Throw Them All Out (17 page)

The economic stimulus bill passed in 2009 provided a much greater opportunity to make money. The amount of federal expenditures on the table, and the small details embedded in the bill, promised to have an enormous influence on the profitability of hundreds of companies. If you could predict which ones would land large stimulus contracts or which ones would benefit from an arcane sentence in the bill, you would reap impressive investment returns. The legislative and executive actions set off a feeding frenzy among investors with political connections.

One investor who worked hard to profit from the stimulus is the legendary George Soros. Whether he is a Baptist or a bootlegger in this story is hard to say. In a way, it is possible that he is both: a true believer and a profiteer from government policies he has championed. Again, there is nothing illegal about taking on both roles. But as a review of the many ways in which he made smart stimulus bets reveals, the lesson is clear: if you are a big investor, you are a sucker if you don't play the Washington game. The symbiosis of politics and markets has become so blatant, the two realms have become so intertwined, that Washington is essentially putting its thumb on the scale of a massive portion of the American economy—and elite insiders are the ones who benefit most.

 

George Soros is perhaps the most visible investor in the world after Warren Buffet. He is as famous for his currency trades as for his outspoken political views. And in a world where government actions and policies have such a huge effect on the world of finance, the two spheres are not so separate as one might think.

Soros's spokesman Michael Vachon told a
New Yorker
reporter that "none of his contributions are in the service of his own economic interests."
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Others, such as former
New York Times
columnist Frank Rich, who shares some of Soros's political views, assert that Soros gives "selflessly" to causes.
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Surely his charitable donations are motivated by his ideals. He is a significant philanthropic investor in science and education projects around the world, among other worthy causes. But Soros also makes huge investments whose fate is tied to his political activism.

Soros made his money early on in currency speculation, which often amounts to a financial bet either for or against a government policy. For example, in 1992 Soros bet (correctly) against the British pound and famously made $1 billion in a single day. Former U.S. Chamber of Commerce chief economist Richard Rahn believes that Soros had hints that his bet would succeed. According to Rahn, he was told by a member of Parliament who was a close adviser of the chancellor of the exchequer at the time that Soros was acting on insider information obtained from the French central bank and the German Bundesbank.
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These banks had previously agreed to support the pound, but when Soros made his big bet that the pound would have to be devalued, neither European bank joined the Bank of England's fight to maintain its value. Whether Soros really knew that they would stand aside is entirely unproven—Rahn's vaguely sourced charge could be wrong. Yet the value of that policy information would have been extraordinarily high. And investors will sometimes do anything they can to attach themselves to politicians who can tip them off to information like that.

Soros has long recognized the important intersection between politics and finance. Mark Malloch Brown, former deputy chief to UN Secretary-General Kofi Annan, left the United Nations at the end of 2006. A few months later, he was named vice president of the Quantum Fund, which is run by Soros. Brown had no experience in hedge funds, though he had worked with Soros on philanthropic efforts in eastern Europe.
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His chief value lay in his political connections.

In the United States, Soros has given generously to prominent members of the political class. Since Harry Reid became the Senate minority leader in 2005 and majority leader in 2007, Soros has poured more than $220,000 into the Democratic Senatorial Campaign Committee through a variety of ventures and family members. He was also an early backer of Barack Obama. He donated more than $60,000 to Obama's 2004 Senate run and was vital in building the 2008 Obama campaign's war chest.

As one writer put it, Soros was one of Obama's "first big catches, and within just two months Obama had a New York money machine that rivaled Clinton's." Indeed, many of Obama's earliest campaign financiers came from the hedge fund industry, including Orin Kramer and Brian Mathis. By the first quarter of 2008, Obama had raised more money on Wall Street than either New Yorker in the race—Hillary Clinton or Rudy Giuliani. Goldman Sachs alone kicked in $571,330.
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Soros is, of course, free to contribute to any candidate he likes, and to help organize fundraising for them. Other financiers do these kinds of things all the time. What is remarkable is that once Obama was elected, Soros not only provided advice and direction on the President's plans for an economic stimulus, but he also had regular private consultations and meetings with White House senior advisers while he was making investment decisions related to the stimulus program. Section 13(f) of the Securities Exchange Act of 1934 requires "institutional investment managers" to report certain positions in publicly traded securities by filing a Form 13 on a quarterly basis. However, these managers are not required to report transactions or prices. Thus it is extremely difficult to determine how profitable (or not) investments by an investment manager like Soros have been. What is certain is that Soros seemed to have a keen ability to anticipate what Washington was going to do and position himself to potentially profit handsomely from it.

Days after President Obama was elected, Soros was helping to set the agenda. Soros had regular meetings with senior White House officials. He met with Obama's top economist, Larry Summers, on February 25, 2009. He also had meetings in the Old Executive Office Building with senior officials on March 24 and 25 as the stimulus was being forged.
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He was later involved in private discussions concerning widespread financial reform.
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Soros was also a financial backer of the Center for American Progress, which functioned as Obama's think tank. John Podesta, who headed CAP, was Obama's transition director. Several CAP policy ideas became part of Obama's agenda. Soros said at the time, "I think we need a large stimulus package, which will provide funds for state and local government to maintain their budgets, because they are not allowed by the constitution to run a deficit. For such a program to be successful, the federal government would need to provide hundreds of billions of dollars. In addition, another infrastructure program is necessary. In total, the cost would be in the 300 to 600 billion dollar range."
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On another occasion he advocated for a "well-advanced fiscal stimulus package" to help the American economy.
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In these general terms, he spoke like a Baptist.

