The Politics of Private Equity and Hedge Funds: A DealBreaker Interview

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This morning’s post on political contributions from private equity firms and hedge funds sparked a debate in our comments about what’s motivating the heavily Democrat weighted giving. We offered a Super-Cynical View of the donations—that our financial titans are simply betting on what they think will be the winning horses. That got beat when someone offered the Hedge Against Leftism view—that financial types give to Democrats to buy them off their usual left-wing positions. But maybe there’s a simpler explanation. Are the money classes of New York City and Greenwich just a bunch of limousine liberals? Or is there something more fundamental going on here?
When DealBreaker finds itself mired in political questions, we turn to Tim Carney. And not just because he’s the younger brother of DealBreaker editor John Carney and has to return our phone calls. He’s also the author of The Big Ripoff, a new book explaining some of the messier things that happen when politics meets business. Tim agreed to speak—or at least instant message—with DealBreaker today about the Democrat favoring political donations of hedge funds and private equity.

DealBreaker:
So, brother, I want to ask you a bit about political donations and the politics of big money.
Tim Carney: How fortunate. I just wrote a book titled THE BIG RIPOFF: How Big Business and Big Government Steal Your Money, that addresses just that topic.
[The rest of the IM interview after the jump.]


DB: So today on DealBreaker we linked to a Bloomberg story saying that our of $7.4 million given by employees at the top hedge funds and private equity girms, $5 went to the Democrats. What’s up with that? Aren't the Republicans supposed to be the party of the rich?
TC: That is a well-worn myth, and nobody who has heard of George Soros or Warren Buffett should really believe it anymore. The four largest individual donors in the 2004 election all gave exclusively to Democrats. In 2006, so far, the three most prolific industries--real estate, securities/investment, and lawyers/lobbies--have all given more to Hillary Clinton than to any other candidate.
DB: Hillary, huh? Well, she’s from New York so that makes sense. But it’s not just Hillary. It’s more widespread. Can you explain this? A lot of folks think businesses, private equity shops and hedge funds essentially free marketers. Why would they give to Democrats, who aren’t exactly known as the party of the free market?
TC: Businesses do not desire free markets. Businesses desire profits. Sometimes free markets yield profits. Sometimes big government yields profits. Take private equity shops. Some of them may resist regulations or taxes on themselves, but taxes and regulations can--and do--drive privately-held companies to sell out.
TC: In my book I discuss a family-owned software company S&S that has sold out to Accel-KKR, and I spoke with one of the owners who said that the estate tax was a major factor in their selling. The estate tax can make motivated sellers out of family-owned businesses.
TC: Also, if you are one of the biggest businesses in your industry, regulation could be a boon. Regulation and tax compliance add to overhead, which acts as a barrier to entry and disproportionately affects smaller businesses. Maybe you got big in the world of hedge funds thanks to relatively low regulation, but now it might profit you to pull the ladder up behind you. Free markets are dynamic. Industry leaders want the status quo.
DB: Some of our readers think that donations to Democrats might be a hedge. If Republicans get elected, then the financial firms will have a natural friend in Washington. If the Democrats get elected, then they will have a bought off friend. Do the political parties really break down into pro- and anti- finance like this?
TC: Despite Democrats' "the-people-versus-the-powerful" rhetoric both parties are the parties of big business. Despite Republicans' "government-that-is-best-governs-least" rhetoric, both parties are the parties of big government.
DB: I want to get back to the hedge fund regulation. A lot of people assume that all hedge funds are against regulation. But you are saying that this isn't necessarily so. And that the reason some hedge funds support regulations is something other than a general concern for the proper functioning of financial markets and American prosperity.
TC: Businesses supporting regulation of themselves can have many motivations. One is the barrier-to-entry factor I spoke about earlier: Regulation can protect incumbents from new competitors.
TC: Businesses also sometimes support regulation as a government stamp of approval. The big meatpackers endorsed Teddy Roosevelt's regulation of meatpackers in part because it allowed them to broadcast to the world: the government says we're fine, so you should buy our meat. Hedge funds who can win a government license might be able to attract customers who wouldn't enter into an unregulated industry.
TC: This may or may not be a good thing. Enron won approval of mark-to-market accounting from the SEC, something private analysts probably wouldn't have thought was Kosher if Uncle Sam hadn't given it the thumbs up. That made possible the Enron bubble.
DB: Here's another possibility someone raised to me over drinks last night at Odeon—that GOP lawmakers get a lot of donations from the CEOs of public companies who are worried about activist investors such as hedge funds and hate short-selling, so they want these folks kept under tight control.
TC: Shortsellers are a scary thing for publicly traded corporations--especially poorly run ones. Ken Lay blamed his company's collapse on shortsellers. Most people CREDIT shortsellers with Enron's collapse. With less regulation of shortselling, we might have caught those guys sooner and fewer people would have lost all that money. So, yeah, it seems plausible.
DB: Alright Tim. Thanks for chatting with DealBreaker. We'll get back to you the next time politics intrudes on our cozy little world of money and, uhm, other kinds of money.
TC: Thanks, Bro. I think I left a brown sock in your living room last week.
DB: You left a red tie from your CNBC appearance too! I was going to give it to the salvation army but the thought of a poor person having to wear that ugly thing made me sad. Thanks again, brother.

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