Bailouts, campaign bucks and bamboozlement


One small news item yesterday: Republican Governor Tim Pawlenty’s Freedom First PAC endorsed Republican-endorsed CD1 congressional candidate Randy Demmer and contributed $2400 to his campaign committee.

By small, I mean that this move was legacy media blog-worthy but not an item for the dead-tree edition yet — and highly re-tweeted by the staff of the Republican Party of Minnesota and its followers.  In the paper’s Hotdish Politics blog, Star Tribune political reporter Rachel Stassen-Berger posted under the  headline Pawlenty supporting Demmer:

No great surprise but still, perhaps, a boost.

Republican Gov. Tim Pawlenty is using his political action committee to support Republican state Rep. Randy Demmer’s bid. . .

. . .The nod comes with a financial lift — a donation from Pawlenty’s Freedom First PAC and a link on Pawlenty’s Web site encouraging others to support Demmer. He needs the cash help. As a Saturday Star Tribune story noted, “Whoever wins the GOP endorsement will get badly needed help from the party in raising money. Walz has nearly $600,000 in cash on hand after raising more than $1 million. Demmer has raised just $71,592 and has $19,424 cash left after expenses.” . . .

The Strib post didn’t name the dollar amount on the PAC contribution. For that, I turned to an update on Polinaut, the political blog at Minnesota Public Radio. Tom Scheck noted in Speeches from the 1st District GOP convention:

Update: Gov. Pawlenty’s Freedom First PAC is backing Demmer for Congress. His spokesman, Alex Conant, says the PAC will give $2400 to Demmer’s campaign.

Where’s Pawlenty getting the money to fuel his presidential ambitions — and to give to fellow Republicans?

I didn’t have to look far for the answer to that question. On April 15, a page editor provided an illuminating teaser for a Star Tribune article by Pat Doyle and Eric Roper, Pawlenty’s PAC: Who’s giving?:

More than half of those chipping in to an exploratory presidential PAC are from out of state, and bankers loom large, FEC filings show.

And who might those bankers be? Doyle and Roper report:

At the top of the list are officers of Citadel Investment Group of Chicago, a major hedge fund manager.

Employees of Morgan Stanley, which helps the state of Minnesota manage government employee pensions, also gave money. Pawlenty sits on the board that oversees the pensions.

Citadel wouldn’t say why more than a dozen of its top officers gave nearly $50,000 to Pawlenty’s PAC — about 9 percent of the money it brought in.

“We have no comment,” said company spokeswoman Devon Spurgeon. “I don’t normally comment on any of our contributions.”

Citadel officers have been major contributors to politicians around the country over the years, giving $64,000 in the current election cycle to individual candidates and party units for Republicans and Democrats, separate from the money given to Pawlenty’s PAC.

Citadel’s founder and CEO Kenneth Griffin and chief operating officer Gerald Beeson, both of the Chicago area, led the way as company contributors to Pawlenty’s PAC with $5,000 contributions each.

Morgan Stanley investment bankers and a financial adviser gave another $7,000, according to FEC filings. They include William Strong of Lake Forest, Ill., who has been a top executive.

Morgan Stanley and Morgan Stanley & Co. earned more than $700,000 last year in commissions managing stocks for the Minnesota State Board of Investment, which oversees Minnesota government pension funds. Pawlenty sits on the Board of Investment with Attorney General Lori Swanson, Auditor Rebecca Otto and Secretary of State Mark Ritchie.

I’ll leave the Stanley Morgan investments in Pawlenty’s career alone for the moment, for I was most intrigued by the mention of Kenneth Griffin. I knew I’d seen that name somewhere recently in my reading. Now where was that?

Search engines are a wonderful tool: Google led me directly to an April 3 editorial in the New York Times, Hedge Funds Make Hay:

Riding high on the bank bailout, hedge fund managers posted record paydays in 2009, according to an annual survey by AR: Absolute Return +Alpha magazine.

