Monday, March 26, 2012
"Hedge funds may be engaged in the biggest economic rip off of all – extracting billions in exchange for creating little or no value to society."
This obscene distribution of income is what we get for failing to rein in Wall Street.
By Les Leopold
Why is America’s distribution of income so colossally obscene? You have only to look at Forbes most recent listing of the top 40 hedge fund moguls – men who, like Pharaohs, sit on top of our income pyramid. Together their personal income from hedge fund hustling was $12.8 billion in 2011.
The top hedge fund guru, Raymond Dalio, the founder of Bridgewater Associates, hauled in $3 billion, which comes to a whopping $1,442,308 an HOUR, (assuming he worked 40 hours a week for 52 weeks.)
It would take the typical U.S. family 29.2 YEARS to earn as much as Mr. Dalio earned in one HOUR.
How much is $3 billion per year?
It's hard to wrap one's head around a number as large as a billion. Here's some context...
That’s as much as 60,673 typical U.S. families earn: Just think about that for a moment. One person earns as much as sixty thousand hard working middle class families.
That’s enough to hire 85,911 entry level teachers: While we’re laying off teachers right and left to close budgets that were destroyed by the Wall Street crash, Wall Street’s top hedge fund manager earns as much in one year as tens of thousands of entry level teachers who on average earn $34,920 a year. That what we get for failing to rein in Wall Street.
That’s enough to hire 17,143 pediatricians: How is it possible for money managers to be as “valuable” as thousands of doctors who protect the heath of our children and earn on average $175,000 a year?
That’s enough to wipe out the student loan debts for 120,000 graduates. The average loan burden for graduating students is now $25,000. One year of income from Mr. Dalio could wipe-out the entire average student debt of 120,000 graduates.
That’s enough to wipe out the negative equity of 46,153 average homeowners: Today there are approximately, 11.1 million homeowners who owe more on their mortgages than the home is worth. The average negative equity is $65,000. The top hedge fund guru’s yearly income would cover the negative equity of 46,153 of those homes. And the irony is that Wall Street crash is directly responsible for the creation of the housing bubble and the crash of home value.
That’s enough to cover the per person average health care costs of 397,984 Americans. America has the most expensive health care system in the world at a per capita cost of $7,538. Yet one hedge fund manager makes enough to cover the health care costs of nearly four hundred thousand Americans.How can that be?
That’s more than the Gross Domestic Product of the 5 poorest African nations combined: The following countries have a combined GDP of less than $3 billion as of 2010; Liberia, Seychelles, Guinea-Bissau, Comoros, Sao Tome and Principe. Together these five nations have a population of 6.3 million. One American equals 6.3 million Africans?
That’s enough to feed 62 million hungry school children for a year: Our obscene distribution of income becomes even more obscene when compared to world hunger. What a top hedge fund manager makes in one year could feed 61.9 million school children from all over the world for one year. What he makes in one HOUR is enough to provide a nutritious meal to 29,748 hungry kids every day for one YEAR.
So what’s a Hedge Fund?
No, it’s not a wholesale gardening business. Hedge funds are exclusive investment funds for the very wealthy and for large institutional investors. It’s for people who believe that they are entitled to earn a much higher return than the rest of us. Hedge fund managers usually earn a 2 percent fee each year on all the money that is invested plus 20 percent of the profits.
How do they earn so much and is it justified?
It’s hard to figure out what hedge funds actually do to “earn” their riches. It’s even harder to justify it. Their specific investing strategies and tactics are closely held secrets. The financial press tells us, however, that these are the best and the brightest investors in the known universe. They are geniuses, we are told, and we should admire their prowess. But more than a few hedge funds also have been implicated in a slew of questionable activities:
Leading up to the crash, government investigations now reveal that hedge funds partnered with large banks to create mortgage-backed securities that were purposely designed to fail so that they could bet against them and win big. One such guru hauled in a billion dollars through one rigged bet.
Hedge funds have been implicated in many insider trader scams. Raj Rajaratnam, the former head of the multi-billion dollar Galleon hedge fund was convicted for amassing more than $70 million of ill-gotten gains. He now is serving a 12 year sentence. More than 50 other hedge fund traders have pleaded guilty.
Some hedge funds engage in high frequency trading where they use high speed computers to get in front of trades made by the rest of us. It is estimated that they extract from $8 to $20 billion per year from every-day stock market investors through this questionable process.
Hedge funds sometime engage in illegal rumor mongering to manipulate prices of stocks…..for fun and profit.
Hedge funds often trade on information gleaned from “political intelligence” analysts -- people paid to hang around Congress and pick up information about upcoming legislation. The Senate passed a bill called the “STOCK ACT” that, among other things, would have forced them to register as lobbyists, but industry lobbying killed the provision in the House version.
Hedge funds are the institution of choice for creating Ponzi schemes. Think Madoff.
Do they at least pay their fair share of taxes?
No. Hedge funds take advantage of the “carried interest” loophole which allows much of their income to be taxed at the 15 percent rate instead of the top rate of 35 percent. Each time Congress tries to close this outrageous loophole, hedge fund money and lobbying makes sure the bills fade away.
Are they worth their billions?
There’s supposed to be a connection between what a person earns and what that person contributes to the economy. Free-market theologians believe that the markets always determine true value – so if you earn a billion dollars, by definition, you must be providing a billion dollars worth of value. But markets are not always the correct indicators of value. When companies have monopolies, for example, they extract extra money from the economy without producing additional value. Economists call that a “rent.” We call it a rip off.
Hedge funds may be engaged in the biggest economic rip off of all – extracting billions in exchange for creating little or no value to society. In some instances – as in the case of creating rigged bets that helped crash our economy – they create negative value. Perhaps the best way to view hedge funds in general is that they collect hidden taxes from the rest of society through their financial machinations. Their profit is our loss.
What do we do about it?
There’s only one real solution: A financial transaction tax on all stock, bond and derivative trades. Such a financial sales tax would extract about $150 billion a year from Wall Street. Overstuffed hedge fund elites would earn much less.
No one deserves to make $1,442,308 an HOUR. But every child deserves decent health care, a good education and enough food to eat.