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« Pro Criminal Illegal Alien Protesters Lose Their Minds, Shut Down Police Meeting | Main | When Wind Power Goes Really, Really Wrong »
Friday
May202016

THE VULTURES CIRCLE: How A New Hedge Fund Strategy Is Corrupting Washington And Controlling The Puerto Rican Bailout

HEDGE FUNDS AND THE PUERTO RICAN BAILOUT

Inside DCI Group, a political dark arts master controlled by a group of powerful hedge funds that are changing how Washington works and running the bailouts of Puerto Rico, Fannie and Freddie and more.

 

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Special Report By Ryan Grimm and Paul Blumenthal

WASHINGTON - Take Robert Shapiro.

A Harvard-trained political economist, Shapiro is the head of a consulting firm called Sonecon. That business card doesn’t do it for you? He’s got a few more in his wallet:

Senior fellow at the Georgetown University School of Business.

Adviser to the International Monetary Fund.

Director of the Globalization Initiative at NDN, a progressive think tank.

Shapiro, a Democrat, has advised presidents and presidential candidates, and has held powerful government posts. It stands to reason, then, that when he has thoughts on public policy, he can find an outlet ready to publish them.

Recently, he’s had ideas on how the government can address the debt crisis in Puerto Rico and how it can end the conservatorship of Fannie Mae and Freddie Mac by moving them into the private market. Before that, he had a take on how to deal with Argentina’s debt crisis. For all three, he produced academic-looking papers, complete with footnotes and charts.

All three situations have one thing in common: If they were resolved the way Shapiro suggested, a variety of bets placed by a select group of the most politically powerful hedge funds would pay off in a huge way. In the case of Argentina, they mostly have. Fights over how to resolve the other two issues are still raging in Washington.

For this article, we called Shapiro to ask on whose behalf he has been waging these intellectual battles. His answer was surprising in its honesty: He’s working with DCI Group, a political dark arts master known to be advocating on behalf of a group of powerful hedge funds that are changing how Washington works.

Shapiro, it turns out, is but one foot soldier in the hedge fund infantry. A review of public documents, tax filings and interviews with people involved finds that in each of the three campaigns, hedge funds have enlisted the same set of lobbyists, political operatives, dark money groups and think-tank experts spanning the political spectrum.

No single document or set of disclosures ties all of these groups together. They don’t put out joint press releases, parade themselves around Washington as part of a coalition, or chat together on conference calls. Finding the players in this game, instead, is more a process of deduction. For a group of firms and experts to be working for vulture funds on the issue of Argentine debt is normal Washington practice. (Vulture’s meaning here isn’t pejorative: it refers to an investment strategy that feeds off of assets the market has left for dead.)

For the exact same people and groups to be working on the next big issue that these funds care about — the Puerto Rican debt crisis — could be a coincidence. But now, the hedge funds are focused on a third issue — government-sponsored enterprise reform, which refers to the effort to establish new housing finance policy in the wake of the federal takeover of lenders Fannie Mae and Freddie Mac. And it’s the same political firms and the same independent experts that are once again weighing in — coincidentally, all on the side of the hedge funds.

Maybe it’s all coincidence, but let’s run the traps either way.

The band that has gotten together for the big three hedge fund jam sessions includes some unlikely allies: There’s DCI Group, the powerhouse lobbying firm. Then there’s the Raben Group, operatives whose specialty is working in the progressive space and lobbying Democrats. There’s the American Continental Group, a bipartisan lobbying firm. There’s 60 Plus and the Center for Individual Freedom, two groups that call themselves part of the conservative movement, but in reality are dark money groups known to run whatever campaign they’re paid to run, and that are happy to conceal the source of the funding. All these groups have roughly nothing in common, other than that they all have united in advocacy campaigns that alternately go up against the Argentinian people, Puerto Ricans and the rest of the American public.

Each of these campaigns appears to have been run by or aided by the DCI Group. We say “appears” because DCI is one of Washington’s great black boxes — news articles that involve DCI routinely include a line informing readers that the organization did not respond to a request for comment. This article is no different.

Old Washington hands involved in these particular fights say that nothing they’ve seen before in politics has prepared them for the mercenary campaigns the hedge funds are now waging.

“There’s something about this that’s almost more disturbing, because you get an issue that’s not particularly a big public issue and people can spend and spend and spend,” said a veteran policymaker who found himself on the wrong end of the hedge funds. “And I don’t know how anybody can compete with it. And then you start losing the narrative and you see groups on the left get bought out and corrupted — really corrupted. I don’t know what to do about it.”

What is being done only exacerbates the situation. Current tax policy allows hedge fund managers to pay billions less every year than competitors who don’t get the same advantage. And tax-exempt pension funds — teachers, nurses, firefighters — invest heavily in hedge funds, hoping to make up big shortfalls with risky investments. The generous tax policy leaves hedge funds flush with cash. What money they’re not stashing off shore, they’ve been spreading freely around Washington.

