hedge funds

Showdown in Chicago

Richard Trumka — Fri, 23 Oct 2009 06:06:41 -0700

I'm going to Chicago next week for the American Bankers Association meeting. Oddly, I haven't been invited to the Roaring '20's dance party I hear they're having.

Why wouldn't they celebrate the era of wild money and hot times (which slid into the Great Depression)? After all, the bankers are doing well these days.

They're doing well because after financial institutions caused the global economic crisis, we bailed them out, to the tune of some $700 billion.

Now they're in good enough shape to pay the suits $7 billion in bonuses for driving working families and our economy to our knees--to the verge of a second full-fledged depression.

Things might be turning around for the bankers, but for the rest of us, unemployment heads toward 10 percent and home foreclosures continue to devastate families and communities. Working families have lost health care, pensions and savings--and in exchange we've gotten predatory lending, outrageous overdraft fees and sky-high credit card interest rates.

Meanwhile, the bankers are doing the Charleston, taking taxpayer money, handing out bonuses for disastrous failure, becoming profitable without lending money that could put people back to work--and spending billions lobbying Congress to kill financial reform.

Shameless. Absolutely shameless.

On Tuesday, about 5,000 of us will be in Chicago to tell them what we think.

It's called the Showdown in Chicago. We're gathering outside the American Bankers Association meeting to demand financial reform and re-regulation that will allow us to rebuild our communities, our lives and the real economy.

We've got a lot to rebuild.

For decades, these bankers have been dealing to each other in what amounts to their own private casino, inventing more and more exotic financial vehicles together and basically regulating themselves. Their Wild West capitalism allowed them to take outsized risk with no oversight and then come hat in hand to the American taxpayers when their house of cards collapsed.

They've become a menace. No one is safe while their private casino bankrupts the real economy and ignores necessary investments in jobs, health care and retirement without oversight or regulation.

This is a complicated topic, but we can break down a plan for reform into four basic needs.

The Consumer Financial Protection Agency (CFPA) that President Obama has proposed. This agency would protect the public against credit card and mortgage rip-offs. The agencies that were supposed to protect us from financial meltdown failed. The CFPA would place consumer protection authority in the hands of a single agency that would monitor banks and other institutions and their credit products like mortgages and credit cards--but not your butcher, as a ridiculous over-the-top ad by the U.S. Chamber of Commerce claimed.
A council of regulators to identify and fix systemic risks that could threaten the entire financial system--risks such as institutions becoming "too big to fail," too complex or too interconnected. When the government intervenes, the purpose has to be to protect the public, not just rescue executives and rich investors. The past year has proven that the Federal Reserve Board is just too close to the banks. We need either to reform and democratize the Fed or to give this job to a true public agency. Let's do it right.
Bring the "shadow markets" into the daylight. Most people probably don't really know what hedge funds, private equity funds and derivatives are or do. You're not supposed to--it makes them easy to manipulate. They've been unregulated and totally lacking in transparency. These vehicles need serious regulation and oversight before they suck more money into the black hole of convoluted transactions.
Reform corporate governance and CEO compensation to protect the interests of long-term investors--people saving for retirement, not speculating.

It's time we hold banks and other financial institutions accountable for making this mess that required trillions of our dollars to clean up.

It's time to hold them accountable for the pain they've inflicted on working families.

It's time to put them back to work for working people, supporting families and jobs.

I've been spending a lot of time on Capitol Hill, calling for reform in meetings with committee chairs and other members of Congress. And everywhere I go, financial industry lobbyists are there, pushing back all out to block reform.

Congress is deciding right now how it will shape financial reform--we need congressional support and intense presidential leadership.

Call your members of Congress. They're sure hearing from front groups for the banks. They need to hear from you, too. Tell them to produce a financial system that isn't set up to reward big banks at the expense of everyone else. The money has to start flowing to regular people and businesses that can create jobs.

