By Brendan Bordelon
Monday, October 05, 2015
Senator Elizabeth Warren claimed another scalp in her
fight against the finance industry’s influence on Washington last week.
After years on the warpath against Wall Street, the
Massachusetts Democrat set her sights on the left-leaning Brookings
Institution. She accused Robert Litan, a Brookings scholar and former
Clinton-administration economist, of being a shill for the mutual-fund company
that funded his research criticizing the Obama administration’s plan to
regulate investment firms. Though Litan claimed that the company, Capital
Group, had no influence on his findings, Brookings sought and received his
resignation just hours later.
Warren’s push to purge Wall Street money from D.C.’s
think tanks is more selective than it seems. The senator maintains a cozy
relationship with Better Markets, a Washington, D.C.–based 501(c)3 organization
funded almost exclusively by multi-millionaire hedge-fund manager Michael
Masters. The hedge funder’s advocacy group is so tight with progressives’
favorite senator that the two often operate as a united front in the fight for
stricter financial regulations — Better Markets’s stake in the finance industry
notwithstanding.
Some see a serious conflict of interest in the
Masters-funded push for financial reform. While Better Markets tirelessly
lobbied lawmakers and regulators to tighten the screws on financial firms,
Masters’s hedge fund held hundreds of millions of dollars in call options for
many of the same companies. If Masters had sold the companies’ stocks short —
and the presence of the call options strongly suggests he might have — he could
use Better Markets’s advocacy to promote rules that would drive down their
prices and drive up his profits.
By failing to adequately disclose its relationship with
Masters to lawmakers, observers say Better Markets is doing exactly what Warren
accused Brookings of doing — covertly taking money from a finance-industry
player to influence regulators with the power to approve policies from which
that player can earn huge profits.
“It’s a huge
conflict of interest,” says Jill Sommers, a former commissioner at the
Commodity Futures Trading Commission (CFTC) who was appointed by President
Obama to a second term in 2009. “I can just generally say it is unprecedented.”
“I think it’s outrageous,” says a former Securities and
Exchange Commission (SEC) counsel with knowledge of congressional finance
committees, who requested anonymity. “From a congressional perspective, it
certainly violates the spirit of disclosure laws.”
Better Markets openly lists Masters as its founder and
chairman, but the group’s IRS 990 forms show that Masters also essentially
bankrolls its entire operation. Through his charity, The Spring Foundation,
Masters donated the group’s entire $3 million operating budget in 2010, 2011,
and 2013. It’s unclear where Better Markets got its $3 million budget in 2012.
The Spring Foundation’s cash comes directly from
Masters’s hedge fund, The Marlin Fund. A 2011 profile explains how Masters
typically turns over 70 percent of the fund’s portfolio in six months or less,
relying on behavioral finance to identify “triggers” that will move mispriced
stocks. These triggers include investor anxiety over political events such as
wars, credit crises, and financial rules proposed or enacted by federal
regulators.
It’s that last trigger that Better Markets might be in a
position to influence, given that the nonprofit often advocates for financial
regulations affecting companies in which The Marlin Fund is invested. In a
March 25, 2015, hearing before the Senate Banking Committee, Better Markets
president Dennis Kelleher told Elizabeth Warren that MetLife and other large
insurance companies should be classified as “systemically important financial
institutions,” a designation that would mandate heavy federal control, impose
additional costs on the firms, and probably drive down stock prices. On May 22,
Better Markets filed an amicus brief supporting the government’s designation of
MetLife as “systemically important.”
But Kelleher did not disclose to lawmakers that The
Marlin Fund held $50 million in call options on MetLife at the time of the
March hearing, and another $775 million in call options on Prudential and
Citigroup, two insurance companies who would also be affected by the proposed
rule change. And the hedge fund held call options totaling $60 million in
MetLife, $85 million in Prudential, and $278 million in Citigroup when it filed
its amicus brief in support of the rule change.
