‘Third Way’ Faction and the Struggle for the Democratic Party’s Soul

Protesters gathered outside Third Way’s offices in Washington, D.C., in December 2013, asking the group to reveal its funding sources.

By Noah Bierman

Boston Globe Staff   Oct 06, 2014

WASHINGTON — On a summer afternoon amid the frenzy of the Democratic National Convention in Boston 10 years ago, a group of Washington business lobbyists, political operatives, and a smattering of senators gathered at one of the city’s downtown law firms to hear a plan.

Members of the group worried that, with the end of the Bill Clinton era, the Democratic Party’s centrist wing had lost its way. Over sodas, they pitched a new think tank named for Clinton’s political philosophy, Third Way.

Fast forward a decade: The philosophy, sketched out privately at the Boston office of Brown Rudnick,
is now at the center of an intense struggle for the soul of the Democratic Party.

Third Way, backed by Wall Street titans, corporate money, and congressional allies, is publicly warning against divisive “soak-the-rich” politics voiced by populist Democrats. Its target: Elizabeth Warren, the Massachusetts senator whose rise to power two years ago helped galvanize Democratic grass roots against Wall Street and pushed the issue of income inequality to the forefront.

This is more than a grudge match. At stake for the Democratic Party is the support of middle-class, swing voters who decide elections.

Third Way ignited a clash in December when its leaders essentially declared war on Warren in a guest column in the editorial pages of The Wall Street Journal, warning Democrats not to follow Warren and New York Mayor Bill de Blasio “over the populist cliff.”

Many on the left were shocked, and angered. Warren’s allies saw Third Way as a proxy — being used by her enemies on Wall Street to scare off the rest of the party.

“Wall Street is extremely good at pushing anybody that is critical of them as being populist, or know-nothings,” said Ted Kaufman, who temporarily served as an appointed US senator to replace Vice President Joseph R. Biden Jr., then succeeded Warren in leading a special congressional panel that oversaw the bank bailout.

For their part, Third Way representatives bristle at the idea they are doing the bidding of Wall Street power brokers.

With the income gap growing between most of the nation’s taxpayers and the wealthiest 1 percent, the battle is over how aggressively the party’s candidates — including, potentially, Hillary Clinton — will contrast themselves with Republicans on tax and economic issues in 2016.

The philosophy set out by Third Way will be part of that conversation.

The organization publicly discloses little about its funding. But a Globe examination of public documents and the backgrounds of its leadership offers a window into how some wealthy Wall Street and business interests — who contribute generously to Democratic candidates — have sought to tip the Democratic Party’s intellectual debate against populism.

Third Way raises just over a third of its $9.3 million annual budget from undisclosed corporations. The remainder, the bulk of its funding, is donated by individuals, almost all of whom are members of Third Way’s board of trustees.

The group is dominated by executives from the financial industry, people who are typically the targets of the populist rhetoric of Warren, and sometimes even President Obama.

Two-thirds of its 31 trustees have held senior leadership positions in investment funds or big banks or served in some other capacity on Wall Street.

Board members include its chairman, John Vogelstein, who once led the private equity firm Warburg Pincus; vice chairman David Heller, the former global head of equity trading for Goldman Sachs; and Derek Kirkland, a managing director at Morgan Stanley.

Both Vogelstein and Heller were major financial backers of Obama, and all three contributed heavily to Senate Democrats.

Third Way’s founders dispute that they are doing Wall Street’s bidding or are trying to leave the poor behind. They also insist their financial supporters on the board of trustees do not influence the organization’s political and policy positions.

“We’re not remotely aligned with what Wall Street wants,” said Jonathan Cowan, the group’s president and cofounder.

This is certainly no Tea Party-style civil war of the sort that is fracturing parts of the Republican Party. This struggle among Democrats often plays out behind the scenes — in the White House, the corridors of Congress, and the office suites of lobbying firms in downtown Washington.

But in a decade of existence, Third Way has been able to expand its influence, hosting Vice President Joe Biden and other Democratic luminaries at its symposiums. Visitor logs show that Third Way leaders have enjoyed excellent access to the Obama White House, with at least 50 visits since 2009.

Third Way leaders are extremely sensitive to questions and criticism about their sources of funding. The real issue, Third Way says, is that harsh populist positions and rhetoric are damaging the Democratic Party.