And if you're in Chicago on Tuesday, join me. We'll meet up at 10:30 a.m. at Wacker Drive and Michigan Avenue to march to the Sheraton Chicago Hotel & Towers where the bankers are meeting.

See you at the Showdown.

Down But Not Out at $464 Million a Year

Sam Pizzigati — Sun, 29 Mar 2009 11:35:15 -0700

Not everyone in the international hedge fund industry is making millions. Not everyone in the hedge fund industry right now even has a job. Amid the worst global economic meltdown since the Great Depression, hedge funds are hemorrhaging positions. An estimated 20,000 will be gone by year’s end.

But the hedge fund industry still does have something no other industry in the known universe can match: the best-paid top executives who ever lived.

“These are the highest earners,” as Manhattan College financial historian Charles Geisst put it last week, “of all time.”

That observation came right after Alpha, the hedge fund industry trade journal, reported that the hedge fund industry’s top 25 managers added $11.6 billion to their personal fortunes in 2008, an average of $464 million each, the third-highest top 25 total since Alpha started keeping score in 2002.

How did the movers and shakers of hedge fund land work such magic? For the most part, we simply don’t know. Hedge funds, as largely unregulated entities, don’t have to reveal almost anything about how they go about their business.

The most secretive hedge fund manager of them all, James Simons of Renaissance Technologies, netted $2.5 billion last year. One of the funds Simons manages generated a 160 percent return in 2008, through some financial alchemy that observers, in the absence of any real information, have taken to describing as “computer-driven trading strategies.”

The number two on this year’s hedge fund top 25 we know more about. John Paulson of Paulson & Co. has made his big money — $2 billion in just 2008 alone — by betting that the incredibly overinflated market for subprime mortgage-backed securities would tank.

Paulson no doubt understands the lucrative irony behind this enormous personal windfall. His colleagues in the hedge fund industry helped inflate that market for subprime securities in the first place.

Fifty years ago, in a more equal America, hedge funds as we now know them didn’t exist. They didn’t explode onto the financial scene until the 1980s, when the Reagan revolution was rapidly concentrating income and wealth at the top of the U.S. economic ladder.

America’s newly flush rich, their pockets bulging, had plenty of cash to invest, and the emerging new hedge funds — pools of investment capital open only to deep-pocket investors — promised better returns than those deep pockets could get anywhere else.

Hedge fund managers then had to deliver on those promises, and they hungered mightily for high-return investment opportunities that could keep their wealthy clients happy. Traditional Wall Street investments — corporate stocks and bonds — couldn’t deliver the high returns the hedge funds needed. But the financial world’s new-fangled “derivatives” could.

These increasingly exotic financial instruments, all based on the endless repackaging of ever-shakier mortgage loans and consumer debt, would find an eager hedge fund market. Hedge fund dollars, in effect, kept the U.S. economy blowing bubbles.

The bubbles all burst in 2008, and the hedge fund industry has certainly felt the aftershock. Over 900 hedge funds, about 14 percent of the fund total worldwide, shut their doors last year. The industry ended 2008 with assets down 37 percent, over $700 billion, from the industry peak last June.

But that downturn left an estimated $1.2 trillion still sloshing in hedge fund coffers, more than enough to power top hedge fund execs to another round of windfalls.

These top execs typically charge investors a fixed percentage of the billions in assets they manage, usually 2 percent. The celebrity hedge fund managers charge even more. James Simons, for instance, levies a 5 percent management fee on the billions investors turn over to him — and then takes a 44 percent cut on any profits he makes selling the assets he buys with those investor billions.

In 2008, you didn’t have to be a hedge fund celebrity like Simons to score big. Even junior hedge fund analysts did quite wonderfully, given the economic tenor of our times. They averaged $195,520 last year, says the trade journal Alpha.

Industrywide, hedge fund jobs paid an average $794,000 in 2008, down from $940,000 the year before. U.S. Treasury Secretary Tim Geithner last week unveiled a plan that will hand hedge funds and other big investors a subsidy worth as much as $1 trillion to start buying up the toxic derivative securities that now have no little or market value.