The large number of call options is a sign that Masters
may have been “short selling” these insurance stocks, hoping to make a profit
on a substantial decline in share price. With Better Markets working to
convince lawmakers to enact onerous regulations on large insurance companies,
The Marlin Fund could bet that MetLife’s, Prudential’s, and Citigroup’s stock
prices would fall. But that, by itself, is a risky strategy — if the price of a
short-sold stock unexpectedly rises, the losses could theoretically be
unlimited. Call options, which give the holder the option to buy a stock at a
predetermined price, would work as a “hedge” against an unforeseen price
increase — allowing The Marlin Fund to limit any potential losses from its bets
against the insurance companies.
Even if Masters wasn’t actually short selling the stocks,
it’s troubling that Better Markets never disclosed its benefactor’s economic
stake in the affected companies. “If you testify before Congress, you have to
sign a form that certifies you don’t have a financial interest in whatever
you’re discussing,” says the former SEC counsel. “It may not be direct —
[Kelleher] isn’t the holder of those call options. But his sole source of
income was. So it’s a classic conflict of interest.”
Better Markets was in a strong position to influence the
rule-making process. Though it was only founded in 2010, the group has quickly
become a key player in the regulatory battles wracking the finance industry
after the 2008 economic crisis. Sommers says that the nonprofit “testified on
practically every roundtable [the CFTC] had on implementing Dodd-Frank,” and
Kelleher remains a frequent panelist in Capitol Hill hearings on financial
rulemaking.
The relationship between Elizabeth Warren and Better Markets
is a close one. Warren was the keynote speaker at one of the group’s meetings
in 2013 and wrote a testimonial on their website lauding them as “strong
partners in the fight to level the playing field for middle-class families.”
Better Markets, in turn, often operates as a high-profile surrogate cheerleader
for Warren’s crusades. When journalists look to give the senator’s point of
view in a story, they often turn to Kelleher as a source.
While Warren attacks Brookings for taking
finance-industry money, she’s remained silent on Better Markets — something the
former SEC counsel sees as a double standard. “I think it’s very analogous,
it’s the same thing [as Brookings’s relationship with Capital Group],” he says.
“It’s an undisclosed financial arrangement.”
Neither Warren nor Sherrod Brown (D., Ohio), the ranking
Democrat on the Senate Banking Committee, responded to National Review’s
request for comment on Better Markets’ potential conflict of interest. And
Banking Committee chairman Richard Shelby (R., Ala.) seemed unaware of Better
Markets’ connection to The Marlin Fund. “Senator Shelby believes that all
witnesses before the Senate Banking Committee should be forthcoming regarding
their affiliations and whether they create any conflicts of interest,” Shelby
spokeswoman Torrie Matous says.
“I can’t imagine that members of Congress know about any
of this, or surely they wouldn’t keep asking [Better Markets staff] to
testify,” says Sommers, the former CFTC commissioner.
Kelleher, however, says Congress should automatically
know about Better Markets’ business connections. “Who in the world doesn’t know
Mike Masters is our primary funder?” he says. “I don’t think you should
denigrate lawmakers’ ability to know widely available facts.”
Kelleher also rejects concerns over his organization’s
ties to The Marlin Fund. “The stock market doesn’t care about what Dennis
Kelleher is going to say two and a half hours into a three-hour hearing,” he
says. “The entire premise is based on the idea that what I have to say can move
the stock market. That is objectively, provably false.”
But others pushed back on Kelleher’s characterization.
“One comment on a hearing, of course, is not going to move markets,” the former
SEC counsel says. “But if the regulators ultimately do what [Kelleher’s]
suggesting they do, that would move
the markets. So his comment is completely beside the point.”
And Sommers says these concerns have swirled around
Masters for years. “Mike Masters himself, probably seven or eight years ago,
was testifying frequently in front of Congress with regards to speculation in
the commodities markets,” she says. “And it was always an allegation that he
was shorting the stocks of those companies while he was testifying on Capitol
Hill.”
She believes some of Better Markets’s activities today
look like an extension of that strategy. “It does seem to be pretty
self-serving, that the issues they tackle seem to be issues that [Masters]
personally profits from,” she says. “I mean, it doesn’t pass the straight-face
test.”
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