"Fidelity fought Washington over money market funds — and won" by Christopher Rowland | Globe Staff October 19, 2014
WASHINGTON — Abigail P. Johnson, the billionaire president and CEO of Fidelity Investments, epitomizes the quiet, old-money side of the Boston mutual fund world. With her understated, publicity-shy manner, messy Washington politics would not seem to be her thing.
But when she arrived at the soaring glass lobby of the Securities and Exchange Commission, Johnson was showing another facet of the Fidelity image: its political power, which flows from the forceful personality of her father, Fidelity chairman Edward “Ned’’ C. Johnson 3d, and the financial might of her vast enterprise.
Her trip to meet with the SEC chief in June 2012 was part of an epic and unusually harsh lobbying battle waged by Fidelity and a handful of allies in the mutual fund industry. Their mission: stop the Obama administration’s move in the aftermath of the financial crisis to rein in a huge and highly profitable part of their business, money market funds.
The saga, unresolved until this year, played out in the shadow of higher-profile debates roiling Washington over extreme risks taken by high-flying Wall Street investment banks. Critics say intense opposition by typically staid mutual fund executives, who manage trillions of dollars in assets, offers an equally instructive example of the financial industry’s Washington potency — and its bluntly self-interested priorities.
The SEC faced withering criticism as it tried to fortify money market funds — which emerged as a surprising threat to the economy at the height of the crisis — against future investor runs and potentially calamitous failures.
“The lobbying pressure was relentless,’’ said Sheila Bair, the former chairwoman of the Federal Deposit Insurance Corporation and now head of the Systemic Risk Council, a nonprofit watchdog group in Washington. “It is a good example of how the narrow interest of the industry prevails in this debate.”
The story also offers a window into the public policy agenda of one of Boston’s richest corporate sectors.
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Fidelity mobilized, alone retaining enough new Washington lobbyists to field a baseball team with a few left over for the dugout. It significantly boosted the amount of political money it contributed to federal candidates. It sent its executives to Washington for dozens of meetings.
Washington’s most vociferous financial industry watchdogs, Fidelity’s home-state lawmakers Barney Frank and Elizabeth Warren, meanwhile, stayed conspicuously out of the fray.
Representative Frank said he was caught off guard by the effectiveness of the opposition to the SEC plan. Warren, a powerful critic of financial sector excesses, was embroiled in a bitter and close Senate race in 2012 against incumbent Republican Scott Brown, a big favorite of Fidelity and its allies who poured millions into his campaign. Picking a fight with a potent home-state corporation that employs more than 5,000 people in Massachusetts was not part of her campaign agenda.
With no cavalry in Congress to back up the SEC, Fidelity and the mutual fund industry found Washington to be favorable territory as it dug millions out of its pockets to influence the system. But a big impediment to victory remained — the vivid memory of the financial cataclysm and the sense, among regulators, that something simply had to be done.
Breaking the buck
It may seem paradoxical that a bare-knuckled Washington regulatory fight would be waged over money market funds, which, by their design, are intended to be dull — convenient, reliable, and anything but risky. And from a consumers’ vantage point, that’s what they seemed to be.
Until suddenly in 2008 they emerged as neither dull, nor low-risk.
A New York fund called Reserve Primary Fund that invested heavily in Lehman Brothers short-term debt “broke the buck’’ when Lehman went bankrupt in September 2008, meaning it was unable to return $1 for each $1 an investor placed on deposit.
That fund’s failure and inability to meet the $1 share price guarantee — a defining feature of money market funds — triggered an immediate global run on the funds by panicked investors. That, in turn, jeopardized a vital system of short-term credit that is relied upon by banks and corporations around the world to keep the economy operating. The economy teetered.
That is who the $y$tem is meant to serve right there.
The danger to the machinery of global credit was so dire that an official at the Federal Reserve Bank of New York, on secret tape recordings recently revealed by ProPublica, confessed that when he learned Reserve Primary Fund broke the buck, he excused himself to a nearby bathroom and vomited.
As investors sucked $310 billion out of money market funds in just one week, the Department of Treasury and the Federal Reserve scrambled to stem the contagion. They set up temporary government guarantees and taxpayer-backed loans that soothed investors, stopped the runs, and helped pull the economy back from the brink. With $150 billion in Fed loans over 10 days, American taxpayers had bailed out the nation’s money market funds.
Looking for a fix
With the immediate crisis averted, attention quickly turned to fixing the system. To the SEC, that meant imposing new limits on the fund managers. The new SEC chairwoman, Mary Schapiro, wanted to move fast to make sure taxpayers would not be asked again to bail out investors in money funds.
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Johnson heads to D.C.
Abigail Johnson, who declined a request for an interview, is a deeply private person not known for outspoken public advocacy. She has waded into politics behind the scenes. She is generous with campaign contributions, personally doling out $94,400 to federal candidates since 2009, 85 percent of it to Republicans.