If Geithner’s plan works, hedge funds will take those tax dollars and jumpstart the market for toxic securities, the securities will rise handsomely in value, and hedge fund managers will reap still more jackpots.

But some financial insiders like venture capitalist and commentator Peter Cohan don’t believe Geithner’s plan will work. A good many hedge fund managers won’t play ball with Geithner’s new plan, Cohan predicts, “because they fear that there'll be a public outcry over their compensation if the plan makes them even richer.”

And if that outcry gets loud enough, the hedgies no doubt worry, lawmakers may feel compelled to shut the loophole that lets hedge fund managers claim much of their income as capital gains. That neat trick lowers the tax rate on a hefty chunk of hedge fund manager earnings from 35 to 15 percent.

The cost to taxpayers? The hedge fund loophole, the Institute for Policy Studies in Washington, D.C. estimates, is running taxpayers about $2.7 billion a year.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

CEOs Get Bailed Out. Workers Get Sold Out

Tula Connell — Fri, 26 Sep 2008 09:11:32 -0700

Before she became the first female Labor secretary in 1933, Frances Perkins had seen firsthand the tragedy of Manhattan’s 1911 Triangle Shirtwaist fire. Locked in by their employer, 146 mostly young girls died when they couldn’t escape the burning building where they toiled in sweatshop labor. Later, as the New York industrial commissioner, Perkins held employers accountable for workplace safety and health, expanding factory investigations and championing other pro-worker laws, like unemployment insurance.

Now, imagine if Elaine Chao had been there instead. Rather than improved job safety legislation, Chao likely would have pushed laws forbidding workers to challenge employers for unsafe working conditions, fair pay or anything that would cost greedy employers a dime.

In fact, Chao, the nation’s current Labor secretary, once again has taken the side of Big Business against working people. As Congress debates whether and to what extent to approve the corporate financial dictatorship proposed by U.S. Treasury Secretary Henry Paulson, Chao, on Wednesday, said Congress must pass the bailout “quickly and cleanly.”

Cleanly as in giving Paulson, a political appointee with no accountability, powers so sweeping even the president couldn’t override his decisions.

Quickly, as in making sure the Wall Street CEOs, whose greed outpaced their brains and created the current debacle, get away with golden parachutes and massive bonuses.

(We at the AFL-CIO strongly oppose giving Paulson a blank check on the bailout. More info here and here. You also can tell Congress “No Blank Check for Wall Street” by clicking here.)

Fittingly, Chao was speaking to reporters at an event in posh Fairfield County, Conn., famous for its expensive houses and site of many hedge funds and other financial service companies. She also took the opportunity to dodge a question about whether she favored extending the unemployment insurance time frame, saying Congress already had extended it this year.

(Let’s see…Chao’s Labor Department reported on Wednesday there were 1,772 mass layoffs initiated in August, the most since September 2005, in the aftermath of Hurricane Katrina. And two weeks ago, Chao’s Labor Department reported unemployment worsened from 5.7 percent to 6.1 percent, a figure that economist Jared Bernstein noted in Sunday’s FDL Book Salon is more like 10.7 percent when underemployment is factored in. But I digress. Why would rising unemployment have anything to do with a need to extend unemployment insurance?)

At the same time that Chao was carrying out her role as a Bush-Paulson puppet, a Senate Judiciary Committee hearing examining pay discrimination heard from Lilly Ledbetter. After years of working at an Alabama Goodyear Tire & Rubber Co. plant, Ledbetter discovered she was being paid less than the lowest-paid man doing the same work.

But although a jury awarded her $3.8 million, Goodyear appealed to the U.S. Supreme Court. The Bush-packed Supreme Court essentially said “tough luck,” and Ledbetter now not only is out tens of thousands of dollars in income, but her Social Security and pension are smaller as well.

