Magazine March 9, 2009, Issue

Losing Gordon Gekko

Wall Street has gone over to the Democrats. Should conservatives miss it?

In the sweating-bullets world of venture capital, start-ups live or die by The Pitch — the one-shot better-get-this-right opportunity an entrepreneur has to sell his idea to the people who have the money to make it happen. Barack Obama, the most successful start-up in modern American politics, made his pitch to 20-odd gorilla-league hedge-fund barons and Wall Street money managers early in the Democratic primary season. He wasn’t yet the front runner, and the room wasn’t necessarily ready to be impressed. New York money was already invested in the presidential aspirations of home-state senator Hillary Clinton, and Chuck Schumer, who had been merciless in his campaign to wring money out of Wall Street for the Democratic Senatorial Campaign Committee, was backing her. So were the CEOs of JPMorgan Chase, Goldman Sachs, and Morgan Stanley. Obama’s net assets: one famous speech.

Pitching Wall Street, Obama didn’t chew through his usual mouthful of Hope and Change. This was a room full of George Soros–level players, not the sort of people who get a buzz from inhaling the heady vapors of Obama’s pharmaceutical-grade oratory. Instead of his usual homily, Obama delivered what one insider describes as a “blistering attack” on the American public-school bureaucracy in general and on teachers’ unions in particular. Busting chops — that got Wall Street’s attention. He said he was close — “this close” — to supporting vouchers, an almost unthinkably heterodox position for a Democrat seeking the keys to the executive suite. But hedge-fund guys spend good coin sending their precious bundles to Choate and Greenwich Country Day School, and they like the idea of education reform. Obama must have been convincing: Nearly three-fourths of the hedge-fund and buyout-firm money that found its way into the two major 2008 presidential candidates’ campaigns went to Obama. He’d taken $2,000 from Tony Rezko and a loan from a Chicago Cadillac dealer and turned it into a $750 million political enterprise. Never mind Colin Powell, the Republicans had lost Gordon Gekko, and the Goldman Sachs Democrats were back in business.

Not that they’d ever gone away.

The Democrats — the party of George Soros and dodgy cattle futures — have long profited by denouncing Republicans as the party of Wall Street, a raggedy front for a gang of amoral money-runners pulling the strings of their puppets in Washington. It’s a useful narrative for Democrats, but it isn’t true. Wall Street may have a few more pachyderms roaming around than the rest of Manhattan, but the world of bulls and bears is also a world of donkeys.

Goldman Sachs is one firm that’s learned that politics matters: The sinking investment bank received some $12 billion in bailout funds while its competitor, Lehman Brothers, was allowed to go bankrupt. Goldman operators move easily between government and the private sector and have played key roles in both Democratic and Republican administrations. But like the rest of Wall Street, they have tilted heavily Democratic of late. Goldman Sachs was the biggest business donor to Democrats in 2008, according to a Center for Responsive Politics report. Some 73 percent of Goldman Sachs’s millions in 2006–08 donations went to Democrats, but its outlook has been informed by bipartisan pragmatism: The banking bailout came from a Republican administration and was marketed by Goldman Sachs alumnus Hank Paulson, who literally begged, on bended knee, for the money. It was managed by assistant treasury secretary and former Goldman Sachs foot soldier Neel Kashkari and was politically nudged along by Bush’s chief of staff, Josh Bolton, another Goldman veteran.

With Democrats now controlling the elected branches in Washington, Goldman has an even stronger hand: Former chairman Robert Rubin is the dean of the Goldman Sachs Democrats, the group that ran economic policy under the Clinton administration and is doing the same under Obama. Rubin acolytes Larry Summers, Timothy Geithner, and Peter Orszag already are filling key economic-policy positions, and Rubin’s son, Jamie, is raising money on Wall Street for Democrats and acting as a talent scout for the Obama administration. The elder Rubin is sure to have the ear of all the major players. Geithner, hurt in the ruckus over his unpaid taxes, has turned to the bank for a reliable loyalist, hiring former Goldman lobbyist Mark Patterson as his top aide. And Geithner’s replacement at the New York Fed? William C. Dudley, former managing director of Goldman Sachs.

#page# Other major nodes on the Goldman-Democratic nexus include Al Gore’s London-based private-equity firm, Generation Investment Management, which was founded with assistance from former Goldman boss Paulson and includes in its ranks a half dozen prominent Goldman veterans. Former Goldman Sachs Asset Management CEO David Blood is its CEO, earning the firm its nickname, “Blood and Gore.” Goldman Sachs is a significant investor in E+Co, Blue Source, and APX, all firms positioned to profit from the cap-and-trade schemes that are at the heart of Gore’s global-warming crusade.

