hedge funds

America's Billion-Dollar-a-Year Men

Sam Pizzigati — Sun, 03 Apr 2011 11:47:13 -0400

Hedge fund honchos bet on stocks. They bet on gold. They bet on lawsuits. Most of all, they bet that the rest of us will never wise up to the awesome giveaway our current tax code ladles on them.

Only in America can someone make $85 million in a year and feel underpaid.

This past Friday, USA Today’s annual corporate CEO pay survey — the first major national report so far this year on 2010 executive pay — revealed that Viacom chief Philippe Dauman earned $84.5 million last year.

But Friday also brought new numbers on annual “top 25” hedge fund manager compensation from AR magazine, the hedge fund industry’s trade journal. The hedge fund earnings needed in 2010 to make this exalted top 25: $210 million, well over double the four-score millions that went to Viacom's Dauman.

Last year’s top hedge fund kingpin, John Paulson, walked off with an astounding $4.9 billion in 2010 from his hedge fund labors. Paulson made more in a week than Dauman made for his entire year.

A decade ago, by contrast, corporate CEOs and hedge fund managers were still rubbing elbows at paycheck time. In 2002, a hedge fund manager only needed $30 million to make the industry’s top 25, almost exactly the entry ante for that year’s corporate CEO top 25.

Since then, hedge fund manager earnings have exploded spectacularly. The total compensation for the hedgie top 25 stood at $2.8 billion in 2003. This total quintupled over the next three years, to $14 billion in 2006, then soared to $22.3 billion in 2007, just before the financial industry meltdown.

That unpleasantness did put a bit of a crimp into hedge fund rewards, but only for a moment. Last year's hedge fund manager top 25 total: $22.03 billion. Six of last year's top 25 pulled in over $1 billion each. America may not yet have recovered from the Great Recession. Hedge fund managers certainly have.

How can hedge fund managers be doing so over-the-top well? Running hedge funds essentially gives these “financial wizards” a license to print money.

Hedge funds, in effect, operate as mutual funds for deep-pocket investors — and deep pockets only. The hoi polloi can’t invest in hedge funds, and this closed, private status frees hedge funds from those pesky government regulations that open-to-the-general-public mutual funds have to face.

Hedge fund managers, without regulators looking over their shoulders, can invest the dollars they grab from investors anyway they choose. Actually, “bet” might be a better word choice here. Hedge funds have zilch interest in making investments that create real economic value. Their goal instead: Find and exploit marketplace “inefficiencies” that offer the potential for quick — and enormous — killings.

Hedge fund managers make some of these killings the old-fashioned way, gambling on stocks. Sometimes they bet that particular stocks, or other financial assets, will rise. Sometimes they sell particular stocks “short,” betting they’ll sink.

John Paulson, 2010’s top hedge fund earner, placed his biggest bets last year on gold. Other hedge fund managers are chasing after far more unconventional windfall opportunities — in lawsuits, for instance.

In these lawsuit bets, hedge funds advance millions of dollars to law firms handling promising medical malpractice claims or big-time class actions against misbehaving corporations. The hedge funds then charge these law firms interest, at sky-high rates, on the mega-million-dollar loans.

The law firms, in turn, pass the interest charges onto their clients. The interest charges can add up. Clients who “win” their cases can end up owing money.

Hedge fund managers don’t have to win all their bets to hit their personal jackpots. They don’t even have to win any. The reason: Investors pay hedge fund managers fees for the privilege of managing their money, usually 2 percent of the total invested. Hedgie superstars can charge more, 3 percent and up.

These superstars do, of course, have to deliver big returns every so often, to justify those fees, and these big returns provide hedge fund managers an even more lucrative income stream. Hedge fund managers routinely rake off 20 percent of whatever investment profits they generate.

The superstars rake even higher shares. Last year, for instance, Moore Capital Management’s Louis Bacon charged investors 3 percent of the money they gave him as a management fee and claimed 25 percent of his investment profits as a “performance fee.” Bacon, for the year, scored a $230 million personal payday.

Bacon's fellow hedgie, Leon Cooperman of Omega Advisors, took home $240 million last year. Cooperman “laughed” last week when a New York Times reporter called to tell him he had made the latest hedge fund manager top 25.