“It goes back to what Bill Clinton said, which is ‘You can’t love the job and hate the job creators,’ ” said Matt Bennett, Third Way’s vice president for public affairs and one of its cofounders. “Vilification of industry isn’t helping Democrats.”

Washington home base

Third Way’s offices are just off K Street, the epicenter of Washington’s lobbying district. The space is modern and youthful, with frosted glass separating work pods and offices for the think tank’s 40 casually dressed employees. The walls can be written upon, which researchers do with colorful markers.

Much of their work squares with bread-and-butter liberal orthodoxy: gun control, gay rights, immigration, and health care reform.

“We are centrist Democrats, not centrists,” Cowan said.

Chris Maddaloni/Getty Images

Matt Bennett, Jonathan Cowan, and Jim Kessler, three of the five co-founders of Third Way.

Their overarching emphasis is on solidifying political support among the middle class. Where they differ from many Democrats is how they plan to appeal to the vast middle: reduce deficits and cut spending growth on such entitlements as Social Security and Medicare.

They insist on deficit reduction and entitlement cuts as conditions for key tax hikes on the wealthy.

That is a sharp contrast from many other Democrats, including Warren, who speak about taxing the wealthy as a matter of fairness and who would support raising their tax rates as stand-alone measures.

Third Way’s insistence on linking tax hikes to a grand bargain — which has been impossible to obtain in the Obama era — has a direct bearing on the wallets of the group’s wealthy funders.

Third Way denies that its wealthy donors give money only because the organization is against stand-alone tax hikes on the rich. Rather, its leaders say it is a political blunder for Democrats to wage class warfare on the 1 percent. It publicly issued a memo in July that said the group’s polling suggested a better message to appeal to America’s middle class: “economic growth and opportunity.”

“Raising taxes is absolutely essential, but it is not sufficient from our perspective,” Cowan said in an interview, in which he also said the group advocated strongly for Obama’s health care law and the deal that ended the fiscal cliff, both of which included tax hikes on the wealthy.

“If the Democratic Party stands only for raising taxes on the wealthy, not for actually making entitlement reforms and other spending cuts,’’ he said, “then the other half of the equation will never happen.”

The group also had some suggestions about the bank bailout that has fueled so much of the anger at Wall Street for the past six years: Don’t call it a bailout.

“This is an emergency line of credit,’’ Third Way executives wrote in September 2008, as anger was reaching a ferocious pitch. “Banks need this loan so they can loan to you — the American consumer.’’

To some of Wall Street’s harshest critics, such talking points — which could have easily come from a public relations shop in Lower Manhattan — undercut the group’s entire mission.

“When your positions correlate 100 percent with your paymasters, you have to wonder about the independentness and robustness of the work product,” said Dennis Kelleher, president and chief executive of Better Markets, a Wall Street watchdog.

Donations to Third Way

In the aftermath of the financial crisis, when big banks were being bailed out, several faced intense pressure over the size of their executive bonuses. Goldman Sachs announced it would shrink its bonus pool and increase its charitable giving. It turns out some of that charity went to Third Way.

The think tank received a total of $850,000 from Goldman Sachs Gives, in 2010 and 2011, according to the charitable fund’s IRS documents.

Bennett said it should not be characterized as a donation from Goldman Sachs, but as a personal contribution from Heller that was made through the Goldman charity.

A Goldman Sachs spokeswoman declined to comment. Goldman Sachs Gives is a “donor-advised fund” that gives money to charity based on recommendations from Gold- man managers, according to its IRS filing and company statements.

Heller reported giving Third Way an additional $250,000 in 2010 from his own charitable foundation, The Hermine and David Heller Foundation. Heller did not return messages and Third Way said he would not comment.

Though Third Way does not report details of its contributions, some of its donors do so through private foundations.

Donald Mullen, who headed global credit and mortgages for Goldman Sachs, gave Third Way a combined $200,000 through his private foundation in 2011 and 2012. Internal Goldman e-mails written during the housing crisis, later made public by the Senate, show Mullen talking about making “some serious money” as the housing market plummeted, the type of revelation that inflamed populist anger. Mullen declined to comment.

