The Dodd Frank Effect in Hedge Funds Unions and PE
By Steven Brill to Reuters
1. The Dodd-Frank effect: Good, bad or both?
Although the Consumer Financial Protection Bureau, the mega-agency created by the Dodd-Frank financial regulatory bill, has only been in existence for about six months, all of the Republican presidential candidates and GOP congressional leaders have slammed the agency and called for its abolition. Their central charge is that the regulations it has already promulgated are strangling the financial system and disabling banks from making the kinds of loans to small businesses and potential homeowners that would reignite the economy.
For example, in the Jan. 23 Republican presidential debate Mitt Romney said he had spoken to a banker in New York who said he had “hundreds of lawyers” tied up trying to navigate the new regulations.
Some sophisticated financial reporter, or team of reporters, needs to dig into that – with specifics. What exactly is the new agency requiring that is gumming up the works? What new rules are drawing the most persuasive complaints? How burdensome are they? How many lawyers and others are actually involved who were not working on the same types of regulations before? What abuses are the new rules intended to prevent? Which ones, if any, really do seem indefensible and which ones, if any, seem smartly crafted and worth the extra burden?
The best way to do a story like this is to go to one big bank and ask for full, on-the-record access to those working in the trenches on compliance. Jamie Dimon of JPMorgan Chase, who has been a lead complainer, would be my first candidate; ask him to show us the trauma. Then enlist a community bank in the same show-and-tell. Dig in to every single detail, with no preconceptions. Either way, it’s a great story about how what happens in Washington affects Wall Street and Main Street.
The controversy over Bain Capital and Mitt Romney’s defense against charges that Bain is guilty of “vulture capitalism” call for a broader story about one of the most interesting ironies in American finance and business: As Romney has pointed out, private equity funds draw much of their investment dollars from – and make much of their money for – pension funds. And among the biggest of these pension funds are those whose beneficiaries are the most liberal-leaning, 99-percenter unions, particularly those representing teachers and other public employees. The same is true of venture capital funds, which, because they focus more on startups than private equity funds do, are perhaps more likely to fund businesses that threaten to disrupt an industrial status quo that unions might want to preserve.
I know of at least one venture fund that is so sensitive to its union pension fund investors that it requires the companies it invests in to pledge not to oppose efforts by unions to organize the companies’ workers. But most operate as conventional, profit-seeking businesses. So how about a story that focuses, with specifics, on private equity or venture funds whose investors are progressive unions but whose investments run counter to the values and positions of those unions? For example, suppose a fund has major teachers’ union pension funds but supports high-tech distance learning companies — which the teachers’ unions adamantly oppose because they fear technology or distance learning will lessen the need for teachers in the classroom. Or what about a fund backed by blue-collar union pension funds that has investments in outsourcing services or in FedEx, Wal-Mart or other, smaller companies that have opposed unionization?
3. Newt’s taxes, chapter two:
As the Associated Press recently reported, it’s not clear that all of the issues related to Newt Gingrich’s income taxes were resolved with his release of his and Callista Gingrich’s personal joint return on Jan. 20, which showed that they paid taxes of 31.5 percent on $3.1 million in income. That’s because the return reveals that most of their income came from his corporation, Gingrich Holdings Inc — which apparently took in the money from his various books, documentaries, and consulting, and most of his speeches. His company is a kind of personal holdings corporation with “subchapter S” status (making it for tax purposes almost one and the same with the individuals who operate it), and that is why the income from it flows directly to Gingrich and shows up as one big number on line 17 on the IRS 1040 personal tax return. Because only Newt and Callista Gingrich’s personal return was disclosed, we only know the amount in profit, after the personal holding company’s “expenses,” that flowed to them personally; what we don’t know is what kinds of expenses Gingrich Holdings paid on Newt’s and Callista’s behalf before that profit was calculated. What amounts for meals or luxury hotels, for example, were picked up by the personal holding company and therefore became a pre-tax benefit not subject to income tax? What about cars, or even clothing, or rent on an apartment somewhere? Suppose, for example, that that $3.1 million in income was net of, say, $2 million in these kinds of expenses? Then, the tax rate would arguably have been 19 percent, not 32 percent.