Hedge Funds Push for Access to COVID Bailout Money

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When the federal government creates a huge program that offers loans to large segments of the population, it will also attract a disproportionate number of opportunists, fraudsters and white-collar criminals.

The current $2 trillion bailout, the first in what is expected to be a number of federal loan programs to aid corporations and small businesses weather the impact of the pandemic, has certainly attracted legitimate, as well as illegitimate applicants.

But in a rare example of a blatant and obvious intent to abuse the federal bailout program, former White House Communications Director Anthony Scaramucci made the case on MSNBC that “small” hedge funds should also be eligible for the bailout money. Scaramucci runs the $9.4 billion (estimated as of 2019) hedge fund in New York. He also said he owns a restaurant that was forced to close due to the pandemic restrictions.

Scaramucci usually provides commentary on economic, financial, and even political events on TV. After all, he got his political experience as the communications advisor in the White House to Trump for 10 days in 2017. He also is a favorite interviewee on MSNBC.

Some have even called the financial services lobby the fourth branch of government.

So, with the entire nation focused on the epidemic, MSNBC anchor Stephanie Ruhle convened an on-air panel Monday morning to discuss the Trump administration’s bungled attempt to issue checks to small businesses. As that discussed ended, Ruhle also said she heard that “small” hedge funds would be applying for federal bailout money. (A “small” hedge fund was never defined.) Ruhle then asked why the financial opportunists who run hedge funds should qualify for a federal loan, potentially with very generous pay-back provisions.

Scaramucci cited a few reasons.  First, he said with a straight face that hedge funds create jobs. He then said they are part of the small business community. MSNBC anchor Ruhle mildly disagreed with Scaramucci’s assessment.

She was tepid in her criticism, although a more pro-individual investor would have laughed at Scaramucci’s self-serving proposal. To her credit, Ruhle did say that despite their poor performance in recent years, hedge funds have not reduced their fees.

While this short discussion between Ruhle and Scaramucci would not be interesting to most MSNBC viewers, it shed much-needed light on the financial services lobby, probably the most powerful in Washington. Some have even called the financial services lobby the fourth branch of government.

It also focused on hedge funds, an esoteric, but very influential, type of investment funds that share many of the same characteristics: they are very risky; they can employ every conceivable investment strategy; they often are highly leveraged; they are mostly unregulated; they are open only to wealthy individuals; they are often global; they rely heavily on technology; they fund one of the most, if not the most, powerful lobby in Washington. Most importantly, hedge funds have been cited as perpetrators or accessories in a number of major global financial debacles, especially the 2008 recession.

This background was not part of the Ruhle interview, or almost all others when the media describes hedge funds, but as any good corporate lobbyist or advocate knows, facts only get in the way when they are part of a media appearance.

Scaramucci is no different. The reality is that hedge funds do not create many jobs since they rely heavily on technology. Funds boast about their low headcount in proportion to how much money under management they handle. The reason is that computers can manage increased trade flow without adding staff.

In contrast, a small restaurant and a “small” hedge fund probably both employ the same number of people, except there are more college grads working in a hedge fund than a restaurant and that beach is on opposite sides of the compensation scale. 

Also, not one to miss an opportunity for free advertising, Scaramucii also said twice that he owns a restaurant, no doubt as a tax write-off.

Scaramucci (whose net worth is estimated at $200 million) also said hedge funds assist in capital formation. The extent of this, and whether funds even supplement capital formation, would be a good academic debate, but he may have meant that hedge funds provide liquidity to financial markets.  This is true, but it does not make much, if any, difference to average MSNBC viewers.

Hedge Funds: Predatory and Opportunistic

But there are two very important things Scaramucci and Ruhle did not say during their interview:

First, hedge funds are by definition opportunistic and predatory. They seek out trading opportunities at whatever the cost to other professional and individual investors. In contrast, almost all small businesses could not be characterized as predatory and opportunistic.

Second, the main support of hedge funds is an esoteric tax loophole based on carried interest.  Without carried interest, a huge percentage of hedge funds would fold in weeks because they would not be able to defer taxes. Carried interest is an esoteric tax and accounting loophole that also applies to real estate developers and private equity firms. It is a tax trick Trump has used for his whole career in real estate development. Through its powerful lobbying and legal-tax research, the hedge fund industry glommed on to this tax dodge and has been using it to boost profitability for decades.

Interestingly, Scaramucci’s hedge fund also operates an Opportunity Zone real estate investment trust that only exists because federal money is provided to investors and developers to create projects that supposedly benefit low-income “distressed” communities. The Opportunity Zone REIT offered by Scaramucci’s hedge fund says it can deliver significant tax benefits, and reductions and deferrals of capital gains taxes.

So, it is not surprising that hedge funds, regardless of their size, should get in line for the beneficial federal loans. If they could, they would push to the front of the line.  My bet is that they have their lobbyists figuring out how to do that right now.

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