Share

Timothy Carney: Regulate your way to riches

|

Hedge funds, which have steadily increased their presence in Washington over the past year, dove headfirst into the swamp this month, hiring a former congressman as their industry’s top lobbyist. Rep. Richard Baker’s career path — from a subcommittee chairman trying to regulate hedge funds to the highly paid president of the Managed Funds Association — shows how lawmakers benefit themselves by expanding government’s power.

In 1999 Baker sponsored one of the first bills to regulate hedge funds, which are lightly regulated and free from oversight by the Securities and Exchange Commission because they are available only to "sophisticated investors." The spectacular 1998 collapse of a hedge fund firm called Long Term Capital Management had raised fears that these huge hedge funds could spark a broad economic meltdown, and so Baker decided it was time for Congress to get its hands on the industry.

Baker’s reputation at the time was as a "fire-breathing, free-market dogmatist," according to a 2000 profile in the industry publication HedgeWorld Daily News, and his proposed regulation was not a big power grab. The Hedge Fund Disclosure Act of 1999 would have required plenty of new paperwork and sunlight, but would not directly restrict or direct the funds’ activities.

He spent the next eight years trying to establish SEC oversight of hedge funds and mandate disclosure, but hedge fund regulation never took off, largely because it never became a priority for lawmakers. But then Steven Schwartzman, chief executive officer of the industry-leading Blackstone Group, threw himself a 60th birthday party on Park Avenue that cost $3 million and included a private concert by Rod Stewart.

While the Schwartzman birthday party did not literally spark the new push for regulation, it symbolized the huge amounts of wealth that hedge fund managers had. As Bill Gates learned in the 1990s and Wal-Mart learned more recently, you can only be so successful before Washington comes calling.

In January 2007, as rumors about Schwarzman’s imminent birthday party were circulating in the gossip rags, Sen. Charles Schumer, D-N.Y., chairman of the Democratic Senatorial Campaign Committee, invited hedge fund chiefs to a dinner in New York City and encouraged them to be a bit more civic-minded, as a New York Times report tells it.

Then Democrats started pushing strict new regulations that went much further than Baker’s bill, with a proposal to increase taxes on fund managers. The message from Capitol Hill was clear: Hedge funds had to start playing ball. The industry’s group in Washington, the Managed Funds Association, knew it needed to ramp up operations. The group’s political action committee, which had spent just $14,000 in the 2000 election, doubled its fundraising pace and increased its contributions.

The lobbying budget ballooned (the MFA has spent $600,000 in the past two years, more than in the previous decade combined), and hedge funds started hiring top Capitol Hill staff. But a real industry (such as the recording, motion picture, pharmaceutical, telecom and insurance industries) needs to be headed by an important former lawmaker. In early 2007, theMFA began talks with Baker. This month the Louisiana Republican quit Congress and joined the MFA as president and CEO.

Had Congress, led by Baker, never threatened the MFA with new taxes and regulation, the MFA would have been happy to remain small fries within the Beltway, and Baker would still be earning a congressional salary instead of a lobbyist’s pay.

And despite the mainstream media portrayal, the hedge funds are not simply begging to be left alone. If they were, they wouldn’t have hired Baker, the pioneer of hedge fund regulation.

These guys are all very rich and making lots of money. The biggest threat for many of them is that their best employees will peel off and start their own funds. New regulations — as long as they’re the right regulations — can act as a barrier to entry and keep out new competitors. More importantly, when the funds take huge bets on the success or failure of a company or another industry, the right congressional action can make or lose millions for the fund.

In two years, when the lobbying laws allow Baker to personally come lobby his former colleagues on Capitol Hill, they’ll notice his nicer suits, French cuffs and new watch. That might just inspire them to find the next up-and-coming industry that needs some regulating — and a good lobbyist.

Timothy P. Carney is senior reporter for the Evans & Novak Political Report. His Examiner column appears on Fridays.

View article comments Leave a comment