Leading the pack, David Tepper of Appaloosa Management made $4 billion, in part by betting successfully that the government would bail out the big banks. John Paulson, of Paulson & Company, made $2.3 billion by buying back bank stocks he shorted in 2008. And a year after his fund received $200 million in the bailout of the American International Group, Kenneth Griffin of the Citadel Investment Group made $900 million. [emphasis added]

. . .Debate is endless about the role of hedge funds, largely unregulated investment pools for institutional and wealthy investors. What is not disputable is that the funds’ profits are bound up with a defective financial system that has fostered booms, busts and bailouts.

The day after the hedge fund results were released, the government reported that unemployment was stuck at 9.7 percent, with 15 million Americans out of work. For most people with a job, average earnings fell by 2 cents an hour in March, to $18.90. To add insult to injury, some hedge fund managers and, more commonly, private equity fund managers are able to pay a much lower rate of tax than the typical working professional. [emphasis added]

The tax disparity results from an outdated rule that lets a money manager in a private partnership treat a chunk of his fees as if they were long-term capital gains, taxed at a special low rate of 15 percent. Fees for managing someone else’s money should be taxed as ordinary income, like wages and salary, at rates as high as 35 percent.

The pairing of John Paulson and Kenneth Griffin reminded me that they had appeared together before Henry Waxman’s committee in late 2008 to testify about the bank bailout (TARP), which Congressman Walz had voted against twice.

Reuters published one account of the hedge fund managers’ testimony before the committee in Big hedge funds say US bank bailout a “sweet deal”, which began with this telling lead:

Hedge fund managers, who rank among some of the world’s shrewdest dealmakers, told Congress the U.S. government’s bank capital injection program did not have enough strings attached.

“The current terms are overly generous to recipients,” said John Paulson, president of hedge fund Paulson & Co.

He was among five hedge fund managers questioned on Thursday by the U.S. House Oversight and Government Reform Committee about Treasury Secretary Henry Paulson’s management of a $700 billion bailout program to unfreeze credit markets through taxpayer investments in financial firms.

John Paulson — whose attack on the plan was dubbed “Paulson versus Paulson” by the lawmakers — said any bank receiving federal funds should halt cash dividends on common stock and restrict cash compensation to executives. . . .

Another problem with the bailout:

Falcone, who runs the activist hedge fund Harbinger Capital Partners and who highlighted his humble upbringing in his testimony, said banks should receive federal capital at a cost aligned with market rates.

According to the article, Griffin was the one dissenting voice:

. . .The contrarian view came from Griffin, whose Citadel Investment Group is facing a difficult year. His flagship Kensington and Wellington hedge funds were down about 38 percent through early November.

Griffin said the government cannot charge market rates for its capital because those rates are too high for many firms. The capital injections are “in essence an indirect subsidy to the banking system” that he said should be ultimately passed through to the consumer.

But that wasn’t Griffin’s only instance as an objector to the consensus of the larger group of hedge fund managers. As New York Times “Talking Business” columnist Joe Nocera wrote in  Facing Crisis, Congress Makes Sense (see copy beginning half way down the column:

They all agreed with Mr. Waxman, and with the other Congressional questioners, that in certain cases hedge funds could indeed pose systemic risk. All but Mr. Griffin said they would favor at least some regulation of hedge funds. They all agreed on the need for more disclosure. They said they had no problem turning over now-hidden information about their portfolios to a federal regulator. Mr. Simons and several others (though, again, not Mr. Griffin) said that if Congress changed the tax laws in ways that caused them to have to pay more taxes, they would be O.K. with that. [emphasis added] I almost fell out of my chair.

The lede of the Rochester Post Bulletin’s article on last Thursday’s Tea Party in the Mayo City mentioned bailouts* as a source of their anger. 

Looks like the Republican activists among them will be urging their fellow angry citizens to vote for a guy who has no trouble in taking campaign bucks from a PAC fueled by banking executives who made out quite well from those bailouts. Imagine that.

*Walz voted against the car industry bail-out as well. Nor did he receive any campaign contributions from Kenneth Griffin.