She met with Obama administration officials, including Cass Sunstein, then in charge of regulatory affairs for the administration (and now back at his job as a professor at Harvard Law School), during a visit to the White House in 2011, according to White House visitor logs. That trip, which came as the debate over money market funds was becoming more adversarial, was not accompanied by any fanfare or public announcement.
Neither side would disclose details of what transpired behind closed doors when Johnson visited Schapiro at the SEC.
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Fidelity’s spending on Washington lobbyists more than doubled, from $1.6 million in 2008 to as much as $3.7 million in 2010 and 2013. Taken in context of the goal — protecting a $650 million a year revenue stream — the potential was for, in effect, a 17,000 percent return, beyond the dreams of even a fund management hall-of-famer like Fidelity’s Peter Lynch.
Fidelity also reshuffled its lineup of outside lobbyists. Not only did it retain eight former Capitol Hill staffers, it added former White House and financial regulators to the mix.
Among the high-wattage players was Charles Brain, a former director of legislative affairs to President Bill Clinton; Heather McHugh, a former aide to Democratic New York Senator Charles Schumer, a key member of the Senate Banking Committee; and Justin Daly, a former senior counsel at the SEC.
An important GOP lobbyist in the lineup was Marc S. Lampkin, who has close ties to House Speaker John Boehner.
Another pivotal insider Fidelity hired was James Segel, who had been Frank’s special counsel at the House Financial Services Committee and a longtime political confidant who helped draft the Dodd-Frank financial regulation overhaul law.
??
See: Senate Sends Along Financial Fraud Bill
This is what is wrong with the AmeriKan political $y$tem.
It was Segel’s second trip through Washington’s revolving door. He registered as a lobbyist for the Investment Company Institute from 1999 to 2006, earning more than $200,000, before he went to work for Frank in the House. Then, a year after Segel left Frank’s Capitol office in 2011, he returned to lobbying for the Investment Company Institute and also added Fidelity as a client. Fidelity paid him $96,000 during parts of 2013 and 2014, according to Segel’s disclosure filings. Segel did not return calls for comment.
Segel did not speak with Frank about money market fund regulations once he went back to work for the investment industry, the former congressman said.
Frank, who lost his chairman’s gavel when Republicans took control of the House in 2010 and left office in January 2013, said he stayed out of the debate over money market funds in 2012 because he thought Schapiro was on track to win SEC passage of her plan.
“I never got into the weeds on the specifics of the money market fund. I was in the minority, and I didn’t have any problem with what [the SEC] was doing,’’ Frank said.
Assuming Schapiro had the votes proved to be a mistake.
By August 2012, it had became clear Schapiro was on the losing end of the fight. A week before observers expected her to press ahead with the proposal, she pulled back. Three of the five commission members were opposed, she announced.
In a dramatic statement, she cited a “false sense of security’’ in money market funds exposed by the 2008 crisis.
“The issue is too important to investors, to our economy, and to taxpayers to put our head in the sand and wish it away,’’ she said.
The swing vote against Schapiro’s initiative was Luis A. Aguilar, a Democratic commissioner who once worked as a lawyer in the mutual fund industry.
Democrat, Republican, what'$ the difference the$e days?
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More wrangling
Related: You Can Wrangle Over These Items
Fidelity’s lobbying fight was not over. The collapse of Schapiro’s initiative opened up another round of intense wrangling. Frustrated Obama administration officials including Treasury Secretary Timothy Geithner, sitting as members of the newly created Financial Stability Oversight Council (a board mandated by the Dodd-Frank law), released their own set of tough recommendations, which prodded the SEC to go back to the drawing board.
Last year, the agency came out with a new proposal. Gone were capital requirements, but the idea of “floating’’ share prices remained.
New objections then came from both Massachusetts senators, Democrats Edward Markey and Warren. In a joint conference call, their staffers telephoned SEC staff in February 2014 to suggest the “floating’’ price rules needed to be scaled back. They did not specifically side with industry; they cited complaints by state and local governments in Massachusetts about possible market disruptions for short-term credit. Opposition letters were written to the SEC by Governor Deval Patrick and Treasurer Steven Grossman, as well as the mayor of Quincy and the Massachusetts Municipal Association. It was part of a flood of such complaints from across the country.
When government is so tied into the $y$tem how can they hope to over$ee it?
Warren’s position appeared to represent a shift in tone. As chairwoman of a federal bailout oversight panel five years earlier (three years before her Senate campaign in Massachusetts), she denounced the “implicit guarantee’’ of future taxpayer-funded bailouts in money markets.
“It distorts the market and changes risk-taking behavior, and that can’t be right,’’ Warren said in a 2009 interview with Bloomberg News.
Her latest statements were more nuanced. Calling the SEC rules an “important first step,’’ in a statement to the Globe, Warren said the agency must “balance the risks that money market funds can pose to the economy against the need to maintain money market funds as an important investment alternative.’’