But as tens of billions of federal dollars became available, he invested like a bootlegger. In the first quarter of 2009, Soros nearly doubled his holdings in Hologic, a manufacturer of diagnostic equipment, which benefited from federal spending on medical systems. He more than tripled his holdings in Emulex, a leading designer of fiber channels and software products and a government contractor that would win big with infrastructure spending. He also tripled his holdings in EMC, a data storage company, which claimed on its website that "EMC's products and services can support stimulus programs tied to creating and preserving jobs in transportation, education, healthcare, carbon-emission reduction, and more."
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He also increased his holdings in Teradata by almost 60%. Teradata provides computer and network technologies to the federal government, including the military and Medicare and Medicaid.
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He also bought 210,000 shares in Cisco Systems, another big stimulus winner, and shares in Vulcan Materials, which is the nation's foremost producer of construction materials such as concrete. The company stood to do big business because of infrastructure spending.

One of Obama's stimulus initiatives was for updating Internet networks around the country. Soros bought shares in Extreme Networks in the first quarter of 2009. Months later, the Internet company was "pushing broadband networks into rural America, as part of President Obama's broadband strategy."
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He also increased his holdings in Radware, an Internet technology company, by 476%. Radware provides high-tech services and computer applications to twelve government agencies.
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In the second quarter of 2009, Soros bought shares in Blackboard, a sizable stimulus recipient of technology grants in education. He also snapped up shares in Burlington Northern Santa Fe and CSX, which would benefit from President Obama's stimulus plans for railroad transportation. Later he bought shares in Cognizant Technology Solutions, an information technology company that was an important health care vendor as well as an education technology provider. Cognizant was a two-fer, a winner in both realms. Indeed, the company reported in one of its publications that business was strong "due to federal economic stimulus funds."
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President Obama's stimulus for alternative energy companies and for developing a smart grid for utilities was also an area where Soros traded aggressively. He snapped up Constellation Energy Group stock (300,000 shares), which received $200 million in federal stimulus money through a natural gas utility subsidiary. He also bought a stake in Covanta (4.6 million shares), a clean-energy company and federal grant recipient. Covanta also received money through earmarks from members of Congress.

Again, to be clear, it is not necessarily the case that Soros had specific insider tips about any government grants. You might argue that any smart investor would have guessed that economic stimulus funds would be used to promote infrastructure improvements, green energy, and certain high-tech ventures. Yet the list of specific investment decisions by Soros is closely aligned with the list of grant recipients. In addition to the examples above:

• In the first quarter of 2009, Soros made an initial purchase of more than 1.5 million shares in American Electric Power, a utility that had invested heavily in an energy project called FutureGen. FutureGen was a government-backed zero-emissions electric power project launched by the Bush administration in 2003, which at first focused on a coal-fueled electric plant in Illinois, but had been subsequently canceled before the 2008 election. President Obama revived the project in June 2009 and poured $1 billion of taxpayer money into it. Soros bought his shares just in time for the revival.
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  Months later, the company received another grant, this one for a coal plant in West Virginia.
  
• Soros scooped up shares in Ameren, a Midwest utility company that was given a $540 million clean-energy grant from the Department of Energy in conjunction with NextGen.
  
• Soros for the first time bought shares in Entergy, an energy utility company, to the tune of almost one million shares. Entergy would go on to get numerous grants from the Department of Energy, for smart grids, smart meters, and other federal stimulus programs.
  
• He also bought NRG Energy, more than half a million shares' worth. The company owns power-generating facilities and was a recipient of Department of Energy grants, including one for $154 million, announced by Energy Secretary Steven Chu.
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• Soros bought a quarter of a million shares of Public Service Enterprise Group, another recipient of Department of Energy federal stimulus grants.
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• Soros held a stake in Allegheny Energy (250,000 shares) and PPL (175,000 shares), which also won lucrative grants from the Department of Energy. He bought shares in Edison International, yet another utility company that cashed in on DOE grants.
  
• Soros also invested in a small ethanol-producing company called BioFuel Energy, which had created a new gasoline containing 15% ethanol. At the time, the EPA had approved a limit of 10% ethanol in gasoline. BioFuel Energy owns and operates two of the largest dry-mill ethanol production facilities in the United States. Getting approval for an increase in the limit, to 15%, would obviously benefit the company. As the EPA debated the idea, stock in the company jumped from about $1.50 to $2.94 a share. The EPA eventually approved the mandate.
  
• Soros invested in Powerspan, a clean-energy technology company, in April 2009. His timing was perfect. Weeks later, on July 1, Powerspan was awarded a $100 million grant from the Department of Energy for smart-grid work.
  

How did these investments perform for Soros? It is very difficult to tell. He is not required to disclose the price he paid or the price at which he sold his shares. We don't know the dates of the transactions, only that they occurred during a particular three-month period. What we do know is that his investment decisions aligned remarkably closely with government grants and transfers. It would appear that one of the world's smartest investors chose a strategy based on political decisions—whether he knew about the decisions in advance or just guessed extremely well.

Soros undoubtedly viewed this the way that General Electric CEO Jeffrey Immelt did when he predicted in early 2009, "The global economy, and capitalism, will be 'reset' in several important ways. The interaction between government and business will change forever. In a reset economy, the government will be a regulator; and also an industry policy champion, a financier, and a key partner."
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Soros recognizes and understands that good politics can lead to good profits as the government plays an increasingly central role in the economy. When he decided recently to launch a new green-tech fund, called Silver Lake Kraftwerk, to invest over $1 billion, Soros selected as its chief none other than Cathy Zoi, the former assistant secretary of energy efficiency and renewable energy. Political access has become the key to financial success.