They may have finally gone too far. A backlash is brewing, threatening not just their current bets, but their various tax benefits too. One senior House Republican aide who’s worked closely with the hedge funds says that members of Congress have seen enough. “I think on the Fannie stuff, they’ve hurt themselves,” he said. “We’re like, fuck em. If they’re not your friends, they’re your enemies.”

And the hedge funds may be losing a crucial progressive ally. Responding to concerns from the Hispanic advocacy community, the Raben Group dropped its work on Puerto Rico two weeks ago. 

 

***

When big banks squared off against merchants such as Walmart in 2011 over the cost of debit card and credit card swipe fees, Washington saw a spending spree and a dirty campaign the likes of which it hasn’t seen since. But at least the arguments on both sides of the swipe fees issue made some rational sense.

“This one, I feel just disgusted by it,” said one GOP Senate aide who witnessed both.

With the hedge fund battles, a group of rich investors simply picks a side and then spends endlessly to tilt the battlefield to make sure that side wins. And in true Washington fashion, people are annoyed that the sellouts have sold low. As the same Senate GOP aide put it: “Sure, I’ll go after a few individuals, and help make Congress dysfunctional, so we can have Donald fucking Trump as our nominee, just so I can make $25,000. That’s just sad for our country.”

John Paulson, billionaire head of Paulson & Co., stands to make massive profits if lobbying campaigns on Puerto Rican debt and Fannie Mae and Freddie Mac go his way.

Not everybody sells out that cheaply. The Wall Street Journal on Thursday ran a piece on the hedge-fund lobbying around reform of government-sponsored entities, or GSEs.

Last year, The Raben Group, a Washington lobbying firm, offered a minority trade association $25,000 contingent on the association signing its name to an editorial arguing that Fannie and Freddie should be recapitalized and returned to private hands, said Gary Acosta, chief executive of the National Association of Hispanic Real Estate Professionals.

“They said, ‘If you won’t say exactly what you need to say, we’re not going to sponsor you,’” Mr. Acosta said. He said the association declined the offer.

Raben Group founder Robert Raben said the firm frequently matches funding from corporations with nonprofits that share a position but doesn’t ask them to change their stance. He declined to disclose the source of the money offered to the association.

What makes the hedge fund pressure campaign distinctive is the ambivalence, or even nihilism, that lies behind the public policy suggestions. Hedge funds want whatever policy outcome will make their leveraged bet pay off. It makes gauging the merits of a particular policy extraordinarily difficult. The targets of the campaign are largely beside the point: It’s not personal, it’s just business. Hedge funder Bill Ackman’s very public lobbying and PR campaign against Herbalife serves as the clearest example of the influence strategy deployed by hedge funds. But in that case, Ackman was only taking on a single company, so the damage to potential bystanders was limited. The same playbook applied to entire countries, a commonwealth or the housing industry itself amplifies the threat exponentially.

This one, I feel just disgusted by it.

And it’s not ideological, either. If a big group of hedge funds decided to short the health insurance industry, it could easily be in their interests to fund a dark money campaign on behalf of single-payer health care. If they short the big banks, they’ve now become allies with Sen. Elizabeth Warren (D-Mass.).

It’s less far-fetched than it might seem. Today, billionaire hedge fund managers are working the halls of Congress with civil rights groups and affordable housing advocates. The progressive groups have long wanted any GSE reform to include big money to make housing more affordable for the working class. Now that the hedge funds are in the game, the groups suddenly have an additional demand: Make sure any final plan pays out the shareholders (i.e., the hedge funds) handsomely.

The hedge funds bought a mountain of Fannie Mae stock after the government took it over and declared it worthless. The funds are trying to revive the share price by pressuring the government to let Fannie keep its profit and ultimately re-privatize the company. The alliance is understandable: For years, the progressive groups have been outmatched and out-funded, and along come some billionaires willing to back their effort. All these new advocates want is for their property rights to be protected. Why not?

“We knew we were getting in bed with people who wanted to see [Fannie Mae] pay them off,” Potomac Coalition founder Larry Parks told The Wall Street Journal for Thursday’s article. “It wasn’t anything we were so ideologically against.”

In Argentina, things didn’t work out so well for the folks on the other side of the hedge funds. In 2002, Argentina bucked years of social pressure from the International Monetary Fund and defaulted on its debt. No longer would it have its public policy dictated by international lenders backed by what became known as the Washington consensus — the notion that the best way for countries to grow was to slash spending, privatize whatever they could, cut taxes and make way for business investment. After defaulting, Argentina negotiated with lenders to resolve the debt, making deals with 93 percent of its creditors. A few American hedge funds held out, and waged a guerrilla campaign to recoup 100 percent of the value of their bonds, even though they bought them for pennies.

It took 15 years, and a pressure campaign against Argentina that linked it to terrorism and other atrocities, but the hedge funds could eventually land a $5 billion-$10 billion payout. It’s even reasonable to say the hedge funds helped bring down the Argentine government. Along the way, they blew up the international system of credit, as negotiations between sovereign borrowers and their creditors are no longer possible without 100 percent buy-in from creditors.

