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It has emerged as one of the more intriguing subplots of the Democratic presidential primary to date: watching the minuet underway among the candidates when it comes to issues involving Wall Street, the industry providing a disproportionate share of financial support for four of the party's contenders.

First there was the move last month by the top three contenders for the nomination -- Hillary Clinton, Barack Obama and John Edwards -- to embrace proposals to bring the tax rates on the earnings of private equity and hedge fund managers in line with the rest of the working world. (One proposal would tax the roughly 20 percent cut that managers take on the gains they obtain for fund investors at the 35 percent rate for regular income, instead of the 15 percent rate for capital gains, on the logic that the gains are not from the managers' own investments, and that they are instead being paid for the service of investing others' money. The other reform would require private equity or hedge funds that go public to organize themselves as corporations instead of partnerships, also resulting in a tax rate of 35 percent instead of 15 percent.)

This was tricky territory for the candidates, all of whom have received hundreds of thousands of dollars from the private equity and hedge fund world. It was particularly messy for Edwards -- he not only has received more than $150,000 in contributions from employees of one of the two private equity funds to go public, Fortress Investment Group, but he also worked for Fortress for roughly a year in 2005, earning more than $500,000 as a part-time adviser, and has more than $15 million invested in its funds.

Yet Edwards last month came out in favor of taxing the industry at the regular income rates, saying it was wrong for hedge fund managers to be taxed "at a lower rate than their secretaries," and Clinton and Obama soon followed suit. (Still on the fence is candidate Sen. Chris Dodd, who represents the hedge fund havens of Greenwich and nearby Gold Coast towns. He, like New York Sen. Chuck Schumer, has expressed reservations about clamping down on the industry, saying last week that he was "concerned about the potential adverse effects that these proposals would have on capital formation, on job creation, and on institutional investors.")

As this week began, the minuet shifted onto another stage -- the subprime lending meltdown. Once again, the candidates were competing to outdo one another in speaking up for the underdog, as the shadow of their Wall Street supporters loomed behind them. On the campaign trail in New Hampshire, Clinton proposed clamping down on lending abuses and providing aid to families at risk of losing their home. She proposed the creation of a $1 billion fund to help homeowners catch up on mortgage payments, renegotiate their loan terms or pay for financial counseling, and she would eliminate the prepayment penalties that often come with subprime loans.

"We can look at the statistics, wring our hands and continue to do nothing, or we can do what America has always done in times of difficulty: acknowledge that we face a real challenge and confront it with head-on solutions," she said.

Her rivals were quick to peg Clinton's plan as overdue and inadequate. The Obama campaign said he would seek legislation to require better disclosure of the full costs of mortgages. Dodd -- striking a far more aggressive tone than he does when it comes to hedge funds -- noted that he has for years been pushing for legislation to clamp down on predatory lending. "We're glad that Mrs. Clinton is concerned about this important issue that Sen. Dodd has already taken leadership on," his spokeswoman said. "But addressing the crisis will require more than rhetoric on the campaign trail."

Adding his own "where have you been?" shot was Edwards who, his campaign noted, has already offered "a real plan to punish predatory lenders and protect homeowners, and we're glad Senator Clinton has chosen to follow his lead."

Edwards' campaign is right -- he has been talking about aggressive penalties for predatory lenders for several months. But the Wall Street shadows also arguably loom largest for him: When Edwards went to work for Fortress, it had a major stake in a large subprime lender, GreenTree Servicing, that was one of the companies seeking to foreclose on New Orleans homeowners shortly after Hurricane Katrina. And while Edwards was at Fortress, it acquired several other major subprime lenders. He has said he was not aware of the company's involvement in the industry.

Look for the dance to only get more intricate in coming months. The home foreclosure wave has yet to hit its peak -- and the hedge fund tax disparities are only now starting to get full airing. And come early October, the next round of campaign fundraising disclosures will show whether the Democratic frontrunners have paid any price among their high finance friends for their one-upmanship on this particular stage.

--Alec MacGillis

Posted at 8:54 AM ET on Aug 8, 2007
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Hedge Fund managers should be more then willing to see the "Carry" rate go to 35%, as long as the Progressives extend the Cap gain rate of 15%. They will lose more customers to overseas and other investment vehicles if their customers lose their reward for risking their Capital.

Posted by: jdcw | August 8, 2007 11:25 AM

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