Across the river from Wall Street, former Goldman Sachs chairman Gov. Jon Corzine of New Jersey was a major player on financial policy when he was in the Senate and has lobbied hard for the bailout as governor. He’s sounded a note of caution on the bank rescue but is shoveling taxpayers’ dollars into other corporate coffers, working to secure government funds to keep Wyeth’s New Jersey campus intact after the pharmaceutical firm’s merger with Pfizer.

Not to be outdone by a bridge-and-tunnel guy, Senator Schumer, the New York grandee who sits on the Senate finance and banking committees, and who is infamous for his aggressive methods of shaking campaign contributions out of the money movers, raised $6 million from Wall Street for his last race — a pro forma campaign against an obscure Republican with one-tenth the cash. Schumer’s tactics for extracting campaign money from Wall Street when he was head of the Democratic Senate Campaign Committee were so aggressive that Sen. Arlen Specter accused him of using congressional inquiries in part as a fundraising tool. But it’s hard to weep for Wall Street when it is getting such a rich return on its political investments: Schumer drove a stake through the heart of tax-code changes that would have treated “carried interest” — the source of many private-equity fortunes — as regular income for tax purposes, instead of taxing it as a capital gain. As it stands, a private-equity manager who makes a billion dollars pays 15 percent in taxes on carried interest, while a guy earning a salary of $34,000 is in the 25 percent income-tax bracket.

Schumer’s opposite number in the House before he became Obama’s chief of staff was Rahm Emanuel, a former investment banker who worked with politically connected utility companies at Wasserstein Perella. Emanuel was the House’s No. 1 recipient of money from hedge funds, private-equity firms, and the wide-ranging securities industry while he was running the Democratic Congressional Campaign Committee. And like Schumer, he made it rain.

The Democrats are reaching out well beyond Goldman Sachs and the rest of Wall Street. The big activist investors, CEOs, and corporate chairmen are trending Democrat, too. Warren Buffett came out for Obama, and during the debates the candidate cited his association with the investment guru to dispel concerns about his other associations, particularly with Weather Underground terrorist Bill Ayers. There are a few Republican-leaning activist investors, Carl Icahn prominent among them. But, as Matthew Wurtzel writes in The Deal, “while Icahn considers himself an activist investor, he really doesn’t fit politically with his peers — no big surprise — who overwhelmingly invested with the Democrats. Only one leading activist, Philip Falcone of Harbinger Capital Partners, put his money behind a Republican in the form of Rudy Giuliani, who later refunded the donation.” And Icahn himself is a mixed bag, making investments in both liberal Republicans and high-yield Democrats such as Jeanne Shaheen and Mark Warner.

In 2006 and 2008, Wall Street poured money on Democrats. Big Wall Street firms that made major political contributions — including Citigroup, JPMorgan Chase, Morgan Stanley, UBS, and Lehman — gave the majority of their contributions to Democrats. The hedge funds followed suit, as they are inclined to do — they depend on the big Wall Street institutions to clear their trades. And it wasn’t just Wall Street: Democrats led in six of the ten big-business sectors tracked by the Center for Responsive Politics: law, health care, defense contractors, communications/electronics, finance/insurance/real estate, and the catch-all category that includes chemical firms, retailers, manufacturers, food processors, and other industrial operators. Republicans held on to agriculture — which is, not coincidentally, the industry in which they are the least interested in practicing capitalism: It’s not the philosophical commitment to free markets that opens up corporate checkbooks, but the promise of favorable exceptions to those principles.

#page# So why is the bulls-and-bears set going donkey? Partly it’s self-interest: Wall Street loves a tax break, but Big Money has over the years found a lot to love about Big Government. Those carbon-offset exchanges may be clearinghouses for products that are, in essence, imaginary, but they are going to make a real bundle for the bankers who set them up — and, since they’ll inevitably have the support of government, there will be relatively little risk involved. And Democrats’ anti-war talk hasn’t spooked the defense contractors. For all the conspiracy-mongering about Halliburton Republicans, now that Democrats control defense appropriations it’s no surprise to find the likes of Rep. Ike Skelton, the Democrat who chairs the House Armed Services Committee, enjoying the support of military providers such as Armor Holdings Inc. What is surprising is that Democrats now lead Republicans overall in financial support from defense firms.

