Months before it happened we warned investors that the private equity bubble was peaking. After a mini-crash in Shanghai, the risks continued increasing. As David Dreman said in his latest Forbes column, “The Risk Problem … There are pockets of risk you should definitely avoid. Two of the most dangerous are private equity and hedge funds,” the ultra-secretive twins favored by the smart money crowd. Dreman’s warning was very specific: “Even the better-known funds like Blackstone Group are taking on immense new risk. When Blackstone purchased Samuel Zell’s Equity Office Properties Trust for $39 billion (including debt). Zell is regarded as one of the shrewdest operators in the real estate world. When Zell sells, it’s like a bell tolling for private equity’s peak. Good luck to Blackstone investors.”

Blackstone’s boss also smelled the peak coming: Stephen Schwarzman and his partner, Nixon’s Commerce Secretary Peter Peterson, have been building billion-dollar fortunes for three decades and were tired of the game. You could hardly blame them if they want to cash out before the coming crash. That, of course, would make way for a new round of investment opportunities—later in a volatile and unpredictable investment cycle.

Yes, unpredictable: The Wall Street Journal pointed out that although the Blackstone “business model has transformed Wall Street,” there’s a bit of hypocrisy in Schwarzman taking Blackstone public. For years he “has been unsparingly calling public stockholding ‘a broken system’ and criticizing the 2002 Sarbanes-Oxley corporate accountability law as having ‘taken a lot of the entrepreneurial zeal out of a lot of corporate managers.’ Quarterly earnings reports for public companies, he has said, create a ‘tyranny’.”

Lobbying: perfect investment for the “Happy Conspiracy”

So he’ll make way for the new. After all, both Wall Street and Main Street love chasing new opportunities, they love the hunt, the sizzle, the mystery. So what’s next when the private equity/hedge fund bubble deflates? Well, we uncovered a fabulous new way to make money. Big money! Opportunities as bizarre as Schwarzman’s strategy flip-flop. Here’s how: Start buying Washington’s “K Street” lobbying firms. Then later, take them public, like Schwarzman’s doing with Blackstone. Buy in now, lobbying’s a growth business loaded with cash cows.

In fact, lobbying may be America’s biggest growth opportunity, thanks to partisan politics and an easy-to-tap-into $3 trillion federal budget. Better yet, that huge budget will be available in the bear market that Dreman and Schwarzman saw coming. Indeed, lobbying may be the single best of the new crop of “alternative investments” now growing in popularity. Check out the investment fundamentals: Here’s why lobbying is such a huge cash cow for companies tapping into federal taxpayer money, and a perfect investment for the smart money:

One. Huge supply of talented lobbyists
Since 2000, the number of Washington lobbyists has doubled. Imagine: 42,000 registered lobbyists for a mere 537 elected officials (435 Congressional reps, 100 Senators, one President and one Veep) with $3.0 trillion to spend each year.  That means each of them have an average of $5 billion to “spend.” Lobbying is clearly a booming growth business: “Lobbying firms can’t hire people fast enough,” said the Washington Post … “Starting salaries have risen to about $300,000 a year for the best-connected aides.”  … Plus lobbying is the favorite retirement job for “early half of all lawmakers who return the private sector when they leave Congress.” No wonder American University political scientist James Thurber says there are actually 261,000 members of the “influence-lobbying complex” running your government.

Lobbying is also huge at the state level. Barron’s says “the number of lobbyists and the amount spent on lobbying has swelled over the years … New York State had 3,842 lobbyists, 18 for each elected legislator. Colorado, Florida, Illinois and Ohio each had 10 per legislator,” for an estimated total of about 40,000 state lobbyists. Other sources believe the total of all lobbyists in America is over a quarter million. And things will only get better, says the Washington Post in a feature story, The Road to Riches is Called K Street: “There’s unlimited business out there for us,’ said Robert L. Livingston, a Republican and former chairman of the House Appropriations Committee, now president of a thriving lobbying firm, ‘Companies need lobbying help’.”

Two. Huge returns on small investments
Yes, companies need help, got lots of money and see big payoffs. One Post report notes that a group of 60 corporations spent a mere “$1.6 million in lobbying fees to persuade Congress to create a special low tax rate that they could apply to earnings from their foreign operations for one year.” It took three years to pass, “saving the companies roughly $100 billion in taxes.” Corporate America loves such huge payoffs from lobbyists.

