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Why You Should Work for a Hedge Fund
Just because I lost a big chunk of my total retirement savings over the last year doesn't mean I should be upset that 25 hedge-fund managers reaped a total of $11.6 billion during the same interval, according to Institutional Investor's Alpha Magazine -- including $2.5 billion for James Simons of Renaissance Technologies and $2 billion for John Paulson. (To be included on the list, you had to take home more than $75 million.)
I do admit to being irked that some of what these guys earn is taxed at a 15 percent rate because the earnings are treated as capital gains, while I'm just about to be walloped by the Internal Revenue Service come April 15.
But what causes me severe heartburn is that these are exactly the sort of investors Tim Geithner is trying to lure in to buy troubled assets from banks, with an extraordinary offer financed by you and me and other taxpayers: If it turns out the troubled assets are worth more than these guys pay for them, they could make a fortune. If if it turns out the assets are worth less, these guys won't lose a thing because we taxpayers will bail them out. Plus, they get to pick only the highest-rated of the big banks' bad assets and can review them carefully before buying.
What a deal. Why can't you and I get in on this bonanza? Because we're too small. The government will designate only about five big investor funds -- run or owned by the richest of the rich -- as potential buyers. Hedge funds fit the bill perfectly.
There's a perfectly ironic symmetry here. The hedge fund managers who raked in billions last year wouldn't have done nearly as well had taxpayers not bailed out Wall Street to begin with. According to John Taylor, a hedge fund manager who tied for ninth on Alpha's list, many funds would have gone belly-up had the government not acted. "Thank god for the government, because if they hadn't intervened, we wouldn't have had anybody to trade with," he told the Times.
So you and I and other taxpayers have kept these hedge-fund honchos flush enough to be able to reap the bonanza that Geithner now wants to bestow on them for cleaning up the mess they and others on Wall Street made -- a bonanza to be financed by you and me and other taxpayers, who are taking on all the risk.
I read this morning that Larry Summers earned nearly $5.2 million in the last two years working one day a week for D.E. Shaw, one of the largest hedge funds of all. I can't help admire Larry for sacrificing all the money he could be making now had he not chosen to work for the government.
I do admit to being irked that some of what these guys earn is taxed at a 15 percent rate because the earnings are treated as capital gains, while I'm just about to be walloped by the Internal Revenue Service come April 15.
But what causes me severe heartburn is that these are exactly the sort of investors Tim Geithner is trying to lure in to buy troubled assets from banks, with an extraordinary offer financed by you and me and other taxpayers: If it turns out the troubled assets are worth more than these guys pay for them, they could make a fortune. If if it turns out the assets are worth less, these guys won't lose a thing because we taxpayers will bail them out. Plus, they get to pick only the highest-rated of the big banks' bad assets and can review them carefully before buying.
What a deal. Why can't you and I get in on this bonanza? Because we're too small. The government will designate only about five big investor funds -- run or owned by the richest of the rich -- as potential buyers. Hedge funds fit the bill perfectly.
There's a perfectly ironic symmetry here. The hedge fund managers who raked in billions last year wouldn't have done nearly as well had taxpayers not bailed out Wall Street to begin with. According to John Taylor, a hedge fund manager who tied for ninth on Alpha's list, many funds would have gone belly-up had the government not acted. "Thank god for the government, because if they hadn't intervened, we wouldn't have had anybody to trade with," he told the Times.
So you and I and other taxpayers have kept these hedge-fund honchos flush enough to be able to reap the bonanza that Geithner now wants to bestow on them for cleaning up the mess they and others on Wall Street made -- a bonanza to be financed by you and me and other taxpayers, who are taking on all the risk.
I read this morning that Larry Summers earned nearly $5.2 million in the last two years working one day a week for D.E. Shaw, one of the largest hedge funds of all. I can't help admire Larry for sacrificing all the money he could be making now had he not chosen to work for the government.
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Damn Mr. Reich, How come you and everyone else seem to forget that the Federal Reserve opened the discount window to these bozos I late 2007. They got cheap money with which to muscle the rest of us out of what little money we had left. If fact they probably shorted the market with money loaned by the tax payer. Damn it, this is pure unadulterated theft.