As Christy at Firedoglake pointed out a few days ago:

Even worse for all of us, the Ledbetter decision has now been cited in hundreds of cases nationwide to justify disparate treatment based on race, gender, age, disability and other reasons to pay someone less or treat them differently because these cases have been jimmied into an analogous argument to what Lilly faced in her claim. The SCOTUS decision effectively undercut decades of precedent on equality in one, fell swoop in favor of companies who want to justify internal discrimination.

Now, let’s imagine Frances Perkins was our current Labor secretary. It’s a safe bet that rather than backing massive CEO pay bailouts while making the rounds in a wealthy New York bedroom community, Perkins would be in those Senate hearings.

Right next to Lilly Ledbetter.

(This is a cross-post from the Firedoglake blog.)

"This Nation Asks for Action, and Action Now."

William Neil — Sat, 20 Sep 2008 12:25:06 -0700

Author's Note: (Sat. Sept. 20th)

The following post was sent out to a large Email audience around 10:30 pm on Thursday evening, September 18, 2008. Its first policy point was to call for an immediate ban on shorting, thereby beating actual events by about 7 hours, as CNBC was reading the just -arrived announcement from the Securities and Exchange Commission listing 799 stocks/firms which could not be "shorted" around 7:00 am on Friday morning. The list has grown since then and some key market "nodes" have re-gained the right to "short" in a constructive way to carry out complex trades. Please also note the call for a "Transaction Tax" on Wall Street and other domestic exchanges, first proposed by Robert Kuttner in his book "Obama's Challenge." I call it a "Speculation Tax," although its base could be much broader than just speculative activities. It's a light tax, well under 1% (harkening back to the Tobin international trading fee) and it is projected to raise around $100 billion dollars a year. Since a central dynamic of the debate about to ensue the week of Sept. 22 in Congress will center around the enormous scope of the proposed "RTC" type "bail-out" of Wall Street - $800 billion - or more - the level of debt it incurs and how to pay it off will be around for a long, long, time. Whether or not the issue gets raised this week - Progressives need to be thinking of logical revenue sources to meet the cost of what Wall Street and the de-regulators have wrought - and it is eminently fair to expect those who play the market for short run excursions to help pay for rescuing the system they have helped place in such jeopardy.

I also make a full bodied call to convert the now infamous private "rating" agencies to public ones, perhaps with the help of American business schools. There's more, but those are the highlights.

Bill Neil

September 18, 2008

Dear Citizens and Elected Officials:

Due to the unprecedented nature and speed of the unfolding financial crisis, I’m shifting formats a bit. “The End of an Era” is happening faster than anyone could have imagined. What follows is brief and contains some policy recommendations. Some are for the immediate front burner, some for mid-term, and some for long-range changes. They are not meant to be comprehensive, but rather address the great urgency of the moment, and to get citizens involved in the needed policy discussions, which are going to rise in prominence over the next several days and weeks.

I trust that the front pages, whether in print or on-line, have convinced skeptics that we are truly on the verge of a 1929-1933 type crisis. The level of wealth destroyed this week, and the dramatic freezing of the world’s credit markets means that whatever level of recession was coming, it will now be more severe than previously thought. The idea that even money-market funds can unravel is shaking Main Street. The piecemeal approach to saving failing financial institutions one by one is not adequate. The systemic reforms that everyone wanted to delay until a new administration can’t all wait. Some will have to because long-term reforms for ten years down- the road can’t be designed in 10 days. But some immediate and mid-term ones will have to be done on that short timetable. So here’s my best judgement from what I hear and read and have come up with on my own. I’m on the record as predicting frozen markets since February of 2007. And frozen they now are. Further reading will be held to the end, but I’ll try to credit ideas to those who have put them out and do so right in the text.

FDR said it on March 4, 1933, and we are back at that moment 75 years later: “This Nation asks for action, and action now.”

