What work do we value most?
In 2009, the worst economic year for working people since the Great Depression, the top 25 hedge fund managers walked off with an average of $1 billion each. With the money those 25 people "earned," we could have hired 658,000 entry level teachers. (They make about $38,000 a year, including benefits.) Those educators could have brought along over 13 million young people, assuming a class size of 20. That's some value.
Apparently the 25 hedge managers did something that is even more valued in our society. But how valuable was it, really? To assess that, we need to answer a few basic questions:
1. What do hedge managers do? They run funds into which very rich people put money to make even more money. Hedge fund managers move the money around in very risky ways to get the most enormous yields possible. (Wealthy investors believe they are entitled to double digit and even triple digit returns.)
Because hedge funds are considered playthings for the rich, who presumably are fully aware of all the risks, they are exempt from most financial regulations. (We'll soon see if the financial reform bill now moving through the Senate changes this in any substantial way.)
The wealthy will have placed an estimated $2 trillion into hedge funds by the end of this year. (That's about $6,500 for every man, woman and child in the U.S.)
2. Where does all that hedge fund money come from? It's mostly excess cash the super-rich have in hand now that their tax rates have dramatically declined. In the 1970s the marginal rate on those with incomes above $3 million (in today's dollars) was 70 percent. Today, the effective rate on the 400 richest Americans is 16 percent, according to the most recent IRS data.
The wonderful thing about putting your money in a hedge fund (or managing one) is that the income you get from it is not taxed as income (say, officially at the rate of 35 percent). Instead, it is treated as a business investment, something that's good for the economy and that we need to encourage through a low tax -- a "capital gain." The tax rate on capital gains is 15 percent. This is one reason that Warren Buffett can say that he pays a smaller percentage in taxes than his secretary.
3. How do hedge funds make money? Some hedge fund managers use computerized modeling to decide where to invest or to make investments automatically. Other managers claim they just make good judgment calls. They also make enormous bets using lots of leverage and deploy an arsenal of derivatives. It's a dicey business, but it's not supposed to put the larger system at risk... until it does. In the late 1990s, the hedge fund known as Long Term Capital Management, run by the brightest bulbs in the financial universe (including a couple of Nobel laureates), found itself with over $100 billion in assets but only $4 billion in capital. When that upside down pyramid began to crumble, the effect was systemic. So systemic that the Federal Reserve, fearing a major meltdown of the financial markets, forced Wall Street banks and investment houses to bail out the fund's investors. Some economists argue that risky gambling by hedge funds did not cause the current crisis. But no one has conducted an impartial investigation into that question.
The $1 billion each those 25 hedge fund managers netted (for themselves) was impressive -- but doing it in the year 2009 was also slap in the face of struggling Americans. That's because hedge funds would have earned little or no money at all in 2009 had the government not bailed out the financial sector with trillions in loans, asset guarantees and other forms of financial assistance. It was, in effect, a generous gift from we the taxpayers. Much of that money was "earned" by betting that the government would not let the financial sector collapse. Smart bet.
In principle hedge funds would do little harm if they were not implicitly backstopped by the taxpayer in this way. Here's how one sage financial expert put it to me recently:
On the other hand, I want to have a protected and closely regulated portion of the financial sector for those who do not want to take excessive risks. And any institution that bets with "house money"--that is, that has access to the Fed in the case of a liquidity problem and to the Treasury in the case of insolvency--must be constrained. That is the direction that true reform ought to take.
4. Do hedge funds create real value that is essential for our economy and our society? Here's a test: Imagine what would happen if they disappeared entirely. People working at the 8,000 or so hedge funds -- a relatively small number of people -- would lose their jobs. But it's unlikely that the national or world economy would suffer at all. The wealthy would simply move their money to other investments. They might even decide to make longer term investments that would be used to produce real goods and services.
But wait, aren't these piles of money a valuable source of funds for investment in the real economy? Don't hedge funds make our markets work more efficiently? By betting against overvalued currencies and bogus balance sheets of toxic-chocked banks, don't hedge funds police the bad guys? Aren't they the essential glue for rebuilding America?
If any of those good things happen, they're an accidental byproduct. The real job of hedge funds is to allow very rich people to make more money as quickly as possible, preferably without tying up the cash for too long. Use hedge fund money for a leveraged buyout that can be flipped quickly for big profits? Sure. Use it to speculate on the value of currency or to make a quick dash in and out of a credit default swap? You betcha.
If we step back and look at the big game, we can see that hedge funds are hard at work skimming profits from the financial sector, which in turn is living off the largess of the American taxpayer. It's all part of the great financialization of the U.S. economy that began in earnest when the financial sector was deregulated in the late 1970s. Over the years, financial sector profits have risen to nearly 40 percent of all corporate profits. And sadly, it's not because financial firms helped our economy grow. It's because they figured out how to run a very profitable casino for the wealthy. And then hedge funds came along and figured out how to skim the skim from those casinos.
5. So how can 25 hedge fund managers be "worth" $658,000 new teachers? They aren't. And I bet the leading hedge managers themselves would admit it.
But our economic system isn't rewarding real value. While the hedge fund 25 are living large, teachers everywhere are getting the axe. Why the layoffs? Because state and local governments aren't collecting enough taxes -- not since Wall Street investors crashed the economy.
In our New Jersey town, we are laying off 85 teachers. Instead we ought to be hiring 85 more to reduce class size and improve support programs for those students who desperately need them. It's obscene that we're shoveling money to the super-rich even as we force teachers to join the ranks of the unemployed. Already 29 million Americans are without work or forced to work only part-time.