April 6, 2009 12:04 PM | Reply | Permalink
What are you complaining about? The government is being run by "adults" now isn't it? Rosenberg continues to crow that he's an "Obama man" and Obama walks on water, doesn't he?
April 6, 2009 12:05 PM | Reply | Permalink
Admiring Larry is snark, right? I'm sure DE Shaw will get a cherry deal buying distressed assets with our money and that Larry will get paid plenty after he leaves the Obama administration.
April 6, 2009 12:57 PM | Reply | Permalink
In the halcyon days of my abruptly aborted youth I believed that this country practiced not only political democracy but what I call economic democracy, democratic capitalism.
Was I wrong. Our version of capitalism is to ensure that about 1.8 percent of us get extremely rich while the rest of us have a duty to make it possible.
Wasn't I taught that Adam Smith invented capitalism as a means of bettering the lives of everyone, from the village shoemaker to the lord of the manor?
April 6, 2009 1:01 PM | Reply | Permalink
Mr. Reich, we know this is inherently unfair. What is the alternative?
I kind of feel like if we're going to have to give money to some of the people who created this mess, I'd rather give it to those lower in the food chain so ordinary people can get their lives organized as part of the benefit. Specifically, to homeowners and even small time landlords who are in trouble. Yup, those people with the extra bathroom and joe the icky landlord. If we're bailing out some low-integrity folks, let's bail on the ground floor not on the paper level.
Ps im one of those people, having bought in 2004.
April 6, 2009 1:13 PM | Reply | Permalink
When you read about stuff like this you have to wonder how vastly naive the people are who keep saying that we need to give the administration "a chance". A chane to what? Steal the rest of the nation's remaining wealth and hand it to the guys who just robbed us all blind?
It is simply amazing there isn't more clamor from Democrats in the US House over this whole thing. In years past guys like Barney Frank would have been raising caine over moves like the administration is making and especially if it were the Republicans in charge. But instead all we get is silence and a bit of shouting over bonuses.
April 6, 2009 1:15 PM | Reply | Permalink
I do admit to being irked that these guys are taxed at a 15 percent rate because their earnings are treated as capital gains
It will be interesting to see if this tax code quirk is rectified given that many of them were early strong Obama supporters and bundlers. (Some quick references: Is Greenwich, Conn., Obama Country? May 11, 2007, and Andrew Wardin, "Finance sector swells Obama poll funds," Financial Times, July 17, 2007.) I'd actually like to see it happen not just because it's the right thing to do but because I think it would be good P.R. for both Obama and hedge fund guys, as in: sometimes campaign contributions and support are not all about petty individual self-interest.
April 6, 2009 1:21 PM | Reply | Permalink
I heard an interesting idea from Stiglitz this weekend. I'd tweak it a bit and be even more careful, but it sounded obvious.
Too late to alter the massive screwup of the past year or so, but it would help going forward.
Stiglitz said we could have taken the 700 billion TARP fund and just set up a bank. Gone 10-1 leveraging and lent 7 trillion. No reason, really, to give that money to the banks so they make a profit and we take all the risk.
We could have gone direct. Tax payer funded bank, lending out enough money to get credit flowing. Tax payers, not bankers, reap the interest rewards.
Me? I think the 10 to 1 leverage is too high. I'd be more careful. Say, 5 to 1. Which means lending roughly 3.5 trillion. That would have been enough to get credit flowing again, and would have further reduced risk to tax payers. Again, tax payer reap the rewards of interest payments. Not bankers.
Right now, as Reich and others have mentioned, we're in a heads they win, tails we lose scenario.
April 6, 2009 1:39 PM | Reply | Permalink
I think this is a marvelous idea! But there's one little bugaboo which is that that is a socialist method of handling the matter. Again, I'm all for it, but if something like that were even proposed, the right wing noise machine would be off the chain as would all the thieves in the parasite class headquartered on Wall Street.
April 6, 2009 3:11 PM | Reply | Permalink
"get credit flowing" is an atrocious idea. Excess private borrowing was the primary cause of the current problems.
There is some good in the idea of setting up new banks in the private sector, but that idea as you presented stinks. I usually find Stiglitz agreeable but your version of the idea I find disagreeable.
April 6, 2009 5:37 PM | Reply | Permalink
"Excess private borrowing" wasn't really the problem. Though excess anything is usually not so good. Excess leveraging, casino capitalism, massive betting on the bubble to continue endlessly -- those were the real causes of this mess.
