As the Bush administration lurches toward a close, and with Democrats newly resurgent in the capital, the captains of the financial services industry are on the defensive. And they know it.
In the first six months of this year, the financial, insurance and real estate sector donated more money to political accounts than any other industry group, according to the Center for Responsive Politics. Its half-year outlay: $112 million. To put that sum in context, it is nearly double the second-place total of $65 million from lawyers and lobbyists — for whom handing out political checks is a virtual job requirement.
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The two biggest lobbying contracts in the first six months of this year both came from Wall Street: the $3.7 million hire of Ogilvy Government Relations by the Blackstone Group and a $2.6 million payout by the Securities Industry and Financial Markets Association. In total, private equity firms spent $6.5 million on lobbying between January and July, which is $1.6 million more than they spent in total from 1998 to 2005.
Some of the reasons Wall Street is feeling harried are in the headlines: The crisis in subprime mortgages and the favored tax treatment enjoyed by private equity firms are both prompting demands for Washington to tighten the legal and regulatory reins.
More broadly, the financial community perceives its interests potentially under assault on issues from taxes at home to trade overseas. The fear is that the cycle is turning in a more fundamental way.
Yesterday’s financier-heroes — celebrated on magazine covers, courted by politicians — increasingly are the new villains, viewed as living lavishly while families fret over their long-term financial security. At the same time, the surging Democrats are pressing long-pent-up agendas geared toward leveling the playing field.
“It’s not one single issue. It’s a perfect storm of issues that have made it challenging not just for the financial services firms but all those businesses that depend on our capital markets to grow,” says David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.
For evidence of The Street’s anxiety, look no further than the first mission tab on the Managed Funds Association’s website. It reads: “Protect.” The association, representing hedge funds, seeks to educate lawmakers on what it perceives as the societal benefits of multibillion-dollar investment pools, which can reap sums approximating the Gilded Age fortunes of the 19th century when they pay off for owners.
The hedge fund group, established in 1991, is working alongside the National Venture Capital Association and the relative newcomer the Private Equity Council.
The efforts by these groups is another sign of fortress-building along the Potomac, not simply by financial services but by the business community as a whole.
Corporate lobbying is on pace to best last year’s record-breaking outlay of $2.6 billion, according to the Center for Responsive Politics. Corporate donations and political spending through business-run political action committees have also skyrocketed, going from $158 million in 2000 to $278 million last year, according to the Federal Election Commission.
There’s no mystery why. Ideas that once had strong bipartisan currency are now falling out of favor, certainly among Democrats, but even among Wall Street’s traditional Republican allies.
Trade is one example, with a new tilt toward protectionism potentially hindering the globalization of financial services and hindering growth in the econoy broadly.
Immigration is another. A backlash building in both parties, but especially among conservatives, threatens to rob the work force of lower-skilled employees and highly educated engineers vital to the technology industry, a major engine of economic growth since the 1990s.
As Washington and Wall Street head into a period of heightened conflict, both sides are treading a familiar path. The nation’s financial capital often has the luxury of being indifferent to the governmental one — confident that it can impose its will on politicians, whether the aim is special favors or simply the luxury of being left alone. Inevitably, some episode — usually a high-profile business failure or scandal — turns the tables.
The 2001 Enron debacle was a comparatively small example. The corporate freebooting and accounting fraud that caused that Texas firm to go bust led to the Sarbanes-Oxley legislation. That measure subjects all public companies to rules designed to hold executives more accountable and ensure greater transparency to shareholders. Businesses seethe at the complexity and costs of compliance.
But political strategists believe that several current issues — popular anger over huge Wall Street salaries and the opulent lifestyles they support, the perception that financial houses were indifferent to the human consequences by promoting risky mortgages to economically stressed homeowners — could pack far more political punch than Enron. This is especially true in a political climate in which Democrats control Congress, and polls indicate a Democratic advantage in next year’s presidential race.
Perhaps it is cold comfort to the financial world that nothing on the landscape seems as consequential as the financial meltdown of the late ’20s and early ’30s, which led to the unlikely appointment of Wall Street tycoon Joseph P. Kennedy to head the newly formed Securities and Exchange Commission.
Nearly three decades later, Kennedy’s son, as president, was reported to have said, “My father always told me all businessmen were sons of bitches, but I never believed it until now.”
But the relationship between Washington and Wall Street can hardly be viewed as simply two antagonistic powers. It is much more complex and intertwined. Wall Street executives pine for influence in the upper councils of government and seek to gain it in part through fundraising dollars. Washington politicians are in many cases eager for the money, and even many Democrats plainly enjoy moving in the elite and glamorous circles of financial titans.
In this year’s election cycle, it doesn’t hurt that two of the presidential front-runners hail from Wall Street’s backyard, Democratic Sen. Hillary Rodham Clinton of New York and former New York Mayor Rudy Giuliani, a Republican.
Wall Street bundlers, volunteer fundraisers who agree to tap into their personal and professional networks to help raise money for a candidate, are signing up in every camp.
Nearly 17 percent of Clinton’s bundlers hail from the securities industry, ranking just behind lawyers. They take the same second-place spot on Illinois Sen. Barack Obama’s list.
They are the highest-ranking sector represented on both Giuliani’s list and that of former private equity investor and Massachusetts Gov. Mitt Romney, according to the Center for Responsive Politics.
In the first six months of this year, Romney received the most money from his old private equity buddies: $766,000. On the Democratic side, Obama, who has close ties to financial houses based in Chicago and New York, bested Clinton with donations worth about $375,000.
Of course, Clinton may well have surpassed Obama since then, considering the more than $1.5 million she raised at a New York birthday bash last week headlined by investor Warren Buffett, a proponent of higher taxes on hedge fund titans.
Alhough Wall Street’s image has long been that of custom-fitted Republicans, this cycle some subsets are leaning toward the Democrats. The private equity donors, for instance, have given $7.5 million to Democratic Party committees since 2000 compared with $6.2 million to their Republican counterparts.
To be sure, some are making contributions because their bundler boss encouraged it. But the giving may also signal a changing wind on Wall Street with a new generation of leaders, many of whom reject the social conservative dominance in the Republican Party.
Still others say a boost in giving may simply be because the 2002 McCain-Feingold law made it easy to play. The maximum an individual can give to a candidate is $2,300, which is pretty much chump change to a Wall Street executive. So, why not get in the game?
“Washington does have a certain ambience that flows from the power,” said one hedge fund insider. “It attracts people who are players in the business. They want to be part of it. They find it interesting.”
EDITOR'S NOTE: This story was updated to characterize more accurately the National Venture Capital Association.