“I have no idea how much I made last year,” Cooperman explained to the reporter. “I don’t know until it’s tax time.”

And tax time just happens to be when hedge fund managers really clean up. Corporate CEOs face a 35 percent tax rate on all compensation over $373,650 they took home in 2010. Hedge fund honchos, thanks to the infamous “carried interest” tax loophole, only pay a 15 percent tax on the hundreds of millions they pull in from their “performance fees.”

Concerned lawmakers have been trying — and failing — to close the “carried interest” loophole for the past half-dozen years. This fantastically lucrative free-pass for hedgies will this year cost the federal treasury upwards of $4 billion — from just the top 25 hedge fund managers alone.

Even so, this week on Capitol Hill, frenzied budget negotiators won’t be debating “carried interest” as they struggle to avoid a federal government shutdown. Lawmakers just won’t have the time. Negotiating away the jobs of Head Start teachers, after all, can really chew up the hours fast.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality published by the Washington, D.C.-based Institute for Policy Studies. Read the current issue or sign up to receive Too Much in your email inbox.

TV Appearance: A Little Buzz Kill About Jobs Numbers, Hedge Fund Billionaires, and Other Econ Stuff

Richard Eskow — Fri, 01 Apr 2011 21:58:57 -0400

I think Alonya was suggesting at the end that I was being a downer about those job figures ... I believe the current slang term for that kind of thing is "buzz kill." Oh, well!

For a change, all of the political negativity coming from my general vicinity was directed at Republicans - and only Republicans.

(This was last-minute, hence the unshaven look.)

About that "unshaven" look: I asked a personal question about it on my own blog - one that's far too trivial to diminish these august pages.

Wall Street Whiners Threaten to Wreck the Economy-- Again

Zach Carter — Sun, 26 Sep 2010 18:10:38 -0400

I agree with everything Paul Krugman has to say about Max Abelson's excellent run-down of the Wall Street whinery, but his critique stops a little too short. Abelson's piece emphasizes that Wall Street isn't really upset about any policies the Obama administration has adopted, since, as I and many others have noted, the Obama administration has been very friendly on that front. What they're upset about-- at least what they say they're upset about-- is the jargon. Obama called bailed-out bankers "fat cats" after they paid themselves obscene bonuses with taxpayer money. To the bankers Abelson quotes, this amounts to some kind of unfair discrimination. That's absurd-- the bailout barons Obama criticized had wrecked the economy and then paid themselves like princes for profits secured by taxpayer largesse. Those who did not benefit from such largesse have no reason to feel slighted by the critique, and those who did benefit have no reason to be complaining from their second homes in the Hamptons.

But what I find most interesting is that the cry-babies in Ableson's story actually threaten to wreck the economy over this rhetoric. The key passage is at the end of Ableson's piece:

Wall Street's emotions have consequences. "If, as a result of this anger, credit becomes unavailable, particularly for small and mid-size businesses," Mr. Schwarzman wrote in The Washington Post this year, before his Poland blunder, "then at best the economy will slow and, at worst, we will find ourselves in a dire situation." He said bankers felt under siege and were responding by "becoming conservative," a lovely little pun about lending and politics.

Credit does not just magically become "unavailable" because of "anger." Some class of angry people has to decide not to make credit available.

There are plenty of reasons why bankers might decide not to extend loans, but feeling "under siege" because the president called you a fat cat of isn't one of them. No sane businessperson would let those feelings overwhelm her decision-making process when the bottom line is at stake. If there were evidence that regulations were going to change dramatically and banks would have to keep more capital on hand to cushion against losses, there's a case to be made that banks might not be eager to extend loans as a result (not a very good case, though, since banks could just raise capital in the markets to support profitable lending opportunities). But freaking out because the President calls you a fat cat and preemptively shutting down your business makes, well, no sense.

Another of Abelson's anonymous Wall Street sources repeats the insanity:

"He's pissing on us and Wall Street and bankers and capitalism; then we have gotten afraid," the executive who turned CNBC on mute said. "We then are not investing in maybe what we should invest in."