Warren spokeswoman Lacey Rose said the contrasting tone does not indicate any change, and that the senator’s “position is exactly the same as it was in 2009.’’
Whatever!
I can't say I'm not disappointed.
‘A qualified victory’
Five years of trench warfare lurched to a close this year, in July, when the SEC issued final rules.
I suppose it is a cla$$ war; however, I'm tired of every damn issue in my paper being framed as a war. $orry.
It was billed as a compromise, but reformers said industry got the best of the deal....
Don't they always.
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Here's a front-page profile on the lady who doesn't like publicity:
"Abigail Johnson named CEO at Fidelity; Investment firm chairman appoints daughter CEO" by Beth Healy | Globe Staff October 14, 2014
Abigail Johnson was named chief executive of Fidelity Investments on Monday, ascending to a job for which she has been groomed for many years and taking the latest step in a succession plan at the Boston investment giant.
The promotion was announced in an internal memo written by her father, Edward “Ned” C. Johnson 3d. The elder Johnson, who is 84 and said to be in good health, will remain chairman of the firm he has led for decades. Yet the appointment of Abigail Johnson to chief executive represents a momentous change of the guard at the company founded by her grandfather.
At age 52, she has worked in virtually every area of Fidelity, rising from fund manager to a series of executive posts at one of the world’s largest investment firms, which manages $2 trillion in mutual funds and retirement plans. She has done so in the classically quiet Johnson fashion, with a low public profile and a serious demeanor, which softens for co-workers and people close to her.
The wealthy elite are $uch wonderful people, according to the mouthpiece of wealth.
Her father chose a quiet Columbus Day holiday to issue news that’s been long anticipated in investment circles. In his memo, a copy of which was obtained by the Globe, Edward Johnson buried the news about his daughter under announcements about changes to the company’s board.
“I am also pleased that Abby Johnson has agreed to become Chief Executive Officer of Fidelity,” added Johnson, who had previously held that title.
It’s been two years since Johnson gave his daughter a firm nod as his successor, following the departures of a string of executives who thought they might claim the ultimate prize from the heir apparent.
Industry analysts have expected this promotion since Abigail Johnson was named president of Fidelity’s holding company a year ago, a title she will keep. Her father, however, remains a major presence at the firm.
“The new title is, I believe, largely ceremonial at this point, especially as she has already been named president,’’ said John Bonnanzio, editor of the independent advisory newsletter Fidelity Insight in Wellesley. “While this announcement certainly signals that Abby continues to amass more responsibilities in managing the Fidelity ship, as long as Ned remains chairman, the tiller is in her father’s hands.”
The Johnson family controls 49 percent of Fidelity’s ownership, and Abigail holds the largest portion of that, making her the seventh-wealthiest woman in the world, worth $17.3 billion, according to Forbes. Other employees and executives own the rest of the company.
Related: Boston Globe Knee-$lapper
A graduate of Hobart and William Smith Colleges, Abigail Johnson joined Fidelity after earning an MBA from Harvard Business School in 1988.
She inherits the top job at a firm that oversees more retirement money for workers than any other and that has a huge brokerage operation. The company employs 5,000 people in Boston and 41,000 around the world. It reported $13.6 billion in revenue last year.
Yet Fidelity is fighting to hold its market share in the business it’s best known for — mutual funds.
Looks like they won that fight.
Actively managed funds like Fidelity’s have been losing ground to low-cost index funds, and the trend continues. Vanguard Group, of Valley Forge, Pa., has overtaken Fidelity as the biggest US mutual fund firm, according to Morningstar Inc., a Chicago fund analysis firm. Fidelity is making new efforts to compete, such as expanding offerings in exchange-traded funds, which are bought and sold like stocks and are popular with sophisticated investors.
“In my role as Fidelity’s chairman and CEO, I have always said that our best days are ahead of us, largely due to the commitment and contributions from all our associates,’’ Johnson wrote in his memo to Fidelity executives who own shares in the company. “I believe this has never been truer than it is today.”
Edward Johnson also announced that longtime Fidelity board member Bill Byrnes, whom he credits with being “at the heart of all the major developments in the company over many decades,’’ will move to an emeritus role. Byrnes joined the company as a research analyst in 1957, “when the S&P was trading at around 50,’’ Johnson wrote, and went on to run FMR Co., the fund management arm of Fidelity.
In an unusual public tribute, Johnson wrote, “I deeply appreciate Bill’s long-standing service and commitment to our firm and his personal friendship through the years.’’
Johnson said Gerry McGraw, president of Fidelity Institutional, and Mike Wilens, president of Fidelity Enterprise Services — overseeing Fidelity’s charitable arm and venture-backed businesses — have been elected company directors.
They will serve alongside the new chief executive. Her promotion takes effect immediately.
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