Bernie Sanderscarried interestconflicts-of-interesteconomic justiceElizabeth Warrenhedge fundHillary ClintonInvestment Abusespreferential tax treatment

Hedge Funds Push Conservative Candidates to Maintain Their Edge

When you are a master of the universe, you have to make sure your place on earth is secure.

Source:  Jeff Wadlow

Source: Jeff Wadlow

That’s why the nation’s largest hedge funds have been pushing the odds, gaming the system, working to get the edge and hedging their bets to get the most bang for their millions in donations to the 2016 group of presidential candidates.

Hedge funds know how to work the system for their own benefit. They do it every day. They know the laws, the grey areas of the laws, and how to shape and then work the system to exploit any possible pricing or regulatory aberration. Detecting weaknesses and opportunities is their forte, so it is not surprising that the 2016 candidates are the focus of their attention.

Not surprisingly, the hedge funds and their many associated lobbying groups are pushing to maintain their dubiously-gained advantages, such as carried interest, preferential tax treatments, and pushing back any further regulations covering the use of leverage, OTC limits, the public disclosure of fees, performance, and expenses.

As reported on opensecrets.org, hedge funds as an industry started to make substantial contributions in 2007, when the industry was cited as a force contributing to the housing market debacle and resulting recession. To fight back any regulatory reforms the industry contributed nearly $40 million during the 2012 election cycle, or more than double their contributions during the 2008 election cycle.

After the popular calls to regulate hedge funds subsided around 2010, the industry began contributing to Republicans who pushed an anti-regulation and beneficial tax position. By 2012, the hedge fund, Renaissance Technologies, was the industry’s top contributor to Republicans with over $8.9 million in donations.

Hedge funds are a lobbying force.  They spent over $7.1 million lobbying in 2012. The Managed Funds Association spent over $4.1 million on lobbying in 2012.  All this money is being spent to push back or eliminate Dodd-Frank Wall Street Reform and the Consumer Protection Act, advocated by

Sen. Elizabeth Warren

Sen. Elizabeth Warren

Sen. Elizabeth Warren, including the regulation of over-the-counter (OTC) derivatives, according to opensecrets. The industry also would be in favor of preventing the fiduciary standard requirement, as well as any public disclosures of performance fees and expenses.

Here is a list of the 20 largest hedge funds that contributed to candidates in 2015-2015 courtesy of opensecrets.org.  Note that the only two funds that contributed to Democrats were the Soros Fund Management and Paloma Partners.

But trying to identify the main sources of hedge fund money is like trying to put your finger on an oil spot: your finger gets dirty, but the oil spurts in all directions.

But we do know that hedge funds hate Bernie Sanders who has publicly said he would tax their transactions, break up the big banks (that would derail the prime brokerage business) and raise income and corporate taxes on their companies. Hillary Clinton has made less sever public threats, but as an

Paul Singer, Elliott Management

Paul Singer, Elliott Management

experienced politician and wife of the former president who repealed Glass-Steagall in 2010, she knows how to walk the fine line between actual and practical regulation.

So while the financial services industry remains one of the largest and best-funded lobbying forces in Washington, here are some of the candidates who have received their money and will respond accordingly if elected.

 

 

 

Jeb Bush

While it looks like Wall Street and other contributors will have to write off their contributions to the former Florida governor and son of a former president and brother of another president, Bush still has the name recognition and old machine apparatus to generate the most money ($128.037 million) of all the Democrat and Republican candidates. His largest single source of industry contributions is from the financial services industry due to Bush’s anti-regulation stance. Letting Wall Street remain unfettered has paid off: he raised $26.8 million from the securities and investment industry, or about 26% of all the money he has raised to date.

Chris Christie

Christie received almost all (98%) of his contributions from individuals, but the largest industry group contributing to his campaign was Wall Street.  While you would most of his contributions would come from New Jersey, his home state, most of his contributors (based on zip codes) resided in Greenwich, not New Jersey, according to opensecrets.org. When he was chairman of the Republican Governor’s Association (RGA) in 2014, Christie received almost $700,000 in contributions from three New York hedge fund managers, who coincidentally were managing New Jersey pension assets, according to Institutional Investor. A New Jersey state legislator said those contributions were intended to help pay for Christie’s presidential bid. And while New Jersey has a prohibition against any “pay to play” payoffs (aka as a “quid pro quo” corruption) to gain access to its state bidding process, the contributions were seen as a form of tribute to gain greater access to state coffers, according to a New Jersey legislator.