The current chairman of Third Way, Vogelstein, heads New Providence Asset Management, which controls endowments for nonprofits and portfolios for wealthy individuals. He remains a senior adviser to Warburg Pincus, the private equity firm he ran until 2002. He and his wife have given Third Way $625,000 between 2010 and 2012, according to IRS filings.

Additionally, the liberal magazine the Nation reported in December that Third Way paid a Washington lobbying firm, Peck Madigan Jones, to raise more than $500,000 of its budget, according to Third Way’s 2012 tax filing. Peck Madigan, which did not respond to e-mailed questions, lobbies for several Wall Street-tied clients, including MasterCard, Deutsche Bank, and the International Swaps and Derivatives Association.

Although Cowan insisted contributions from trustees play no role in the think tank’s positions, in at least one instance, Third Way gave a major donor direct influence over its public policy positions: a paper that took aim at populists.

Bernard Schwartz was listed as one of five authors of a Third Way research paper released in February 2007, before the financial crisis, titled “New Rules for the Economy: A framework for the 21st Century.” Among its contentions is that populists are wrong about the decline of the American middle class, one of several misguided “myths” in their ideology.

Schwartz is a retired industrialist and Third Way trustee who runs a private investment company. His family foundation has donated $5 million to Third Way since 2006, according to IRS records. Schwartz is one of the Democratic Party’s largest donors, sending six-figure contributions to party committees and Democratic super PACs every election cycle.

The Third Way report Schwartz cowrote also lists two fellow Third Way trustees — Heller and Kirkland — as contributors.

Schwartz declined a request for an interview.

Access to the chief of staff

Just six weeks after President Obama chose William M. Daley as his chief of staff, in February 2011, Cowan walked into the White House for the first of three coveted meetings with the powerful insider.

Daley was tapped for the job after what Obama labeled a “shellacking” in the 2010 congressional elections. His selection was seen by many as a signal that Obama wanted to dial back his rhetoric after earlier lashing out against “fat-cat bankers on Wall Street” in a “60 Minutes” interview.

Daley, who held senior positions with JP Morgan Chase, also represented a golden opportunity for Third Way: He was a member of the group’s board of trustees when he was selected to run the White House.

The former secretary of commerce for Clinton, and a key supporter of the North American Free Trade Agreement, was seen as friendly toward business. His selection was praised by the Chamber of Commerce and Republican Senate Minority Leader Mitch McConnell as a step toward common ground.

Cowan would not say what he discussed with the chief of staff. Daley said he does not remember, but that many groups try to “tee up ideas.”

“I knew Jonathan and I knew that they were smart,” Daley said.

Daley said he does not think Obama’s Wall Street rhetoric changed dramatically during his tenure as chief of staff.

“We and others want to break up the banks, however you define that,” Daley said, in describing Democrats. But “that hasn’t become the sort of mantra of the normal person out there so you’re going to continue to have this tension between the left of the party and the middle” over rhetoric, he added.

Daley left the White House after a year on the job. He returned to the Third Way board. In May, he became managing partner of Argentiere Capital, a Swiss hedge fund.

Toward the 2016 election

The battle over money and influence has now moved to the 2016 presidential election, and the competition between parties for the financial favors of Wall Street executives will be fierce.

Though Third Way’s salvo against Warren in The Wall Street Journal became a seminal moment in its fight against Democratic populism, the group is now very sensitive about the topic and will not even discuss why they chose to wage it.

Cowan and Bennett took pains not to utter Warren’s name in several interviews.

Nor would Warren, who is backing several moderate senators in tough reelection campaigns, talk about Third Way.

Robert Reich, Clinton’s former labor secretary, who has become a leading Wall Street critic, argued that there are several issues Democrats are unwilling to tackle because of Wall Street’s grip on the party — including tax breaks for hedge fund managers, transaction taxes for high-speed traders, limits on the size of banks, and income tax rates for high earners.

“At some point it becomes a Faustian bargain,” he said. “The financial dependence on Wall Street effectively ties the hands of the Democratic Party.”

But moderate Democrats worry the party is doomed to lose general elections if candidates are perceived as antibusiness in an effort to win over activists on the hard left.

“That really has never generated a hell of a lot of support on Election Day,” Daley said.

Noah Bierman can be reached at nbierman@globe.com. Follow him on Twitter @noahbierman.