There are many other examples. One lobbyist was “so proud of its performance that it annually publicizes its clients’ costs and compares them with the benefits they receive.” In its most recent “it collected $11 million in fees and delivered $1.2 billion in assistance to its clients, a ratio more than 100:1. The payoff is large but fairly typical of modern-day lobbying.” For another client, a small $500,000 “investment” paid off $1 billion. Of course not every lobbying effort has a $100 billion or even $1 billion payoff. But “the return on investment in lobbying is often so substantial that experts and insiders agree that Washington’s influence industry will continue to thrive no matter how lawmakers decide to rein it in.” Get it? You can’t stop it!

Three. America’s newest “big business”
Yes, lobbying is definitely a major growth business. In a 25-part special series currently in The Post, the title says it all: “Citizen K Street: The Life & Career of Gerald S. J. Cassidy, How Lobbying Became Washington’s Biggest Business.” Thirty years ago Cassidy founded what’s now “the most lucrative lobbying firm in Washington.” Today he’s the “godfather of the influence business.”

Cassidy was the genius who created “earmarked appropriations” where Congress votes to giveaway federal tax dollars to private organizations even though no federal agency asked for the money. One member of Congress can make the decision. In three decades, “lobbying for such appropriations became a booming Washington industry.” Cassidy “helped invent the new Washington, which had made him seriously rich. His personal fortune exceeded $125 million.” In size, lobbying is America’s biggest business.

Four. Politicians protect lobbyists and visa versa
Lobbyists and politicians have a mutual benefit society according to a revealing New York Times report, “Big Money Still Learning to Lobby.” Here’s a specific example of how the back scratching evolves: “On a cold evening in late January 2007, Senator Charles E. Schumer invited a who’s who of hedge funds to dinner at Bottega del Vino on the Upper East Side of Manhattan. More than $100 billion worth of wealth sat around the table … the New York Democrat had some simple advice for the billionaires in his midst: If you want Washington to work with you, you had better work better with one another.” Schumer is on the Senate Banking and Finance committees, and chair of the Economic Policy Subcommittee.

“United by a desire to avoid stringent regulation,” said The Times, “the industry’s efforts have witnessed remarkable results. More than two years after the Securities and Exchange Commission required that funds register with the agency—a move overturned by a federal appeals court last summer—the Treasury Department, the Federal Reserve, Congress and the S.E.C. seem to agree, hedge funds are as regulated today as they should be.” Apparently a few guys with $100 billion count more than 100 million Main Street investors and voters.

FirstPubDate: Mar’07

The court’s decision to let public companies spend freely on elections simply isn’t fair to shareholders. But there’s a way to push back. …”The First Amendment confirms the freedom to think for ourselves,” wrote Justice Anthony M. Kennedy … But public companies aren’t people. As Justice John Paul Stevens, writing for the minority, observed, the court committed a grave error in treating corporate speech the same as that of human beings. The notion that the same freedoms should apply when a public company, often with tens of thousands of owners, speaks in matters beyond the scope of its business affairs offends common sense.

Those investors who share my concerns aren’t powerless against the Supreme Court’s decision. Their first order of business is the submission of a resolution such as this for inclusion in the next proxy statement for each corporation in which they’ve invested: Resolved: that the corporation shall make no political contributions without the approval of the holders of at least 75% of its shares outstanding. … Delaware corporate law [requires] a unanimous shareholder vote to ratify a gift of corporate assets. …

Most institutional money managers today are owned by giant U.S. and global financial conglomerates with their own shareholders. Of America’s 40 largest, 23 are owned by conglomerates, 8 are publicly held, and only 9 remain privately owned. Money managers … must publicly pledge a no-political-contribution policy of their own. This may sound like a tall order, but it’s the only avenue that presents itself for, in effect, overriding the Supreme Court’s unwise decision.

No doubt there’ll be many other attempts to limit the Supreme Court’s decision, but whether Bogle’s or another, something will be done. For now, however, Bogle got a great “keep-it-simple” solution and his integrity is impeccable, think he’s got a great way to solve the obvious conflict of interest here.