What, exactly, are this guy and his friends afraid of? That Obama might call him another name that he likes even less than "fat cat?" Obama has proposed a couple of tax changes for some types of Wall Street revenue and some types of hedge fund pay-- but the fear of higher taxes wouldn't be grounds to invest less, or invest improperly. Bumping up the capital gains rate from 15 percent to 20 percent doesn't alter the incentive structure at all-- it isn't going to push any bankers or traders out of the investment business.

So these brats are saying one of two things with their tantrums. Either Wall Street is dominated by completely irrational fools who will wreck their businesses after hearing a dirty words, or this is a threat: Treat us like superhuman royalty, or we'll wreck the economy. If the first case is true, then these guys are paying themselves enormous sums of money to be total idiots-- something the "well operators" that one of Abelson's anonymous Wall Street sources spits on never do. If the second is true, then we have another excellent reason to keep these sharks out of economic policy debates.

UPDATE: Also note the use of anonymous sources in Abelson's story. Usually that anonymity protects somebody from something-- in financial journalism, anonymity usually protects a source who divulges a trading strategy or a lobbying tactic that ought to be a company secret. But these guys are just whining, and asking for Abelson not to tell anybody who they are. At least some members of the Wall Street whinery are ashamed of themselves.

Scott Brown Votes for Reform-- After Selling Out to Wall Street

Zach Carter — Thu, 15 Jul 2010 15:33:05 -0400

Wall Street reform passed Congress today, with three Republicans voting "yes," among them Scott Brown of Massachusetts. But Brown's vote came with a high price tag: he insisted on both hammering ordinary citizens with new taxes, instead of imposing them on the financial behemoths that jeopardize our economic stability. And he punched an enormous loophole in rules limiting bank gambling with taxpayer dollars. Both were explicit favors for powerful special interests in his state.

These were the first truly significant legislative maneuvers Brown has made since taking office, and they stand in stark contrast to the image he painted of himself while campaigning as a Tea Party favorite. The reform package comes with a $19 billion price tag. Traditionally, the cost of regulating an industry is covered by the industry being regulated. But of course those industries don't like those taxes, in part because they create up-front costs that limit profits, but also because a smaller profit-base results in a smaller bonus pool.

Brown led the charge in demanding that Wall Street bonuses not be hampered by these regulatory costs. He successfully pushed to restructure the tax burden to hit ordinary citizens and shield major Massachusetts hedge funds and banks. The taxed-enough-already Tea Party's man-of-the-people pushed to protect big financier bonuses, while imposing new taxes on the rest of us. Thanks for the new tax bill, Tea Partiers.

But this was the second time Brown dealt out major damage to reform in just a few weeks. In order to get the Wall Street overhaul through the conference committee, Brown demanded that the Volcker Rule—a ban on risky proprietary trading by banks—be watered down. Proprietary trading doesn't serve any client or help any business, it's just a naked bet, and when those bets are made through the commercial banking system, they're subsidized by taxpayer perks (those perks are designed to boost economically productive lending).

One of the biggest banks in Massachusetts is State Street Bank. It's a pretty boring institution—except for its prop trading operations. Throughout the crisis, it made decent money, and generally didn't run into any trouble—except from its prop trading operations. State Street's gambling operations backfired big-time, forcing taxpayers to step in with billions of dollars in bailouts.

What did Brown learn from this episode? Why, that State Street deserves to keep gambling with taxpayer dollars! Prior to Brown's efforts, the Volcker Rule would have banned any proprietary trading at major banks. After Brown's efforts, banks can put up to 3 percent of their capital into a proprietary hedge fund. That dealt a tremendous blow to the substance of the reform. When banks sponsor proprietary hedge funds, they collect lots of money from outside investors. If those hedge funds go under, the bank's reputation is immediately on the line, and it faces a tremendous amount of pressure to bail out other investors in the hedge fund. If they don't stand behind the hedge fund, investors wonder why, and it can spark a run on the bank.

So even if only a small amount is initially invested in the fund, banks often end up paying out several times their original investment to cover losses (Bear Stearns put about $40 million into a hedge fund and had to pay $3.2 billion when it went under). There are some provisions in the reform bill limiting the degree to which big banks can bail out their hedge funds, but they will be extremely difficult to enforce.