1. The SEC and Federal Reserve need to ban short selling of all types immediately. This goes way beyond the half-way measures just proposed. Robert Kuttner raised this idea in his new book, Obama’s Challenge, and the New Deal pushed for it in its 1934-SEC proposals, but they didn’t make it. The idea behind it is self preservation now for our financial system. Even with the ban on “naked-shorting,” regular shorting still utilizes a form of leverage that allows hedge funds and other major actors to multiply their downward spiral bets against each newly vulnerable financial institution to a degree that threatens the entire system. It may have to be implemented in other world exchanges as well. On Thursday afternoon (Sept. 18th) CNBC announced that just such a ban has been put in place on London markets. Some of this shorting tactic is pure desperation by hedge funds forced to raise large sums to meet demands on them from banks – some is just the old “animal spirits” of free-market orthodoxy, oblivious to how interconnected the new financial world really is. The financial world will not end if it looses the shorting mechanism. If you own stocks, bonds or indexes and don’t like the way they’re run or their future prospects, then sell – all or part. Whether this is a 3-6 month ban or perhaps longer, it needs to stay on for as long as the system remains so fragile. Congress needs to step into this vacuum and you can help by asking your Senators and Reps to call upon the Federal Reserve, the SEC and the major exchanges to put a full ban in place. I believe this can really make a difference in easing the short run pressures.

2. The problem in the banking system and credit markets is not just one of liquidity, but also one of solvency. We need a “Transaction Tax,” or “Speculation Tax” to raise revenue. Capital is not adequate because of the mountain of bad assets, like the bad mortgage debts, and the fact that their values keep dropping, and promise to continue to do so as the income streams backing them falter with the downward spiral of general economic activity. Thus we will have a continuing “capital is not adequate” crisis that moves in tandem with the declining debt instruments that the giant speculative pyramid has been build upon. Months ago I mentioned to you that the idea was being floated in the private sector to create a giant “bad bank” or “conduit” to take all the questionable mortgage debt off the holders’ balance sheets. It sounded a bit whacky at the time, but the crisis has evolved to lead me to believe that it can’t be resolved by individual institutions trying to work out their bad bets and shrinking capital one at a time. More and more you are going to hear the call for a Resolution Trust Corporation (1989-1995) type entity to take a lot, if not all, of these toxic instruments off the hands of those with them now so that the remaining financial system can get back on its feet and resume something resembling normal lending. Jim Cramer says the cost could be as “low” as $400-500 billion and is pushing the idea. I tend to think in terms of $1-2 Trillion, the price tag being put on the overall losses by folks like Nouriel Roubini. The Dow jumped 400 plus points on the mere thought of systematic help. As I write on Thursday evening, September 18th, high level meetings are under way in Congress to discuss the general idea. We are facing a huge decision crossroads here. There are only two sources for sums that large: our own “sovereign” nation or private equity/ Sovereign Wealth Funds. That means US taxpayers; or the unregulated private equity funds or the foreign nations behind the Sovereign Wealth Funds, a list of which I don’t believe will prove to be satisfactory to the American people. And Private Equity (and Hedge Funds) are going to lose some of their current freedom of maneuver with new regulations reducing the allowable leverage and forcing full public disclosure like other entities, so they may not be around for the time it will take to buy and re-sell all these damaged investment instruments (2-10 years?)

So here’s the idea. If you look at the current Federal Reserve’s balance sheet, it can’t keep up levels of this type of intervention running for long. And many say the Fed shouldn’t be the institution running the bailouts at all. We hope the Treasury can raise what they need this week and next week: now running to $100 billion or more from the sale of short term US instruments. The larger sums to make a RTC go could be raised in chunks of $100 billion. There are huge practical problems to doing this, and many details to be considered. There is a large range of mortgage debt out there – what types should be purchased? Should it be done from solvent institutions or ones which have collapsed? Whose books will the newly purchased debt reside on? What if the economy continues south and other types of derivatives go bad? What level of derivative will be taken – and are Credit Default Swaps part of it? Other troubled industries are said to be lining up in the halls of congress as you read this.