In short, the financial sector placed horrendously stupid bets and lost. They didn't have enough to cover those bets by several degrees. The way things are structured, the folks placing those stupid bets were paid regardless. They really had little incentive to worry about outcomes. It didn't matter to them. It's a bit like drug dealers. They don't care if they're selling good drugs, bad drugs, cut drugs, phony drugs. They don't care if the user gets sick or dies. They get paid regardless.
Another way it's similar: Drug dealers cut their product, add filler, repackage and sell again. In a sense, that what all of those crazy financial instruments were. Repackaged cut goods. Add to that a massive "kick the can down the road" ethos, and you get your debacle.
Whenever I hear or read someone trying to blame this mess on poor people or individual homeowners, I just want to throw up. Bad mortgages, in and of themselves, never would have caused this system-wide crash. Institutions should have had the funds to cover for them. Instead, they leveraged themselves 30 or 40 to 1, repackaged and resold their risks, borrowed, lent, insured, securitized again and again and again, until the original point of commerce was completely lost.
And, again, the brokers (drug dealers) along the way got paid regardless.
Stiglitz's idea would have prevented all of that. Direct lending, cutting out all of the middle men/brokers/drug dealers.
Too bad no one tried it, or will.
April 6, 2009 7:00 PM | Reply | Permalink
But "leverage" in finance IS borrowing.
"private borrowing" means, don't count government deficits for this purpose.
Private borrowing, whether by consumers, home purchasers, homeowner equity loans, producers, financial sector, whatever ... was excessive.
The part which is clearest to me is the ripoff of investors by home buyers and HELOC draws which would not be paid back. That's some trillions of dollars which investors are now trying to get back from the government, aka future taxpayers. Much of that was crooked or gambling debts and should NOT be paid back by government funds.
April 7, 2009 2:12 AM | Reply | Permalink
The Obama administration has only two toxic assets: Summers and Geithner
April 6, 2009 2:01 PM | Reply | Permalink
aka "legacy assets"
April 6, 2009 3:13 PM | Reply | Permalink
Very witty.
April 6, 2009 3:37 PM | Reply | Permalink
@Blue Pearl:
You've gone right to the heart of the matter. Whatever the reason that Obama listens to these two [your own epithet]s, he needs to hear from millions of folks that THEY NEED TO GO, YESTERDAY.
April 7, 2009 1:14 AM | Reply | Permalink
One more thought: is that other professor @ UC Berkeley still an apologist for his intellectually stimulating buddy, ol' Larry?
April 7, 2009 1:16 AM | Reply | Permalink
Summers, Geithner, and Phil Gramm, bag men for Wall Street?
April 6, 2009 3:38 PM | Reply | Permalink
For every hedge fund manager who did well last year, there were many more who didn't.
And many more who didn't survive.
April 6, 2009 3:44 PM | Reply | Permalink
Ellen,
I doubt these hedge fund managers who didn't do so well or who didn't survive lost all or at least the bulk of their personal fortunes.
April 6, 2009 3:59 PM | Reply | Permalink
Mr Reich, thank you. The incestuous nature of all this, brought home after reading the NY Times story about Mr. Summers' genius, just about blows my mind. We are being had by an industry still regarded as too big to fail. Why not make management of this little plan contingent on agreeing to receive no fees whatsoever--you know, serve your country, not yourself?
April 6, 2009 4:27 PM | Reply | Permalink
"Those who rob Peter to pay Paul will always have the support of Paul."
-JK Galbraith
April 6, 2009 6:12 PM | Reply | Permalink
WE'RE ALL CHUMPS NOW! This video from today has already gone viral over the internet.
William Black of PBS Moyers fame was back at it today. Thank God and perhaps someone in the administration will finally listen to him and others while showing Tiny Tim and Larry summers the door. Watch this interview from today.
http://finance.yahoo.com/tech-ticker/article/225897/Geithners-Stress-Test-%22A-Complete-Sham,%22-Former-Federal-Bank-Regulator-Says
Geithner"s Stress Test "A Complete Sham," Former Federal Bank Regulator Says
April 6, 2009 7:23 PM | Reply | Permalink