12 broker-dealers: Cabrera Capital Markets, LLC; Great Pacific Securities, Inc.; Guzman & Company; Kaufman Bros., L.P.; Loop Capital Markets; M. Ramsey King Securities, Inc.; Mischler Financial Group; M.R. Beal & Company; Sturdivant & Co. Inc.; Valdes and Moreno, Inc.; The Williams Capital Group, L.P.; and Wm Smith & Co.”

An earlier Treasury press release gives details on the 12 firms:

Cabrera Capital Markets, LLC is a Hispanic-owned full-service broker-dealer headquartered in Chicago, IL. Cabrera specializes in the execution of domestic and international securities for institutional financial customers whose client base includes unions, governments, corporations, hedge funds, and foundations and endowments.

Great Pacific Securities is an Institutional full service broker-dealer located in Costa Mesa, CA that has been certified as Service Disabled Veteran-owned for 20 years. Great Pacific provides domestic and international trading capabilities in equities and fixed income securities.

Guzman & Company is a Hispanic-owned broker-dealer headquartered in Coral Gables, FL. Guzman & Company is a member firm of the NYSE that provides top-ranked, agency-only program and block equity trading, and fixed income trading, underwriting and analytics, to the nation’s leading investment managers, plan sponsors and financial institutions.

Kaufman Bros., L.P. is a Hispanic-owned and operated full service investment bank and broker-dealer based in New York, NY. KBRO delivers proprietary research, advisory and sales and trading services to issuers and institutional clients including multi-strategy hedge funds, mutual and pension funds and private equity funds.

Loop Capital Markets is an African American-owned full service investment bank and brokerage firm headquartered in Chicago, IL. Loop Capital Markets provides capital solutions for corporate, governmental and institutional entities, including financial advisory services, equity, taxable and tax-exempt securities sales and trading, and analytical services.

M. Ramsey King Securities, Inc. is a Native American- and woman-owned broker-dealer based in Burr Ridge, IL. M. Ramsey King facilitates agency-only individual and program executions for domestic and international securities on behalf of institutional clients.

Mischler Financial Group is a Disabled Veteran Business Enterprise (DVBE) Broker-Dealer headquartered in Corona Del Mar, CA. Mischler provides financial services in equities, fixed income, and cash management to state and local governments, financial institutions, insurance companies, hospitals, universities, private and public pension funds.

M.R. Beal & Company is an African American-owned full service broker-dealer headquartered in New York, NY. M.R. Beal specializes in municipal, corporate finance and equity execution for institutional clients including U.S. corporations, state and local government, and not-for-profit entities.

Sturdivant & Co. Inc. is an African American-owned agency broker-dealer based in Voorhees, New Jersey. Founded in 1988, the firm specializes in providing highly rated boutique-like large, mid and small cap equity research and execution services, including algorithmic program trading, commission recapture, transition management and equity underwriting services.

Valdes & Moreno, Inc., founded in 1994, is a Latino-owned broker-dealer based in Kansas City, Missouri focusing on institutional and retail investors alike. The business of the firm includes financial advisory and underwriting services for issuers of corporate and municipal securities, liquidity management and private equity in the socially responsible investing space for institutional investors, as well as a broad range brokerage services for retail investors.

The Williams Capital Group, L.P. is an African American-owned full service broker-dealer based in New York, NY. Williams Capital provides equity, taxable and tax exempt fixed income, corporate finance and investment management services to institutional and corporate clients.

Wm Smith & Co. is a woman-owned broker-dealer based in Denver, CO. Wm Smith provides special situations fundamental equity research on 13D Filings and Insider Transactions, capital markets, and sales and trading services to institutional clients.

I can understand and sympathize with the impulse behind these sorts of programs. Rather than simply cutting government checks to disabled veterans or historically discriminated against minority groups, it’s better to help them build businesses, which generate jobs and real wealth, the argument goes.

The other side of the argument, though, is that in a situation such as the Citigroup share sale, the government ends up choosing its business partners based not on who can get the best sale price on the stock for the taxpayers, but on the race, gender, or disabled veteran status of the owners of the firms. The minority-owned firms wind up marketing themselves not primarily on their excellence but rather on their minority status: Look, for example, at the home page of the Mischler Financial Group Web site or of Kaufman Bros. Many of the individuals involved were well on their way to success via Ivy League educational institutions before getting any help from these preferences for minority-owned businesses; Kaufman’s CEO, Benny Lorenzo, for example, has a Harvard MBA, while the Williams Capital Group’s Christopher Williams has an MBA from Dartmouth’s Tuck School of Business. Getting certified as a minority or women-owned business is a time-consuming process that can involve spending lots of money on well-connected lawyers. And sometimes a second injustice is committed in an effort to rectify an initial injustice. Suppose a child of Carlos Slim, according to Forbes the world’s richest man, moved from Mexico to America and set up a Hispanic-owned broker-dealer. Should that firm get a preference over one begun by the son of a poor Italian-American janitor?

Disentangling America from Citigroup is a complicated matter in its own right. Righting or rectifying America’s historical record of discrimination is also a complicated matter in its own right. Trying to combine the two in one transaction seems like it’s asking an awful lot.

The Treasury press releases don’t disclose how much money this business will end up being worth to each of the firms.

Ira Stoll at Future of Capitalism