After The Love Is Gone…

Andrew Ross Sorkin at Dealbook at NYT:

Daniel S. Loeb, the hedge fund manager, was one of Barack Obama’s biggest backers in the 2008 presidential campaign.

A registered Democrat, Mr. Loeb has given and raised hundreds of thousands of dollars for Democrats. Less than a year ago, he was considered to be among the Wall Street elite still close enough to the White House to be invited to a speech in Lower Manhattan, where President Obama outlined the need for a financial regulatory overhaul.

So it came as quite a surprise on Friday, when Mr. Loeb sent a letter to his investors that sounded as if he were preparing to join Glenn Beck in Washington over the weekend.

“As every student of American history knows, this country’s core founding principles included nonpunitive taxation, constitutionally guaranteed protections against persecution of the minority and an inexorable right of self-determination,” he wrote. “Washington has taken actions over the past months, like the Goldman suit that seem designed to fracture the populace by pulling capital and power from the hands of some and putting it in the hands of others.”

Over the weekend, the letter, with quotations from Thomas Jefferson, Ronald Reagan and President Obama, was forwarded around the circles of the moneyed elite, from the Hamptons to Silicon Valley. Mr. Loeb’s jeremiad illustrates how some of the president’s former friends on Wall Street and in business now feel about Washington.

Mr. Loeb isn’t the first Wall Streeter to turn on the president. Steven A. Cohen, founder of the hedge fund SAC Capital Advisors and a supporter of the Obama campaign, recently held a meeting with Republican candidates in his home in Greenwich, Conn., to strategize about the midterm elections, according to Absolute Return magazine.

Other onetime supporters, like Jamie Dimon, chief executive of JPMorgan Chase, also feel burned by the Obama administration, people close to him say.

That the honeymoon between Washington and Wall Street has turned to bitter recriminations is not news, given that the administration had long pledged to revamp Wall Street regulation in the wake of a crisis that rattled the global financial system.

Less than two years ago, Democrats received 70 percent of the donations from Wall Street; since June, when the financial regulation bill was nearing passage, Republicans were receiving 68 percent of the donations, according to an analysis by the Center for Responsive Politics, a nonpartisan research group.

But what is surprising is that some of the president’s biggest supporters have so publicly derided his policies, even at the risk of hurting their ability to influence the party in the future. Issues like the carry-interest tax on private equity or the Volcker Rule have become personal.

Why so personal? The prevailing view is that bankers, hedge fund mangers and traders supported the Obama candidacy because he appealed to their egos.

Mr. Obama was viewed as a member of the elite, an Ivy League graduate (Columbia, class of ’83, the same as Mr. Loeb), president of The Harvard Law Review — he was supposed to be just like them. President Obama was the “intelligent” choice, the same way they felt about themselves. They say that they knew he would seek higher taxes and tighter regulation; that was O.K. What they say they did not realize was that they were going to be painted as villains.

Paul Krugman:

I talked to some financial-industry backers of Obama back during primary season; they really didn’t know or care much about policy issues, but were in love with Obama over his style — and also over the prospect of being in his inner circle, something they knew wouldn’t happen with Hillary. Now they’re mad because they don’t feel that they’re getting enough stroking.

And you have to bear in mind that this comes after Obama has made immense efforts to placate the financial industry. There were no bank nationalizations; there were hardly any strings attached to bailouts; the financial reform bill was by no means draconian given the scale of the disaster. But Wall Street is furious that Obama might even hint that they caused the crisis — which he does, now and then, because, well, they did.

And as far as I can tell, hardly any of the new anti-Obamanites is thinking at all about what will really happen once John Boehner is speaker.

You know, one might have thought that having all the money in the world would make people less petty, less concerned about whether they feel that they’re in the in-group. But nooooo [/Belushi]

Daniel Indiviglio at The Atlantic:

In fact, most of those who I know on Wall Street aren’t particularly politically principled. They basically have the view that the government can do its thing, and they can do theirs. More regulation? They’ll just shrug and find loopholes or new ways to make money. Higher taxes? They have accountants with sophisticated income recognition strategies that handle that sort of nuisance. Their involvement in politics essentially consists of donating money to important politicians so that they can be relatively sure that government will generally leave them alone, or lend them a helping hand in case of emergency.

And that’s what they expected from President Obama. Instead, he adopted the popular narrative that Wall Street was the villain. This was a shock, because these bankers don’t share that view. As far as they’re concerned, a very small portion of them actually were responsible for the problems that led to the financial crisis. Indeed, many of them suffered disproportionally, as they had a year or two where their bonuses were far below what was anticipated, even though their individual performance hadn’t declined. They felt that they were in many ways victims of the housing bubble as well, even if their consequence wasn’t foreclosure or long-term unemployment like so many Americans.

