President Obama has promised to run against the private equity industry in which Mitt Romney made his millions. But Obama, amid all his talk of "reform" and battling the special interests, has done virtually nothing to check the supposed excesses of that industry.
"This is not a distraction," Obama said of his campaign's attacks on Romney's private equity career. "This is what this campaign is going to be about." If he follows through, it will be yet another example of Obama governing one way and campaigning another.
Obama's signature financial legislation, the 2010 Dodd-Frank law, did virtually nothing to constrain private equity firms or hedge funds. For one thing, Democrats declined to use the bill to fulfill populist campaign promises and raise taxes on hedge fund and private equity managers.
Most of Dodd-Frank's regulations target investment banks such as Goldman Sachs, commercial banks such as Capital One, and conglomerates of the two forms, such as JPMorgan Chase, Bank of America and Citigroup.
Private equity firms don't take deposits, don't enjoy Federal Deposit Insurance Corp. protection and don't have access to Federal Reserve lending windows. Instead, they raise money from large investors, such as pension funds, and use that money to buy shares in companies that are not listed on public stock exchanges. Often they take public companies private -- meaning they delist the companies from a stock exchange. Dodd-Frank barely touched any of these activities.
"It doesn't really affect us," private equity kingpin Henry Kravis said of Dodd-Frank in January while speaking with Bloomberg News.
Not only does Dodd-Frank have little direct impact on private equity firms, it indirectly helps them by constraining their competition. The law's Volcker Rule limits banks' private equity investing. The result: less competition for PE firms, and thus better deals and expanded opportunities.
The Volcker Rule has already pushed a few big banks to shut down or spin off their businesses that compete with Kravis' KKR & Co. and other private equity firms.
Davis Polk & Wardwell, the pre-eminent law firm serving the financial sector, wrote in the weeks after Dodd-Frank's passage that the Volcker Rule "may provide an opportunity for private equity sponsors to hire talented personnel or increase market share." They were right.
In October 2010, nine top traders left Goldman Sachs for KKR. The New York Times reported at the time that Apollo Global Management had bought up Citigroup's real estate investment, and Blackstone Group -- another PE giant -- absorbed the Asian property business Bank of America had to unload.
KKR, Apollo and the Carlyle Group are responding to Dodd-Frank by expanding their divisions that invest in debt. As Reuters put it, "Opportunities in the credit markets have grown" because some competitors "have retreated from the space, either because of strategy shifts or regulatory pressure."
Specifically, Reuters cites Dodd-Frank's Volcker Rule and other rules limiting banks' risk taking.
Regulation frequently helps private equity firms. Most famously, the last financial "reform" -- the 2002 Sarbanes-Oxley law -- drove a ton of business toward private equity firms.
The regulations Sarbanes-Oxley placed on publicly traded companies forced many of them to go private, creating lucrative business for PE firms. Blackstone Chairman Stephen Schwarzman explained, "Sometimes governmental reforms really work well for you, because they mess things up. ... We're the beneficiaries of governmental reforms."
KKR, for instance, bought up Toys R Us, which feared that some of its honest accounting mistakes could lead to criminal prosecution if the company remained listed on the stock market.
KKR also benefitted from the estate tax. In 2005, an arm of KKR bought up a majority stake in Systems & Software, a family-owned software company whose owners were being weighed down by estate planning. Burt Willey, who together with his sister had inherited the company, told me the estate tax that would hit the next generation helped convince him to sell.
So Obama is not significantly constraining private equity firms with his regulations. (Dodd-Frank requires these firms to register, but some larger firms have welcomed this requirement.) By slapping new rules on banks but not private equity firms, Dodd-Frank helps clear out PE firms' competitors. And by increasing government's role in the economy, Obama creates more regulatory arbitrage opportunities for private equity firms.
Just as Obama ran against the drug companies in 2008 while giving them what they wanted in Obamacare, he's running against private equity today while helping their bottom lines.
Timothy P.Carney, The Examiner's senior political columnist, can be contacted at email@example.com. His column appears Monday and Thursday, and his stories and blog posts appear on washingtonexaminer.com.