Whether we move down a RTC type path or a RFC one (from the New Deal) which helped railroads out in the 1930’s (see Steve Fraser’s article below, and which Sen. Schumer and Senator Obama are alleged to be conferring on) or some other new design, I support what Robert Kuttner has broached in his book, a transaction tax on market activity which, at a rate of well under 1% is capable of raising $100 billion per year. Given the scope of this task, it may have to be a bit heavier than he intends, but still under 1%. The idea is to make those whose rapid and repeated actions in the financial markets are causing so much stress to help pay for relieving it – a levy that leans against short run speculation but that is not heavy enough by itself to end it. I would call it a “speculation tax” even though it would also be paid by folks like you and me entering or leaving markets in a more main street fashion. For hard-line conservatives born and raised on anti-tax ideology, who are already foaming at the mouth at the mere thought of this, I’d remind them that what’s left of the US financial system could re-capitalize itself through more traditional means: charging $5 per check and $10 per ATM withdrawal….and higher fees for late credit card payments….and so on…the usual. Or we can have China, Japan, Russia, and Saudi Arabia step in and buy up what’s left of Wall Street with the vast store of dollars they’ve been accumulating while we ran up debt. I prefer to tax speculators and also pay a small price myself to move money around in investment markets.

3. Credit Agencies Should Be Made Public Agencies. A possible RTC like approach would be an enormous commitment of US taxpayers to keeping our financial system from collapsing. It will have to make up ground by correcting for the disastrous effects of nearly 30 years of de-regulation and monitoring by entities and officials who didn’t believe in even the weakened roles they were supposed to be carrying out. So there has to be a further price to pay for the public bailout, whatever the design and details: a new and redesigned system with vastly reduced speculation. The balance of power, which had swung so far to the private sector that it has brought us and the world to the brink of another 1929, now will have to swing back towards a sober and diligent public sector role. Bob Kuttner only hinted at it in his “reform” article of Sept. 17, but I’m putting a more full-throated version out: we need public agencies performing the functions of the various credit rating agencies that have been so deeply involved at nearly every step in this financial fiasco. Exactly what form of public agency will be the subject of much debate, and perhaps our educational institutions can play a role here – after all, the nation has been flooded, ever since the “Morning in America” days, with tens of thousands of MBA’s, and with the dramatic consolidations which are happening and going to continue on Wall Street, there will be tens of thousands of the newly laid off: very credentialed, very skilled people who can help with these new agencies. But the public will have to be as sharp as hawks to make sure that conflicts of interest are banned and that the new employees put the long term public good above all other considerations.

4. The degree of leverage for various financial institutions is going to have to be explicitly set, probably from 10:1 to 5:1 depending on the setting. As my readers by now probably know, we have gotten into deep trouble with leveraging ratios ranging from 100:1 to 30:1. Whether capital requirements can be set so boldly just now, under the crisis of inadequate capitalization, I am going to leave to others and keep an open mind. Wherever margin requirements need to be raised to help fill in the gaps in policy and to reduce the degree of risk in financial markets, then that has to be made clear with public debate and easily understood application.

5. Hedge Funds and Private Equity Funds must be brought under the new broad umbrella regulations based on functions actually performed in the markets, regardless of the labels under which they are carried out. This means full and equal disclosure. If this means they cannot survive the calls for transparency (remember our author Richard Bookstaber doesn’t think hedge funds can fully disclose and survive) then they don’t have a place in the newly governed markets.

As this posting goes “to press” late Thursday evening, I do have worries about the rush and complexity of what Congress is going to consider over the next week or so. There is tremendous pressure to act quickly, because of panic in the markets, and the high political stakes. I do worry that things are moving so fast that the public’s voice and taxpayer protections will be slighted in the rush. So I hope that what is enacted contains provisions to allow for flexibility and future adjustments. And ongoing citizen participation.

If my readers think these are important matters, I urge them to call Senators Schumer and Dodd, Cardin and Mikulski and Representatives Barney Frank, Charles Rangel, Majority Leader Steny Hoyer and Chris Van Hollen. They can be reached through the US Capitol Switchboard at 202-224-3121.