That’s not to say people — or even President Obama — should necessarily by sympathetic to their bruised egos. This is just the explanation. If these Wall Street bankers and traders had analyzed President Obama and his base’s politics on a deeper level, then they would have seen precisely the treatment they got. Frankly, it could have been worse if the far-left progressive wing got their way. Of course he would vilify Wall Street after a credit crunch nearly caused another depression. After all, politicians need someone to blame in such situations. What other outcome could they have reasonably expected?

Naked Capitalism:

Please. Are you going to seriously tell me big financial players are up in arms because Team Obama occasionally calls them bad names? That explanation is so obviously bogus as to call for a look for the real reason. There’s a much more straightforward explanation, and it’s called “follow the money.”The key omission from this story is the name Rahm Emanuel. Rahm, a former partner at Wasserstein Perella, was particularly effective at fundraising from private equity funds and hedge funds.

So re-read this key phrase: ” They say that they knew he would seek higher taxes and tighter regulation; that was O.K.” But what the article buries in plain sight is the fact that the plans to tax hedge and PE funds carried interest at ordinary income tax rates, rather than a preferential capital gains tax rates, has the 2 and 20 crowd seeing red. And in case you had any doubts, there was no justification for this special treatment in the first place. Loren Steffy of the Houston Chronicle noted (hat tip Independent Accountant) provides a deft skewering:

Dear IRS: Please note that beginning this year, I am no longer earning an income. From now on, I am compensated through what I like to call column interest. It isn’t pay. It’s a capital gain that I receive in exchange for providing about 2,000 words a week to this newspaper. Please lower my tax rate accordingly. hey, you can’t blame me for trying. After all, a similar strategy has worked for years for money managers at hedge funds and private equity firms. … The private investment community is decrying the move as a massive tax increase, is if oblivious to the fact that it’s enjoyed an unfair tax break for years. … Let’s set aside the rather silly notion of private equity as an engine of job creation–most buyouts result in big job cuts–and focus on the inequality. Private equity managers typically collect a 2 percent annual fee on assets in the fund, which is taxed as income. They also scoop up 20 percent of their funds’ annual profits, which is known as carried interest. … Profit-sharing plans for just about everyone else are taxed as income. … Tax law is a murky world, but one basic principle of our tax code is that people who perform similar jobs for similar pay should receive similar tax treatment. That’s not the case in the investment world.

Sorkin does mention Steve Schwarzman’s infamous outburst (”likened the administration’s plan for taxes on private equity to ‘when Hitler invaded Poland in 1939.’”) but does not indicate the fact that this is the major reason for the falling out among Obama’s former backers. It’s one thing to raise taxes generally, the big boys can stomach that. But it’s quite another to raise taxes in a way that targets them. (And note, by the way, that this measure failed, but the industry was still deeply offended at this show of disloyalty).

Similarly, Sorkin later argues for the reasonableness of the revolting businessmen:

Mr. Loeb’s views, irrespective of their validity, point to a bigger problem for the economy: If business leaders have a such a distrust of government, they won’t invest in the country. And perception is becoming reality.

Just last week, Paul S. Otellini, chief executive of Intel, said at a dinner at the Aspen Forum of the Technology Policy Institute that “the next big thing will not be invented here. Jobs will not be created here.”

Yves here. This is patently ridiculous and disingenuous. First, Sorkin chooses to overlook that Otellini’s comments about inventions and jobs is based on his throwing in his weight with the venture capital industry, which was one of the groups that fought the proposed taxes on carried interest. The argument, implicitly is that the VC industry would shrink or disappear were there no carried interest tax break, and that we’d therefore see much less new business formation.

Both those ideas are questionable. Yes, the VC business as it is currently constituted might shrink, but a lot of angel investors do deals as principals or with small syndicates. One can as easily argue with so many people now possessing Wall Street experience, we’d likely see capital move through new channels to small ventures.

But more important, the idea that VC is critical to new business growth is complete urban legend. Amar Bhide, in the first systematic study of successful new ventures, determined that VC contributes very little to the funding of new businesses, even the most successful ones (his proxy was the Inc. 500).

Second, the line that Sorkin parrots from big businesses, “Be nice to us or we’ll quit investing,” is also bunk. Guess what? As we’ve indicated, big businesses were net disinvesting even during the corporate-friendly Bush Administration. And to the extent they are leery of investing now, far and away the biggest reason is macro uncertainty. It’s awfully hard to plan if you aren’t sure whether the outlook is for inflation or deflation. But businesses will cavil like crazy about government intervention because it is one of the few variables they might be able to influence.