In sum, Brown actively weakened U.S. financial stability and hit taxpayers with unnecessary fees, and did it all for the express benefit of a handful of special interests.

Not all votes come at the price of weaker reform. Sen. Maria Cantwell, D-Wash., threatened to vote against the bill if it was not strengthened, and secured stronger reforms as a result. Not even all Republicans insisted on a weaker bill. Sen. Susan Collins, R-Maine, refused to vote for the bill unless it was substantively strengthened. Collins insisted on imposing higher capital requirements on major banks—effectively reducing the degree to which banks can make bets with other peoples' money. It's not the most important section of the legislation, but it is a real reform.

Brown didn't do any of this. He simply created specific giveaways for special interests. If that's the Tea Party's plan for reforming Washington, then they're doing just fine. But if they want responsible public policy, maybe it's time to put down the assault rifles and start courting serious reformers.

The Fog of Reform: Dems Oversell While Tea Party Saves Billions For Hedge Funds

Richard Eskow — Wed, 30 Jun 2010 13:21:33 -0400

President Obama was right to call out John Boehner today for describing our economic catastrophe as an "ant" that didn't deserve a strong response. That "ant," as the President pointed out, "led to the loss of nearly eight million jobs" and "cost people their homes and their lives savings." But the President seriously oversold the Dodd-Frank bill in an otherwise stirring speech in Racine, WI when he said this:

"W)e’re on the verge of passing ... reform that will prevent a crisis like this from happening again ...Reform that will protect consumers against the unfair practices of credit card companies and mortgage lenders. Reform that ensures taxpayers are never again on the hook for Wall Street’s mistakes."

President Obama spoke eloquently about the millions of Americans who are still suffering economically, but these claims are simply not true. The consumer protections the President described in his comments are real and praiseworthy, and so are the bill's transparency provisions. But Dodd-Frank still leaves the entire system at risk of another crisis. It does not "protect our economy from the recklessness and irresponsibility of a few," nor will it ensure that "taxpayers are never again on the hook for Wall Street's mistakes."

What's more, events of the last couple days have left some of us who supported Dodd-Frank as a good, if incomplete first step feeling as if we've been played. While the bill as initially proposed didn't do nearly enough, it did provide some needed first steps: it created a (somewhat compromised) Volcker rule and it implemented a version of the Lincoln amendment to reign in derivatives. These provisions at least began the process of reigning in the Wall Street casino, and they seemed to open the door for further improvements. But dealmaking with Scott Brown and other Republicans (why not deal with progressives Cantwell and Feingold, who also said they won't vote for it?) have watered down these key provisions to near-meaninglessness.

While a fog of confusion remains, it appears that Goldman Sachs and Citigroup will now have up to twelve years to comply with the modified Volcker rule. That's twelve years of grave risk for the rest of us. According to my calculations, those two companies alone are 31% of the total derivatives market. As for Lincoln's amendment, Business Week reported its dilution in a piece entitled "Banks Dodge a Bullet ...." Economist Dean Baker called the revised amendment a "fig leaf," while an analyst offered the dry understatement that it "won't have a colossal impact."

A note to the President and the Democrats in the House and Senate: We all recognize that compromises are sometimes needed to pass legislation. And we understand that it's politically necessary to trumpet your victories. But you also need to send a signal to the country that you understand how urgently we need broader, systemic reform. And all reform-minded politicians need to draw clear lines between those who would have done more and those who obstructed them.

This bill has some good provisions, but we're still in economic danger. We still live in an economy where five banks control 97% of the derivatives market. Too Big To Fail banks still hold the rest of us hostage while profiting like blackmailers from their size. Another economic crisis could be coming even as millions of Americans remain mired in the last one. Our leaders need to let us know that they understand that. Otherwise, those of us who went head-to-head with others to defend your bill (as I did with Dylan Ratigan) will be left wondering if we did the right thing.