When Obama made his case for the stimulus bill — which is larded with corporate welfare — he was flanked by two big-league CEOs: IBM’s Sam Palmisano and Honeywell’s Dave Cote. For many on the anti-war left — the people who elevated Obama over Clinton during the primary — Honeywell is a war profiteer, only a little less detestable than Halliburton. You’d think this would chap the hide of the Democrats’ progressive wing. For the most part, you’d be wrong, though a few on the left, such as Harold Meyerson, have scolded the Democrats for courting capital. Success has a way of pre-empting criticism: Democrats may have kidded Clinton about being the best Republican president since Gerald Ford — Clinton himself raged that he’d been turned into Dwight Eisenhower — but they loved him, even if he is today seen less as the second coming of FDR than as John the Baptist to Obama’s Jesus Christ Superstar. But there’s no denying Clinton’s great political accomplishment in making peace between the Democrats and Big Business — and cutting into Republicans’ credibility on the economy.

Wall Street isn’t politically agnostic, and there’s more to its politics than money. Culture matters, and you won’t find a lot of Pentecostal churches in Greenwich, Conn. Wall Street guys, for the most part, do not have time for social conservatives. “Of course these guys aren’t conservative,” says one longtime bond trader. “Why the [expletive deleted] would they be? We’re talking about guys who live in Manhattan, guys with manicures and eight-figure bank balances. And their wives — their wives aren’t showing up at parents’ day at Brearley with a Sarah Palin button. It’d be like showing up in flip-flops from Wal-Mart. Like showing up in a [rather lengthier expletive deleted] tracksuit.”

This cultural divide is particularly visible in New York City politics. “Ten to 15 years ago, half of the Upper East Side [officeholders] were Republican,” says John Mills, executive vice president of the Lexington Democratic Club. “There’s not one Republican there now. Abortion and gay rights are two of the biggest issues, and there are a lot of Jewish voters here not comfortable with Christian conservatives.”

Wall Street has no love for the southern, rural, and evangelical. But it’s not just the Jesus stuff — the southern and rural parts matter, too: Republican congressmen tend to represent places like Glasscock County, Texas, America’s most Republican jurisdiction, which reliably gives 90-odd percent of its votes to the GOP. Those districts are not going to feel the pain of the financial markets the way New York, New Jersey, California, and Connecticut are. The bailout is not very popular in farm country. Wall Street knew there was a gathering storm in the markets, and it didn’t want to find itself at the mercy of small-town and rural Republicans’ riding to the rescue.

#page# “I think it was a feeling in their bones,” says David M. Smick, a financial-market adviser and the author of The World Is Curved. “And they probably thought that, when you got down to it, the Republicans came from districts that would not be affected by a real downturn in the financial markets.”

The Republicans’ loss of Wall Street magnifies an ancient fissure in the party, a conservative contradiction: the misalignment of incentives between the party’s free-enterprise wing and its entrenched business interests.

“The problem with socialism is socialism,” Willi Schlamm famously observed. “The problem with capitalism is capitalists.” From Wall Street to Detroit, businessmen have had at best a marriage of convenience with free-market principles, a fact that often puts the Republican party in the impossible position of mediating between philosophical purists and parochial business interests that profit from expansive government, protectionism, and regulations that smother competition. Republicans have long thought of themselves as the party of Big Business and free enterprise but, as Wall Street sends its money and votes to Democrats and snuggles up in an ever-cozier relationship with the government, Republicans face the choice of being the party of Big Business or the party of free enterprise — the party of capitalists or the party of capitalism.

The Democrats have already decided which party they are. Which is to say, the Democrats have figured out that they can keep Wall Street in their coalition by offering them easygoing social liberalism, a few sweet tax breaks, and good access to government revenue streams. Republicans are not above the same deal-cutting and back-scratching, obviously, but they have a knottier coalitional contradiction to resolve: The capitalists don’t want capitalism, and neither do a lot of mid-American social conservatives. Even as Reagan talked about the miracle of the invisible hand, the blue-collar social conservatives who put him in office indulged in a near-paranoid loathing of Japan — an economic phobia that is still very much alive in Republican heartland attitudes toward trade with China and India. George W. Bush talked up free trade — except on steel, sugar, and most agricultural commodities. The Republicans’ philosophy is informed by free-market idealists who celebrate the wonders of Schumpeterian “creative destruction,” but the guys flying business class would much rather sink into a nice warm bailout and let capitalism creatively destroy somebody else’s money — the taxpayers’ money, for instance. The bankers are the last guys who want free markets right now, and so it’s no surprise to find them writing big checks to the Democrats. But against all evidence, Republicans remain the party of Wall Street in the public imagination.

“That’s the irony of it all,” says Smick. “But really, isn’t that the job of a CEO — in addition to managing, to get a special deal? To get yourself protection? That’s what you do, whether it’s a monopoly, or the ultimate backstop, the ultimate hedge: the taxpayer.”

Welcome to the hedge-fund racket, America.


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