Senate candidate Eric Hovde trumpets community banking, soft pedals hedge fund ties

By Rob Copeland

Mon Mar 19, 2012

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In a Q&A with AR, the Wisconsinite asset manager says he "sure the hell ain’t gonna be anything more than a two-term senator."


 
  Hedge fund manager Eric Hovde has his sights on the Senate (Source: ericforsenate.com)

Eric Hovde, a hedge fund manager running for the U.S. Senate from Wisconsin, is quick to criticize Wall Street practices but slow to advertise his tenure in the hedge fund industry.

The Republican primary candidate, vying for an open seat in a state filled with Tea Party activists, is the founder of $360 million Hovde Capital Advisors, a Washington, D.C. hedge fund trading mostly in the stocks of relatively small financial institutions. But the biography on his campaign website makes no mention of the fund. His other businesses include firms involved in real estate, investment banking and private equity, as well as a foundation.

Hovde, whose father was undersecretary at the U.S. Department of Housing and Urban Development during the Reagan administration, faces an uphill climb to get into the general election. Former governor Tommy Thompson and state Assembly speaker Jeff Fitzgerald are among the other candidates running for the GOP nomination. Because Hovde only entered the race this month, no public polling is immediately available on his prospects.

In a telephone interview with AR, he struck back against the idea that he is running away from his hedge fund background, and offered his views on a wide variety of issues important to the industry.

"I don't hide from the fact that I manage money. I have an asset management business, a hedge fund business," he says. "There's nothing to hide from. There's nothing that my funds have ever done that is even slightly wrong."

AR: What about your experience as a hedge fund manager prepares you for such a big public role?

Well, you know I'm not strictly a hedge fund manager. I own some broadly different businesses-community banks, real estate companies and a variety of things.

Our country so desperately needs right now people who understand the financial system, the credit markets, the global capital markets. If you go into Washington and talk to politicians, these guys just don't get it, they have no clue in understanding how the financial markets work.

AR: Just to go back, you may run some other businesses but you do have a $360 million registered hedge fund, correct?

Yes.

AR: You're very tough on Wall Street. It's a huge part of your platform.How do you square that with your experience working in finance for so many years?

You can do right and do well, and that's what I don't understand about too many people on the Street. There are a lot of wonderful, ethical hedge fund managers, investment bankers and other people in the industry. Unfortunately, what happened is there became far too many that broke all kinds of ethical and moral standards. The consequence is that large chunks of the American public no longer have faith in the free market capitalist system.

AR: Let's move to a specific issue of interest to the hedge fund industry: Taxing carried interest as ordinary income. What's your position?

My position on the issue is that our whole tax system should be thrown away and redone. We have the highest corporate tax rates in the world right now. If you're a small to medium-size business, you're getting taxed in the mid-to-high thirties, you have almost no deductions. If you're a multinational corporation your effective tax rate is somewhere around half that. Get rid of every single loophole but for a couple like charitable deductions and, for now, the mortgage interest deduction. I don't think there should be any sacred cows in the tax system.

The IRS has become an utter monstrosity. Heck, I'm a financial expert-most of the guys in the hedge fund industry are financial experts-but yet we all have to have somebody prepare our tax returns.

AR: So if there were an up-or-down vote to tax carried interest as normal income…?

I probably wouldn't support it because the simple fact is that it would be solely on that issue. But I'm probably never going to be voting on that issue [alone].

AR: How do you respond to the criticism, which has also gone to Mitt Romney, that as someone who runs a private fund, an opaque vehicle, you were part of the problem in 2008, and you're not part of the solution?

[Raises voice] What did I do? That is a silly comment. There is nothing that our fund investing in the financial services sector did to contribute to any aspect of the problem. I wasn't originating junk mortgage products. I wasn't packaging them in complicated financial products like CDOs and selling them to pension plans. I did none of that! I invest in financial service stocks.

There are a lot of hedge funds that played no role in the financial collapse. Zero. Now, I'm sure there are some that may have played a role but the vast majority didn't play any significant role in that crisis.

AR: Then do you think this additional push to get hedge funds to register and disclose more about their positioning is a little overblown?

Yeah. Frankly, we have regulatory overreach at every single level of our government. One of the big things that needs to be done, just like President Reagan did when he came into office, is a massive push for deregulation.

AR: One thing that hedge funds are sometimes confused about is the use of expert networks and how much they can use these middle-men. Do you think there should be tougher regulation on that?

I think there should be tighter regulation on it. I don't think people should be able to buy access, just like certain firms shouldn't be able to have a direct tie-in to the Federal Reserve to get information ahead of the market.

AR: Did you ever employ such networks to research for your fund?

No.

AR: When you go and talk to citizens on the campaign trail, how do you present the industry? Clearly you don't say I'm a hedge fund manager; instead you say I'm a financial advisor, I own community banks, etc. What is the reaction you get?

I don't hide from the fact that I manage money, I have an asset management business, a hedge fund business. I don't hide from that fact-there's nothing to hide from. There's nothing that my funds have ever done that is even slightly wrong. We buy and sell stocks, OK? How has the reaction been? It's been largely very positive.

AR: It's interesting because you are running as a Republican, but in the Tea Party movement there is a lot of sentiment against big banks and big business-and you have made a career of investing in big banks and big business.

No, I invest in small banks, small business, big business, and I've been very critical of some of the big business practices.

AR: What's your plan for your hedge fund if you are elected?

That's something I have to think through whether we transfer that to the team. That isn't a conclusion that is fully reached at this point.

AR: What do you think of those studies that say that U.S. senators do better than average in investing their own money?

Well, of course! I didn't even know they didn't have to adhere to our securities laws. I saw that piece on '60 Minutes' on insider trading and it made me sick. But, you know, that's the Congress and Senate. They write laws for everybody else and not themselves.

AR: We're nearly out of time. Is there anything you'd like to add?

Could you please put one thing into this article? I say to my fellow colleagues, I say to others in the asset management and hedge fund business: Get involved. We desperately need people who know the financial markets. We need people who understand economics in the system. I don't want to do this for a lifestyle. We need people who are willing to do this for a sacrifice to get this country turned around.

AR: Does that mean you're a one-term senator?

I'm not going to say that, but put it this way: I sure the hell ain't gonna be anything more than a two-term senator. I'm gonna go there, I'm going to try to get the job done and then hopefully I can go back to a wonderful private sector life.

Interview has been condensed and edited.

ISSN: 2151-1845 / CDC10004H