Billionaire Crony Capitalism Failed…This Time
There’s an old joke: If you want to make God laugh, make a plan. It only works because it’s true, but when it happens to some people it’s funnier than others. At least to me.
A case in point is a story I’ve written about here in both 2015 and 2016: the story of a billionaire who attempted to weaponize the federal government to make himself a small fortune. And it just backfired in a big way.
William Ackman isn’t your typical crony capitalist, mainly because he’s a donor to both parties. That label is generally reserved for big donors to one party of the other so they can curry favor with elected officials to garner special treatment or government contracts.
Ackman, on the other hand, hedged his bets in the hope of ruining a particular company while making a sizable fortune for himself in the process. Last month it blew up in his face, causing him to cut bait and eat his losses.
What Ackman did was attempt to use his influence with government regulators to destroy the company Herbalife.
Whatever you think of vitamin supplement companies, using the government as a weapon to make a profit, or at least attempting to do so, is the height of crony capitalism. That’s exactly what Ackman tried to do.
His hedge fund took a huge “short” position against Herbalife’s stock – which is essentially borrowing the stock to sell at the time with the intention of actually buying it later, hopefully at a lower price, to cover what you “borrowed.” The potential for profit is large, especially if the stock price bottoms out. But there’s also the potential for serious loss if the stock goes up because the borrowed stock has to be purchased at some point.
Ackman’s problem was that Herbalife’s stock increased in value, leaving him the potential of a massive loss. But he wasn’t playing on an even playing field. Ackman attempted to use federal regulators to damage Herbalife’s value, helping himself in the process.
The plan was to get the government to declare Herbalife a Ponzi scheme. The New York Times reported Ackman “spent tens of millions of dollars on research and legal fees in a campaign against the company. He has walked the halls of Congress, pressing lawmakers to take action, and personally urged regulators to shut the company down.”
After years of fighting this battle, last month Ackman called it a day and admitted he’d lost. Reuters reported, “Billionaire investor William Ackman, who has been betting for five years that Herbalife Ltd’s stock price would tumble to zero, said on Wednesday that his firm recently restructured its position in the nutrition and supplements maker.”
This new position was reached only after Herbalife stock “climbed roughly 50 percent this year,” according to Reuters.
The Street said: “Seeing the writing on the wall after almost five years, Ackman recently covered his short position in Herbalife shares, which even now he apparently sees as too risky to stomach any longer.”
That Ackman’s billion dollar bet failed isn’t the real lesson of his attempt, what should bother people is how close he came to creating the collapse of a company using the power of federal regulators. There are other William Ackmans out there, and thousands of federal regulators with tens of thousands of federal regulations at their disposal to do the bidding of connected investors. It’s only a matter of time until someone succeeds and the federal government leviathan is completely weaponized.
The saying, “It’s not what you know, it’s who you know” remains as true today as the first time it was spoken. Even as President Donald Trump is eliminating federal regulations at a record pace, there are so many out there that it’s nearly impossible to fully rein in government power. And with the government spending more the $4 trillion per year, and having a hand in trillions more through regulations, there will be other William Ackmans ready, willing, and able to exploit loopholes and connections to enrich themselves at the expense of others.
That Ackman failed is good for capitalism, but there are always others out there ready to take his tactic to the next level, and they may have the needed connections and the government-created pathway to make it happen. Capitalism is only as healthy as the government allows it to be, and that isn’t very healthy at all.
Derek Hunter is a contributing editor at The Daily Caller and a columnist at Townhall.com.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of The Daily Caller.