The largest hedge funds in the country – those with more than $10 billion in assets – could be on the hook for tens or even hundreds of millions of dollars in fees to pay for financial reform approved early Friday.
Under the proposal, the Federal Deposit Insurance Corporation would be mandated to raise up to $19 billion over five years from hedge funds managing $10 billion and financial institutions with more than $50 billion. The proposal is part of the financial reform package that President Barack Obama is expected to sign before July 4.
As of January 1, there were 34 hedge fund firms in the U.S. managing $10 billion or more, including Highbridge Capital Management, owned by JPMorgan, Bridgewater Associates, Paulson & Co. and Soros Fund Management.
Shortly before 3:00 am Friday morning, Representative Barney Frank (D-MA) announced a plan to fill an unexpected revenue gap resulting from financial reform legislation. Frank said he doesn’t expect the full $19 billion assessment will be necessary – the Congressional Budget Office requires some wiggle room – and that $15 billion is more likely.
At roughly $4 billion a year, Frank equated the assessment to roughly the bonus pool of the largest financial institutions.
“We think the rationale here is very clear. It was the collective errors of many in the financial industry that led to this set of problems and we think it is legitimate to ask them to contribute to it,” said Frank.
The amount that firms would have to pay would vary in accordance with a “risk matrix” determined by the Financial Stability Oversight Council, although details on who would have to pay what and when were unclear as of Friday afternoon.
Frank said that hedge funds would pay more than mutual funds because their investments are riskier.
“The uncertainty of it all should make the hedge funds nervous,” said Andrew Lewin, a principal at the Podesta Group, a Washington lobbying firm. “They’ll need help lobbying the FSOC, once that thing gets set up.”
Republicans balked at the idea. “There’s no reason you would tax one fund that has received no taxpayer support whatsoever greater than you will treat another fund,” said Representative Scott Garrett (R-NJ) during last night’s deliberations.
Garrett equated the tax on hedge funds to one on retirees. “Why on earth, during an economic downturn will we be putting an additional burden on our pensioners?” Garrett lamented. “Why is it that Congress always sees the need to raise taxes on the American people in the dead of night at 3 o’clock in the morning and why do it in the disparate manner that we’re doing here?”
Added Representative Jeb Hensarling (R-TX): “I’m not surprised to see yet one more tax on our economy.”
The assessment partially negates a major lobbying victory for large hedge funds in defeating a much larger tax to finance a $50 billion fund to help dismantle failing financial companies and avoid more taxpayer bailouts. Partially because of industry push-back, an amendment proposed in November by Representative Brad Sherman (D-CA), was killed.