A billionaire hedge fund activist makes a billion dollar “short” stock bet that Herbalife is going to crater and go out of business. He then turns to his friends in government to wield their regulatory influence and cause Herbalife's stock to drop, thereby guaranteeing the activist's profits.
It may sound like a synopsis for a Hollywood Wall Street thriller. In reality, it's actually happening, and Pershing Square Capital's Bill Ackman is the antagonist. It's yet another sad scandal of the sort Americans aren't used to seeing in headlines: crony capitalism.
According to Against Crony Capitalism, the term is defined as, “the marriage of the state and private special interests." In short, the term describes a form of capitalism where the well-connected and wealthy interests in the private sector can use the power of the public sector - the government - to insure profits, becoming a sort of insurance against losses.
Hedge funds serve a very important purpose in the markets, yet they should not be able to use resources to rent government to make good on market bets. Yet Bill Ackman is doing just that, resorting to government influence to make good on his billion dollar “short” bet against Herbalife.
The New York Times reported in March 2014 that, earlier that year, Ackman had lobbied some friends on Capitol Hill to get the government to open an investigation into the company. He then met at a “Midtown Manhattan steakhouse” with other powerful hedge fund managers to offer his latest evidence that Herbalife's stock would soon plummet. Ackman told his companions that Rep. Linda T. Sánchez (D-Calif.) had sent a letter to the Federal Trade Commission the day prior calling for an investigation into the company. The letter had not yet been made public (the FTC hadn't even yet stamped it as received), but Mr. Ackman, who had personally lobbied Rep. Sánchez and hoped that the news of the call for an inquiry would hit Herbalife's stock, "already knew what it said, and read from a copy of it that he had on his cellphone.”
The story of Herbalife and Bill Ackman is not the only way crony capitalism has been used as a vehicle for the government to pick winners and losers. The Export-Import Bank continues to be a poster-child for this type of behavior, even as lawmakers on both sides of the aisle help keep it alive.
Farm subsidies are also prime real estate for this type of crony capitalism, and it’s been happening for years. As Vince Smith with the American Enterprise Institute put it in a recent op-ed for U.S. News:
“Farm subsidies persist because of political power, not economics...The largest 15 percent of farm operations and the richest farmers and landowners, with incomes and wealth that are many times the national average, receive over 85 percent of all farm subsidies.”
Another example of a program marketed as a way to help poor farmers, yet ends up helping well-connected large farm companies with the best lobbyists.
Both the political right and left have rallied against cronyism and there is a real opportunity for those involved in the political process to help push this fight and force Congress to take action. The fight against crony capitalism has even made it onto the 2016 stage as GOP presidential candidate Carly Fiorina has made it a rallying cry in her campaign. Washington can take the lead here, and there’s no better time than the present. The House Financial Services Committee, chaired by Rep. Jeb Hensarling (R-Texas) and Sen. Richard Shelby (R-Alabama) of the Senate Banking Committee have jurisdiction to conduct oversight hearings on crony capitalism. It would be a good use of their time to conduct year-long hearings into these and other cases of crony capitalism.
Whether it’s the Ex-Im Bank or billionaire hedge fund activist Bill Ackman, Congress must do their due diligence with oversight hearings and eliminate this dirty by-product of the political process.