What if you could bet on Wednesday’s NBA game between Golden State and Oklahoma City, and before the game or at least before the final buzzer, you could lobby the referees and the league to change the rules? Maybe you would bet on Oklahoma City and then lobby to abolish the three-point shot.
Hedge funds and other investment firms are playing that very game in Washington, D.C., these days. Recently, Capitol Hill has seen a blitz of lobbying on how Puerto Rico should handle its debt amid fiscal disaster, and how Treasury should deal with private investors in bailed out government-sponsored enterprises Fannie Mae and Freddie Mac.
Behind the barrage of lobbying, op-eds and public relations is a handful of hedge funds who have gambled one way or another on GSE stock or Puerto Rican debt, in the hope that they could pull enough strings in Washington to make big bucks.
It represents something different from typical Washington lobbying.
Congress created Fannie Mae and Freddie Mac in past decades in order to pump up the housing market. These government-sponsored enterprises (GSEs) buy mortgages off of lenders, freeing up more capital for more and cheaper mortgages. Their willingness to take on and sell out more and riskier mortgage paper contributed to the housing boom that preceded the bust that led to the financial crisis.
In 2008, as the mortgage and housing markets crumbled, Fannie and Freddie collapsed, and the U.S. government stepped in to bail them out. The Bush and Obama administrations didn’t liquidate or nationalize the companies; instead they placed them into “conservatorship” under its federal regulator, the Federal Housing Finance Agency. It was as if Fannie was a mentally incompetent person and the FHFA was its guardian.
Along the way, as taxpayers were absorbing hundreds of billions in Fannie and Freddie losses, enterprising investors began buying up Fannie and Freddie stock dirt cheap. Clearly they hoped that the Obama administration would shore up the companies, and then set them loose again to resume their job of fueling demand for mortgages (in all likelihood with a renewed government guarantee).
But again, the funds weren’t passive spectators. Some conservatives wanted to liquidate the GSEs as bubble-making bailout bait. Some liberals wanted to replace Fannie and Freddie with a full-fledged government agency. So Perry Capital and Paulson & Company hired up lobbying firms to lobby for a privatization that would allow private shareholders to pocket the companies’ profit.
This involved fighting — in court and on Capitol Hill — to overturn a 2012 ruling by the administration that the taxpayers who bailed out Fannie and Freddie and would continue to backstop Fannie and Freddie would also get to keep their profits.
Perry Capital’s lawsuit ran into a brick wall recently when Reagan-appointed judge Royce Lamberth dismissed it.
On the lobbying front, they’ve had more success: Last month Rep. Mick Mulvaney, a Republican on the Financial Services Committee, introduced HR 4913. The bill would end the government’s sweep of Fannie and Freddie profits and would release both from conservatorship. A coalition of funds invested in Fannie and Freddie applauded the bill, which promised to make their investments pay off. The funds weren’t just spectators in this sport.
Mulvaney’s bill, in its draft form, leaked to the press last year. “The bill leaked out in September, and since then we’ve heard from everyone,” Mulvaney told me. It wasn’t introduced until this month, but lobbying records show Perry Capital’s lawfirm, Gibson Dunn, lobbying on it before that for Perry Capital. Many other investment firms, including Paulson & Company, hired K Streeters to tip the scales on their Fannie bet.
Perry Capital’s lobbyist at Gibson Dunn, longtime GOP aide Michael Bopp, also lobbies for other investment funds making similar gambles. For instance, Blue Mountain Capital Management is a Bopp client on bills involving Puerto Rican debt. Blue Mountain is reportedly owed over $400 million by the Puerto Rico Electric Power Authority (PREPA). Puerto Rico wants to allow PREPA to restructure its debt and thus pay only a portion of what it owes.
Mulvaney told me that he and other Financial Services members and their staff constantly hear from lobbyists and financiers expressing strong opinions and laying out “reform” ideas for Puerto Rico’s finances. “We always ask them what they’re invested in and when they invested in it.”
Unsurprisingly, those lobbyists, think tanks, and non-profits arguing one way or another on Puerto Rico tend to be in the pay of those invested. Mulvaney says he works hard to “get unbiased information. Or if you have to get biased information, try to get biased information from both sides.”
This hedge-fund lobbying is different from most corporate lobbying. Most companies lobby on issues about how their businesses may be run, or seek a government-guaranteed competitive advantage against rivals. The GSE and Puerto Rico lobbying is investors lobbying to make their gambles pay off. The investor-lobbyists aren’t people who have a business idea that could be affected by public policy—they are operatives whose business idea is, at its essence, gaming public policy.
Investors allocating capital according to which policy tweaks they think they can win doesn’t sound like the type of capitalism that maximizes economic efficiency. It’s just public-policy profiteering.
As government gets involved in more parts of the economy, hedge funds will increasingly engage in this public-policy profiteering. This will make lobbying on these arcane issues more common and more intense.
So maybe it’s a good time to be long on K Street.
Timothy P. Carney, the Washington Examiner’s senior political columnist, can be contacted at [email protected]. His column appears Tuesday and Thursday nights on washingtonexaminer.com.
