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Hedge Fund Managers Invest on Capitol Hill
by Manu Raju
John Paulson, one of the world’s richest hedge fund managers, has not been shy about spreading his wealth to Senate campaign coffers — or to the chairman of the committee that could directly affect his bottom line.
Paulson held a ritzy $1,000-per-head fundraiser for Senate Banking Committee Chairman Chris Dodd last year — and then maxed out his donation with $4,800 more for the Connecticut Democrat’s now-aborted reelection run.
Paulson is hardly alone.
According to a review of Federal Election Commission records, the nation’s 10 richest hedge fund managers have dumped nearly $1 million into campaign accounts over the past several years — with much of it going to senators who’ve given them a friendly reception on Capitol Hill.
And despite all the tough talk about a crackdown on Wall Street, consumer advocates and critics from other financial sectors say hedge funds would get off pretty easily under the regulatory reform bill Dodd’s committee approved last month — a charge Dodd’s aides reject.
Many hedge funds enjoyed an enormously profitable year in 2009, in part because of good bets that federal dollars would be used to rescue “too-big-to-fail” financial institutions. And the Top 25 earners made more than $25 billion last year, according to a recently released survey by Absolute Return + Alpha magazine.
Those Top 25 feature some familiar names in Capitol Hill’s fundraising quarters, including liberal investor George Soros, who earned $3.3 billion last year and has dropped $42,000 of his cash into Democratic campaigns in the past few years.
Other Top 25 managers have hedged their bets, in some cases making contributions to candidates.
For instance, Carl Icahn of Icahn Capital, who earned $1.3 billion last year, pumped $4,600 into New Hampshire Democrat Jeanne Shaheen’s 2008 campaign to unseat then-Sen. John Sununu — only to give Sununu $1,000 a short while later.
Steven Cohen of SAC Capital Advisors, who earned $1.4 billion last year, contributed $59,000 to the Democratic Senatorial Campaign Committee’s coffers in 2006 and 2007 and $58,900 to the National Republican Senatorial Committee in 2007 and 2009, records show.
Sheila Krumholz, executive director of the Center for Responsive Politics, which tracks campaign donations and lobbying, said that the hedge fund industry’s political contributions skyrocketed 16,000 percent from 1990 to 2008, with the bulk of the cash flowing in the past election cycle when the industry spent $17.2 million. And she said that lobbying by the booming industry has increased substantially, too, pointing to a 680 percent increase in lobbying expenditures between 2006 and 2007.
“They’re doing this because they saw the writing on the wall: more regulation and more taxation,” Krumholz said.
A spokesman for Cohen declined to comment, and Icahn did not respond to a request for comment.
Industry officials argue that hedge funds and other private investment pools are not large enough to bring down the system and should be subject to less stringent regulations than the major financial institutions that helped spawn the global recession — and that often only a wealthy private investor loses money if a hedge fund crashes.
And Dodd's aides contend that the Banking Committee took an aggressive posture towards the investment pools that are now largely unregulated.
“Dodd’s bill imposes tough new restrictions on hedge funds, including better regulation, greater disclosure and protections to the economy as a whole,” said Kirstin Brost, a Dodd spokeswoman. “Sen. Dodd never has allowed campaign contributions to influence his positions. It’s just silly to suggest he’d start when he’s not running for reelection.”
But critics say that the Senate Banking Committee bill will be ineffective if it doesn’t provide for even stronger regulation of the hedge fund industry and private equity firms.
“Failing to pass legislation that allows the [Securities and Exchange Commission] to oversee hedge funds and private equity will leave critical holes in the regulatory framework and allow systemic risks to build in the shadowy financial markets,” said Heather Slavkin, AFL-CIO’s senior legal and policy adviser.
FEC records show that Dodd, the driving force behind the bill, collected big money from hedge fund managers — particularly in 2009, as he prepared for the reelection campaign he eventually abandoned. In recent years, Dodd has received $18,000 in campaign contributions from the Top 10 hedge fund managers on the Absolute Return + Alpha list.
Asked about Paulson’s contributions to Dodd, a spokesman for Paulson said in a statement: “John Paulson supports a variety of candidates in both political parties, based on keeping the United States the financial and economic capital of the world.”
Paulson has donated $30,300 since 2007, with most of it going to senators, including Democrats Arlen Specter , Frank Lautenberg, Finance Committee Chairman Max Baucus, Majority Whip Dick Durbin and Senate Majority Leader Harry Reid and Republican Scott Brown.
Hedge fund managers prefer the Senate Banking Committee’s bill to the measure that passed the House last December. Unlike the House bill, the Banking Committee bill does not put restrictions on executive compensation for hedge funds.
Under the House bill, hedge funds could shoulder the bulk of the financing to wind down failing financial institutions, since hedge funds with more than $10 billion in assets would have to pay into the program. Dodd’s bill would spare hedge fund managers by making more systematically risky firms finance the program for failing institutions – unless the hedge funds themselves are considered systemically risky.
The Banking Committee’s bill would require hedge funds with more than $100 million in assets to register with the SEC and smaller ones to register with states, but some advocates of tougher regulations are concerned that it would not go as far as the House bill in pushing them to divulge information about their risks to investors and creditors. Supporters of the Banking Committee’s bill say the measure gives the SEC ample authority to investigate the books of hedge fund managers.
Private equity firms and venture capitalists are both exempt from certain registration requirements under Dodd’s bill. Sen. Jack Reed (D-R.I.) is preparing an amendment that would close off that exemption by requiring private funds with more than $30 million in assets to register with the SEC and disclose information to regulators on any risks.
Douglas Lowenstein, president of the Private Equity Council, which represents private equity firms, said the House, the Senate Banking Committee and the Obama administration “all have recognized that private equity firms, by their nature of their business model, do not pose systemic risk.” And he said that the group supports the need for regulators to obtain information about private equity firms’ systemic risk, which both the House and Senate bills would allow them to do.
The Managed Funds Association, which represents hedge funds, supports mandatory registration requirements for its members and all private investment firms.
The disparity between the two bills comes on the heels of another House-Senate fight — over whether to continue allowing hedge funds, private equity firms and other similar partnerships to treat profits at the capital gains rate of 15 percent — rather than as ordinary income, with tax rates as high as 35 percent. The House is pushing forward with language that would increase the tax rate as a way to pay for a number of expiring programs, but the Senate has long resisted such a tactic.
Sen. Chuck Schumer (D-N.Y.) said Monday that the tax is “one of the things on the table” as the two bodies negotiate. But Schumer has many allies on Wall Street, too. When he ran the DSCC in the past two cycles, Schumer was notorious for collecting funds from top money managers, including nearly $150,000 from the 10 wealthiest hedge fund managers, FEC records show.
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