When Democrats oversell this bill they leave themselves open to the criticism that they don't understand what's happening out here on Main Street. That's the very criticism that empowered the Tea Partiers to put Scott Brown into office (along with big boosts from Wall Street). So what impact did these Massachusetts "populists" have on financial reform? Their candidate single-handedly won an exception to the Volcker rule that will allow banks to invest billions more of their of shareholders' money in risky hedge funds and private equity firms.

You say you want a resolution ... And Scott Brown - that tribune of the "New American Revolution" called the Tea Party - wasn't done. He was also able to protect our largest financial firms from a $19 billion tax to finance the resolution and winding down of failing large banks, distributing that cost instead among more bank, and indirectly to their customers and the taxpayer (in the form of accounting tricks with TARP funds and FDIC depositor insurance). So here's a message for those people with tea bags hanging from their hats: The hedge funds of America thank you for their billions.

Not that the message is likely to get back to them. As long as Democrats brag that this bill "protects us from future crises" they're missing an opportunity to explain how and why their opponents (and the Wall Street appeasers among them) left the job partially undone. The way out is to explain to the American people that this bill does some good things but still leaves our most urgent work unfinished, thanks to obstructionism on the right.

Consumer confidence plunged last month because Americans are fearful about their jobs and the overall economy. Why shouldn't they be afraid? They don't seem to have anyone they can trust to fix these problems. The "populists" in the Tea Party really work for Wall Street, and the Democrats - the party that should be drawing sharp distinctions - are pretending this bill solves everything.

The President made terrific comments about jobs, clean energy, and other critical economic issues today, and he was a powerful advocate for the constructive role government plays in areas like regulation. That was good to hear. But this is no time for Pollyanna-ish proclamations that this bill will fix Wall Street or prevent the next crisis. It won't. Pass it for its consumer protections and minor tweaks to slot machines in the Wall Street casino, but recognize its weaknesses and pledge to fix them. Our leaders need to send a clear signal to their supporters and the American people at large: We know we're still at risk, we know what we still need to do, and we won't rest or celebrate until the job is done.

Scaling Back Our Bloated Financial Sector

Zach Carter — Wed, 26 May 2010 16:38:31 -0400

It's been apparent for several weeks that the Wall Street reform bill will not cut down the largest U.S. banking behemoths to a safe and manageable size. But individual oversized banks are not the only problem Big Finance poses to the economy—the overall sector is much too large, and if we do not shrink it, we'll be dealing with difficult economic conditions for years to come.

Right before the banking system crashed, the financial sector accounted for an astonishing 40 percent of corporate profits. That share of the economy plunged as banks sought their bailouts, but by the end of 2009, finance was back, again accounting for almost 36 percent of corporate profits.

When the financial industry takes up that much of the economy, it becomes a big problem for two reasons. First, instead of serving as a catalyst for broader economic growth, finance is simply devouring other sectors of the economy. Like money, finance is not a goal in and of itself—it's just a way to support goods and services that make life better. At 40 percent of profits, finance is not supporting that activity, it's destroying it.

Second, for finance to take up 35 to 40 percent of the total profit pie, it has to be engaging in a lot of raw speculative gambling, rather than economically productive lending. That creates a tower of speculation that can easily topple with a single event—and the resulting mess can be very hard to clean up. As Nomi Prins has detailed, between 2002 and 2008, only about $1.4 trillion in subprime mortgages were issued, while about $14 trillion in securitized bets were derived from these mortgages. When the subprime market cratered, all that speculation made a big problem much bigger.

So in addition to cutting the biggest banks down to size, we also need to scale back the entire financial sector. There are a handful of provisions in Wall Street reform packages approved by the House and Senate that would help accomplish that goal. Unfortunately, the bank lobby, and in some cases, the Obama administration itself, is fighting those provisions. Here they are:

1. Capital and Leverage

Banks amplify their bets in the capital markets by using leverage—borrowing a lot of money. If you buy $10 million worth of stock, and it goes up 10 percent, you make a ten percent return-- $1 million. But if you borrow $490 million, put up $10 million of your own money, and put all of it into the same stock, a 10% gain in the stock price scores you $50 million—a 500% return (it would actually be a little less, as you'd have to pay interest on that $490 million loan, but you get the idea). But if the stock drops just 2 percent, you lose all of your own money, and find yourself $490 million in debt. You are ruined.