How to tame these runaway paydays? Just institute a financial transaction tax or a windfall profits tax. The fix is technically simple but politically complex. It's going to take a lot of political will -- over a long period of time -- to reorder our most basic economic values.
In the meantime, try explaining to your kids why school programs are being cut while 25 shrewd gamblers are living like Pharaohs.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009.
Follow Les Leopold on Twitter: www.twitter.com/les_leopold
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In a related articule, CNBC is discussing the 58% to 70% taxes that anyone over $250K could expect. Is this right???. A doctor makes this type of money, are we to tax a doctor who has surely put way more time into his education and training then the average Joe. This puts the doctor at $125K before he even startes his taxes. Truly not fair, in the land of the free and brave. We as a nation are becoming a welfare state, that is one thing no one can argue. Shame, it was a great country.
Why Are 25 Hedge Fund Managers Worth 658,000 Teachers? They're not. At least, not in this world, but maybe in their own minds.
After salivating continuously over wealth and all of its trappings our culture has barely enough intellectual spittle left to turn on a microwave oven.
great article. I agree, 99% tax on pure money profits. better still, outlaw all derivatives, as the world has done before, and force investment back to main street. at the very least outlaw CDS insurance without reserves fraud, and prosecute the banksters for fraud. we are living through the greatest heights in human history. We must also outlaw all political contributions for the bribery they are, till then the USA is a plutocracy for sale to the highest bidders. get all candidates to sign a legally binding contract to do that.
The Hedge Fund managers should be in the %90 tax bracket. I wonder how much they don't pay in taxes, passing it off to the middle class. Maybe we should take out insurance policies on them, as the economy is directly effected by their decisions...a la WalMart.
I agree that they should pay income taxes on this income. You should be aware that the top 10% of taxpayers foot nearly 70% of the Federal bill while 53% pay none. Taxing at such astronomic rates will push money offshore, into tax shelters and will punish the productive and talented.
For the same reason that people like Paris Hilton and Kim Kardashian have "careers". We have a culture and an economy that rewards wealth rather than work. Before people start jumping on me for being a "socialist" or "communist", I'm not saying that a brain surgeon shouldn't be paid the same as a burger flipper. But we should try to create a society where even the burger flipper can afford food, shelter, and health care. That's not so radical, is it?
Obviously, unlike President Obama, you don't appreciate these "savvy businessmen." As long as the American people continue to believe that President Obama is on their side, instead of on the side of Wall Street as he has repeatedly shown, the looting of the American people will continue. Obama lovers are as blind, used and abused, as their tea-bagging cousins. Sad.
great post!
Let me see if I get this, you losers are trying to criticize this people for making loads of money from the free government give away ( tarp ) and not put any responsibility on the government and its lousy sold out regulators. Why do you know anyone that rejects free gov. money Who do we elect to protect our tax dollars ? that's who we should make accountable for their actions.
You don't get this.
" And you do....."
The mistaken assumption you are making is that the source of the money was TARP. Actually, the reasons these people have so much excess money to play with are financial deregulation and tax cuts for the wealthy. That's why we have such a destructive system.
As a teacher, I have to wonder that if you had received a better education, your posts would be more logical and easier to read.
we have a society structured in such a way that it's a struggle for most people to have the basics, shelter, food, clothing, utilities, etc... it's all about what one can get from the others... why not a society structured around the well being of humanity, rather than the power of a few over the many?
Very well said Mr. Leopold-- I will educate myself by investing in your book.
Re:"Why Are 25 Hedge Fund Managers Worth 658,000 Teachers?" You come from a culture that glorifies the phrase 'Those who can't do, teach', and you have to ask this question? Change the culture, and the laws will go along with it.
Thanks again, Les. Capitalism is immoral is my primary take. Secondarily, Republicans are always wrong. Every financial system deregulation from the time of Ronnie Reagan to the present has been a disaster.
Make your plans for Venezuela, dude. You'll love it there.
Really? I country that has lost its middle class would seemingly be more to your taste.
Theft is immoral. Whatever the "--ism" label, commun--; imperi--; or captial--, it is the corruption of any system so that people steal from the productive work of other's efforts which is immoral. Hedge funds, ENRON and Bernie Madoff are Ponzi schemes which occasionally prey on the weakness born of greed. Which is why it is so Orwellian the way the word "economy" is twisted and slogans which include "hard work" are true Jedi mind tricks to dupe LF people.
Who are these hedge fund managers stealing from? They are private funds, for wealthy people and institutions. Any person who is eligible to invest in one has to have the permission of the manager and can sit down with that manager and ask them anything they want with regards to their investment strategy. If the manager doesn't disclose that information or doesn't give enough information for your liking, you don't have to invest money there. Every investor gets reimbursed for their expenses and management fees and has to clear a hurdle rate of return before that manager gets anything.
Actually, if we are not willing to pay for good teachers, then who will train the next generation of hedge fund managers, who will then go on to bankrupt our economy and get bailed out by taxpayers i.e. teachers.
The next generation of hedge fund managers will be trained by the same people that trained this one: Ivy league business school professors, not public school teachers.
And you get into an ivy league school how?
That's the whole point. The rich in America are desperately trying to recreate a monarchy here. It's no coincidence that teachers are getting fired and Pell grants were unobtainable the last decade. See, the rich know that their kids are very unlikely to be as smart or lucky as they were. So they stack the deck; they make sure that their kids have no competition from poor geniuses by keeping wages below poverty level, pushing fattening, non-nutritious foods, fostering a self perpetuating subsistence-level welfare state, and most especially, making sure the poor never get educated. If they could, they'd make it illegal to teach anyone else's children to read!
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