Schumer's Racket: Lobbyists and Hedge Funds

By: Timothy P. Carney
May 26, 2010

Three years ago, Sen. Chuck Schumer, D-N.Y., leaned on hedge funds to lobby more. The funds soon hired his banking staffer as a lobbyist. She began raising money for Schumer. Now he's championing financial regulation that would benefit these hedge funds. "Racket" might be the right word here.

Here's the story: In January 2007, the month Democrats took control of Congress, Schumer invited hedge funds executives to dinner, where, the New York Times reported, he "had some simple advice for the billionaires in his midst: If you want Washington to work with you, you had better work better with one another."

Until then, hedge funds had largely minded their own business. But in the 2008 elections, they tripled their previous contributions to politicians, with Schumer and Barack Obama as their favorites, along with other Senate Democrats (Schumer was head of the Democratic Senatorial Campaign Committee).

But more to Schumer's point, the hedge funds shifted their lobbying into high gear. After spending less than half a million in 2006, they spent more than $6 million in 2007.

In a June 2007 banking committee hearing, Schumer used his chairman privileges to praise a staffer: "This is the last hearing for somebody who has served this committee and me and the people of New York and America extremely well, and that's Carmencita Whonder, my banking person, who's going on to other things."

Those "other things," included (1) lobbying Congress on behalf of hedge funds, and (2) raising money for Schumer from hedge funds.

When the K Street firm Brownstein, Hyatt, Farber, Schreck announced Whonder's hire, they quoted Schumer's on-the-record praise in the press release -- including his telling description of her as "my banking person" -- which couldn't have hurt Whonder's client recruitment.

Within days of Whonder's hire, she registered three private equity firms as clients. By the time Obama came to office, her clients included the Private Equity Council and seven private equity or hedge fund firms.

Then, in March 2009, with financial overhaul looming, the hedge funds' main lobby group, the Managed Funds Association, retained Whonder.

So Schumer told the hedge funds to lobby up, and they did -- spurred on not only by his words, but also by Democrats' pitchfork rhetoric and their regulatory proposals -- enriching Schumer's banking staffer in the process.

But how did Schumer benefit from his January 2007 meeting with the hedgies? How does Schumer always benefit? Fundraising. Democrats in 2008 brought in $11.7 million from hedge funds, nearly twice the GOP haul.

One asset in this effort: lobbyist Carmencita Whonder. According to documents on file with the Federal Election Commission, Whonder has raised $18,200 for Schumer. Other hedge-fund lobbyists, such as Steven Elmendorf and Barry LaSala, representing the MFA, are official bundlers for Schumer's DSCC.

Of course, the hedge funds get a good return on the money they've spent electing Democrats and hiring Schumer's staff: beneficial legislation, which includes stricter regulation.

The MFA supports requiring hedge funds to register with the Securities and Exchange Commission. As the Wall Street Journal reported, "Executives of smaller hedge funds are scrambling to hire compliance chiefs and otherwise prepare for SEC audits. They are expecting months of work ahead to register, adding new costs to starting or continuing to run a firm." But many of the bigger hedge funds have already voluntarily registered with SEC, "because investors demand it," according to the Journal. So mandatory registration helps the big guys by imposing new costs on the small guys.

But it gets better for the big hedge funds: New regulations could force banks to spin off some trading operations. Banking analyst Dick Bove told Crain'sthat "hedge funds and the nontraditional banking sector will explode in size" from these rules. Last month Citigroup sold its $4.2 billion hedge fund operation. JP Morgan is reportedly looking to unload its $21 billion fund if "reform" passes. Amid the regulatory debate, Citigroup and Goldman are also losing talent to the hedge funds.

The result is less transparency and oversight, but more profits for the hedge funds -- which of course can be poured back into electing Democrats and hiring up the Schumer staffers who are writing this "reform." By late Tuesday, neither Schumer's office nor Whonder responded to messages I left them on Monday. And so, for now all we can do is follow the money -- and it all leads back to Schumer.

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