Here are the hedge funds which all managed New Jersey pension money that made the contributions:

CEO, Owner Hedge Fund NJ Money Managed Amount DonatedTo RGA
Leon Cooperman Omega Advisors $150 million $36,400
Dan Loeb Third Point $100 million $400,000
Paul Singer Elliott Associates $200 million $250,000

Source:  Institutional Investor, May 25, 2015

As the article notes, New Jersey does not have any public hedge fund fee and performance reporting requirements. Christy vetoed a bill in May 2015 that would require those disclosures, so it looks like the contributions achieved their goal and their put position went in-the-money.

Hillary Clinton       

Clinton’s top category of contributors is lawyers and law firm employees, and she also received the most money of all candidates from educators, and retirees, according to opensecrets. However, since her public promises to curtail Wall Street, the financial industry has reduced contributions to Clinton and all but eliminated them to Sanders. But Wall Street (commercial and investment banks and securities firms) has given Clinton about 7% of her total fundraising, primarily via Super PACs, according to opensecrets.org. As the most experienced politician in the 2016 presidential race, Clinton knows about the “triangulation” strategy devised by her husband to bring well-heeled Wall Street banks into the Democratic Party. Maybe the funds are betting on a back-door entrance to her policymakers as she looks better in the national election.  That could be their best bet of all.

What Hedge Funds Get in Return

So what do hedge fund contributions get for handing out money to politicians?  Plenty.

According to the Willamette Week, John Paulson, one of the industry’s most successful hedge-fund managers, made a fortune betting against the mortgage market (and against average American homeowners  as depicted in the movie “The Big Short.” For this bet, Paulson made $9 billion in fees in just two years. His current tax bill on $9 billion: $0. Yes, he paid nothing.

This is because Congress lets hedge-fund managers earn all they can now and pay their taxes in the future thanks to an arcane tax loophole known as “carried interest.”

In 2007, Congress debated whether hedge-fund managers should pay the top tax rate that applies to wages, bonuses and other compensation for their labors, which is 35%. That tax rate starts at about $300,000 of taxable income—not even pocket change to Paulson, but almost 12 years of gross pay to the median-wage worker, according to the Willamette Week..

The Republicans and a key Democrat, Sen. Charles Schumer (D-New York), voted to keep the tax rate on hedge-fund managers at 15%. Their public position was that hedge fund profits should be considered capital gains, not ordinary income.

But that was  a cover story.  Hedge-fund managers don’t pay 15%. At least, not currently. As long as they leave their profits in the company, known as “carried interest,” in the hedge fund, their taxes are deferred. Taxes are only paid when they are cashed out, which could be decades from now. In the interim, to maintain their high-style of living, the managers borrow against the carried interest, often at very low rates.

All this is something the average American taxpayer can never do, but they are just the working people who don’t have the access tot he best Congress money can buy.

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Chuck Epstein

Chuck Epstein

Chuck Epstein has managed marketing communications and public relations departments for major global financial institutions and participated in the launch of industry-changing financial products. He also has written by-lined articles for over 50 publications, five books and served as editor and publisher of nation’s first newsletter on the topic of using the PC for personal investing and trading. (“Investing Online, 1994-1999). He also is a marketing consultant, writer and speaker on topics related to investor protection and opportunities in the very dynamic cannabis industry.

He has held senior-level marketing, PR and communications positions at the New York Futures Exchange, Chicago Mercantile Exchange, Lind-Waldock, Zacks Investment Research, Russell Investments and Principal Financial.

He has won national awards from the Mutual Fund Education Alliance (MFEA) and his web site, www.mutualfundreform.com, was named best small blog in 2009 by the Society of American Business Editors and Writers (SABEW).

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