Rep. Jackie Speier, D-Calif., managed to squeeze an amendment capping bank leverage at 15-to-1 into the House reform bill, meaning that banks could not borrow more than $15 for ever $1 they put up. That's good-- less leverage means less overall financial activity. Sen. Susan Collins, R-Maine, managed to get a weaker, but related provision into the Senate bill, which would force megabanks to reduce their leverage.

Unfortunately, the Treasury Department and the Federal Reserve are fighting both amendments. Even worse, as Mike Konczal notes, the Treasury is also fighting hard against international agreements to limit bank leverage.

2. Derivatives spin-offs

Five big banks control over 96% of the derivatives market, which totals literally hundreds of trillions of dollars. One of the reasons this market is so big is that banks fund these operations with deposits. Since the government guarantees bank deposits against losses, this funding is cheaper than anything else the bank can get outside of the Federal Reserve, which also lends to all five of those banks. Sen. Blanche Lincoln, D-Ark., pushed a provision through the Senate which would bar any commercial bank that deals derivatives from receiving Fed loans. In practice, this would force the banks to move their derivatives dealing operations into a separately capitalized subsidiary.

The banks, Treasury and the Fed are all fighting this provision tooth-and-nail because it would significantly alter the way the derivatives business is funded. Instead of being able to rely on cheap government money, banks would have to finance their derivatives operations in the more expensive capital markets. When something gets more expensive, people do it less, so the Lincoln plan (authored by Sen. Maria Cantwell, D-Wash.) would trim back the derivatives casino.

3. Consumer Financial Protection Agency

One way banks eat up the broader economy is by simply stealing from consumers. Just about everyone has had a bad experience with a credit card, mortgage or overdraft rip-off. These are, first and foremost, bad for our pocketbooks. But what is bad for our pocketbooks is bad for other businesses—it means we have less to spend on goods and services. So by screwing consumers, banks are really sticking it to the broader economy.

The existing bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency simply have not enforced consumer protection rules over the past decade. Their primary goal is ensuring bank profitability, so if banks profit from consumer abuses, they don't really care. We can end this system of abuse by establishing a strong, independent Consumer Financial Protection Agency (CFPA) tasked only with looking out for consumers. The House language on the CFPA gives the agency more independence and broader authority to both write and enforce regulations than the Senate version, but it also exempts abusive auto dealers from the agency's jurisdiction, which the Senate version does not do.

So what else in the bill will cut back on our oversized finance system? Not much. There is a very weak version of the Volcker Rule, which bans banks from gambling with taxpayer money, but it will take years to implement and can easily be gutted by regulators. That leaves a handful of key provisions that should be focus of the reform fight next year:

1. A financial transactions tax.

Many of our current economic woes are tied to excess speculation in finance. By imposing a tiny tax on trades of stocks, bonds and derivatives, the government can discourage rank speculation while bringing in a lot of revenue for the federal coffers. A tax of just a few tenths of one percent will not seriously effect long-term investors. But for speculators who place big bets on the movement of stocks over the course of an hour, or for flash traders who buy and sell millions of shares in less than a second, this kind of tax actually would matter. Based on trading volumes from 1997, which are vastly lower than today's trading volumes, economist Dean Baker estimates that this tax could bring in $100 million a year in tax revenues, even if the overall trading volume fell by 25 percent.

2. Glass-Steagall

Banks don't just use taxpayer-guaranteed deposits to back their derivatives bets, they also fund all kinds of risky securities businesses with deposits. In the 1930s, Congress passed the Glass-Steagall Act, which barred banks that accept deposits and make loans from operating in the securities markets. By separating taxpayer guarantees from risky activity, the move made that risky activity less profitable, and by extension, less profuse.

3. Regulate Hedge Funds and Private Equity

The current bill doesn't really do anything to rein in these shadowy entities. They'll now have to register with the SEC . . . just like Bernie Madoff.

Showdown in Chicago

Richard Trumka — Fri, 23 Oct 2009 09:06:41 -0400

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 14:35:15 -0400

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 12:11:32 -0400

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 15:25:06 -0400

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.