And it’s also remarkable that Sorkin can treat the self-serving and misleading canard, “We’re mad that Obama is treating us like bad guys” seriously. For anyone at the TBTF firms, it’s patent rubbish. The firms got overt and back door bailouts so they could shore up their equity capital, and what do they do? Pay a big chunk of government-provided largesse out to themselves in record 2009 bonuses. It’s one of the most blatant acts of looting on record, and the industry deserves every bit of scorn the authorities can muster dumped on its head.

Felix Salmon:

Now Sorkin and Dealbook are the exemplars, at the NYT, when it comes to the journalistic virtue of putting primary documents online. Their Scribd account has over 100,000 subscribers and has had over 2 million visits; it’s much more active than the parallel documents.nytimes.com format used by much of the rest of the paper.

But anybody reading Sorkin’s column today simply has to take him at his word when he says that Loeb’s letter “sounded as if he were preparing to join Glenn Beck in Washington over the weekend.”

If I wanted, I could paint I different picture of the letter. I could point out that there are no fewer than three quotes from Barack Obama on its first page, talking about the importance of helping others and spreading wealth across the whole American population. I could note that Loeb is just as harsh on capitalists as he is on the government.

Many people see the collapse of the sub-prime markets, along with the failure and subsequent rescue of many banks, as failures of capitalism rather than a result of a vile stew of inept management, unaccountable boards of directors, and overmatched regulators not just asleep, but comatose, at the proverbial switch.

And he also sees new government rules being helpful on this front:

Many of the boards we have come across are populated by individuals who rely on the stipends they receive from numerous corporate boards and thus appear motivated primarily to ensure continuing board fees, first-class air travel and accommodations, and a steady diet of free corned beef sandwiches until they reach their mandatory retirement age. We are therefore encouraged by the recently finalized proxy rules, which will ease the nomination and election of directors by shareholders.

He’s even pulling with the government when it comes to cracking down on sleazy for-profit colleges:

Our perspective on the government’s increased willingness to use its regulatory muscle enhanced our short positions in the for-profit education space. Indeed, this summer certain government actions taken regarding these companies served to accelerate the unfolding of our thesis on these names.

So, who has the more accurate view of Loeb’s letter, me or Sorkin? The answer is Sorkin: I’ve been quoting very selectively. But in one crucial respect I’m being much more open and transparent about the letter than he is: I’m linking to it. He’s not.

There’s no legal or journalistic reason why Sorkin shouldn’t link prominently to the letter. When I spoke to Richard Samson, the NYT’s top lawyer on such matters, he was clear that although there are copyright reasons why the NYT might not post the letter itself, there’s absolutely nothing to stop the paper from linking to where the letter is posted elsewhere. And in general, Sorkin’s Dealbook blog is pretty good when it comes to external links.

I see a few possible reasons why Sorkin might not link to the letter, none of them good.

First, he might be moving Dealbook away from the blog concept (and it was always more of an email newsletter than a blog to begin with) to something much more self-contained. Dealbook has been hiring aggressively, and is clearly setting itself up in opposition to, and in competition with, other online sources of financial news. Maybe that makes Sorkin more hesitant to link out than he was in the past.

Alternatively, maybe Sorkin is happy to link out in theory, but he has problems linking specifically to the relatively juvenile and tabloid Dealbreaker. I don’t think that’s true: Dealbook does link to Deabreaker on a semi-regular basis.

There’s a couple of other possibilities, too, which are more worrying. Perhaps Sorkin got the letter directly from Loeb himself, on the condition that he not publish it, and he felt that linking to it would violate the spirit of that agreement. Or maybe there was no formal agreement at all, but Sorkin just felt that linking to the letter would annoy Loeb, and therefore decided not to do so in order to help maintain his relations with a source.

Or maybe it was just an oversight, further evidence that linking to primary sources simply isn’t very important at the NYT.

James Kwak at The Baseline Scenario:

I’ve criticized the Obama administration in many more words than Daniel Loeb. But putting the blame on certain categories of people does not somehow absolve “capitalism.” Our capitalist system–which until recently we considered the best, most pure version in the world–allowed incompetent people to become executives (and to run hedge funds), allowed incompetent people to become directors and to avoid any responsibility for their actions, and allowed companies to swamp regulators with battalions of high-priced lawyers and lobbyists.

This is a basic category error. Capitalism is an economic system; managers, directors, and regulators are people. They are not mutually exclusive. If you want to say that capitalism necessarily means universally good managers, responsible directors, and effective regulators, then that’s an argument you have to make (and good luck making it).

Just because you make a lot of money doesn’t mean you know what you’re talking about. Unfortunately, in this country if you make a lot of money, a lot of people listen to you.

(Here’s the full letter. Along the way, Loeb says that the current decline in confidence and economic activity is due to the SEC’s lawsuit against Goldman.)

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