In Puerto Rico, the group of hedge funds waging the biggest lobbying campaign own debt that is first in line to be paid off in case of any calamity. (That’s not to say there aren’t other hedge funds that own different sets of Puerto Rican debt lobbying so that they’re the first to be paid; more on them later.) They’re now betting that they can stop Congress from rescuing Puerto Rico by amending bankruptcy laws to allow Puerto Rico to cover its basic expenses before paying out the hedge funds.

Betting that Congress does nothing is often a smart wager. If the island government is forced to pay off creditors first, it will have to take those funds from vital programs threatening the livelihoods of people who live there.

In a trip to the commonwealth this week, Treasury Secretary Jack Lew emphasized the human impact that the hedge fund lobbying campaign is already having on Puerto Ricans. “The financial crisis is not just a question of bondholders, but a question of the lives that are being led by 3.5 million Americans who live on Puerto Rico,” Lew said during a visit to an elementary school in the heart of San Juan.

That’s not to say that there isn’t lobbying on the other side of these issues. An entirely different group of hedge funds and investment firms want relief for Puerto Rico so that the bonds that they’ve purchased will be paid in full. Legislation that they support has received the backing of House Speaker Paul Ryan (R-Wis.) and has moved through a favorable committee. On GSE reform, big banks like Bank of America and Citigroup have lobbied for legislation that would eliminate Fannie Mae and Freddie Mac and replace them with a system of government insurance for bank loans. The banks employ dozens of lobbyists, but do not appear to be engaging in the kind of surreptitious campaign the hedge funds are conducting on the other side.

***

Corporate lobbying is often constrained by the need to play the long game. Sometimes a company, or an entire industry, realizes it needs to take a loss today, but will be back tomorrow to fight again. That can encourage corporate actors to rely more on carrots: Campaign contributions and cushy jobs are in store for staffers and members of Congress who play nice.

But because the hedge funds are fighting over a different bet each time — Argentina today, Fannie and Freddie tomorrow — the most bang for the buck may come from a run of negative TV ads in key congressional districts, or targeted campaigns against leading members of Congress on the wrong side.

Or even against staffers. In the midst of the debate over how to restructure Fannie Mae and Freddie Mac in early 2014, Jim Millstein was sitting down on Capitol Hill with Michael Bright, an aide to Sen. Bob Corker (R-Tenn.), who was working on the legislation. Millstein, like other hedge-fund titans lobbying on the bill, had a set of structural recommendations he thought the Senate should take up.

Millstein was worth listening to: While a top Treasury Department official, he had overseen the successful restructuring of AIG after the government bailout. But Millstein had an extra recommendation: The Fannie Mae shareholders needed to be paid out — shareholders like Millstein.

The aide told Millstein he didn’t see why shareholders, who bought Fannie stock for pennies when the government had already bailed it out, needed a windfall. The meeting turned tense. “Don’t worry kid, you’re about to get yours,” Millstein said, according to a Democratic committee staffer later briefed on the episode. Bright, reached for comment, declined to speak for this article.

A week or so later, the conservative Free Beacon dropped a story headlined, “Banker Who Helped Crash Housing Market Helped Crafting Mortgage Reform.”

The headline was absurd — Bright had been a low-level trader at Countrywide Financial Corp. right out of college, hardly in a position to blow up the housing market. But the facts didn’t matter. With the story in print, political operatives could now put the claim on the airwaves, and for cover source it back to the Free Beacon, a neat trick since the same operatives may well have been the ones who fed it to the Beacon. Two weeks later, the 60 Plus Association, a conservative dark money group, put out an attack ad repeating the allegation that “a former Countrywide financial executive is even helping craft the legislation.” The ad ran in North Carolina, Virginia and Idaho, targeting specific lawmakers involved in the legislation.

ATTACK AD -- BIG BANKS ARE BACK

Continue reading at Huffington Post...

 

 

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Reader Comments (5)

Some years ago in a British TV interview a trader said, "The new buzzword is hedge-fund but there's no such thing as a hedge-fund. If they were that good we'd all be in them and they'd be investment funds." I've had a different view about them since that day.
May 20, 2016 at 5:20 PM | Unregistered CommenterMick McNulty
The usual wretched reeking of "usual suspects"
See. I don't even have to say it..
May 20, 2016 at 9:11 PM | Unregistered CommenterL Garou
John Perkins just described this in some sort of talk show recently. They don't give a fuck about any side but their own.
May 20, 2016 at 10:02 PM | Unregistered Commenterskinflint
These guys need a smack in the ass that only eliminating the carried-interest loophole could deliver. When is that going to happen? We might be waiting a long time.

http://www.youtube.com/watch?v=qEK1jfZ7Fy0
May 21, 2016 at 3:18 AM | Registered CommenterDailyBail

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