When the gods dance...

Tuesday, May 28, 2013

What Our Hedges Hide

Too Much

George Packer, the New Yorker writer, had some insightful observations to share last week on our “new aristocrats,” the celebrities who so dominate our cultural landscape, “like giant monuments” to aspiration and overreach.
These monuments, Packer notes, “loom larger” when inequality soars. Indeed, we seem to have celebrity everything today, from celebrity bankers to celebrity chefs, a “superficial diversity” that “dangles before us the myth that in America, anything is possible — even as the American dream quietly dies.”
Celebs may rank as our society’s most visible deep pockets. But they don’t make our society’s highest incomes. Not even close. Oprah, for instance, took home $165 million last year. Twenty-five of America’s least visible deep pockets — our hedge fund managers — grabbed at least $200 million each.
We all know what Oprah does. But what do hedge fund managers actually do? In this week’s Too Much, we peer inside hedge fund-landia to find out.

The National Association of Manufacturers, the corporate lobby group, has a new chair. NAM’s choice: the latest hero in executive circles, Doug Oberhelman, the CEO of Caterpillar. Oberhelman's tough-guy labor tactics — he shut down one plant when workers refused to swallow a 50 percent pay cut — have sent Caterpillar profits soaring. Oberhelman’s own pay has jumped to $22 million. Last year, a Caterpillar worker in Illinois who hadn’t received a wage hike in 10 years asked Oberhelman when he could expect one. The CEO told him that all paychecks at Caterpillar have to stay globally competitive. Oberhelman’s chief CEO rival, Kunio Noji of Japan’s Komatsu, took home $2.1 million in 2012 . . .
The latest GatsbyAustralian filmmaker Baz Luhrmann has a new cinematic take out on F. Scott Fitzgerald’s 1925 classic tale of greed and grasping, The Great Gatsby. But Luhrmann has come under fire for populating the film’s soundtrack with contemporary American pop, not period jazz. The irony of that choice? The jazz musicians of Fitzgerald’s era, notes critic Sam Lefebvre, never genuflected before the “irresponsibility of 1920s wealth.” The “status-obsessed ambitions” of today’s pop stars, says Lefebvre's review, amount to a “modern manifestation of exactly what Fitzgerald meant to criticize.”
To see really serious genuflection before great wealth last week, you didn’t have to go see The Great Gatsby. You just had to tune in to Tuesday’s Senate hearing on corporate taxes. The hearing’s star witness: Apple CEO Tim Cook, America’s highest compensated CEO the last two years. The hearing panel’s chair, Carl Levin of Michigan, had hoped that a grilling of Cook would expose the enormity of corporate tax avoidance. Uncle Sam would collect $42 billion more a year, nearly half the “sequester” budget cuts, if Apple and other big firms paid full taxes on the profits they’re parking overseas. But Levin’s fellow senators, instead of grilling Apple's Cook, gushed over him. Raved Missouri Democrat Claire McCaskill: “I love Apple. I harassed my husband until he converted to a MacBook.” Added Republican Rand Paul from Kentucky: “I’m offended by the spectacle of dragging in Apple executives.”

Quote of the Week
“A grossly unequal society is disgusting and disheartening.”
Editorial, Unequal distribution of wealth, Charleston Gazette, May 21, 2013
harles JohnsonIf anyone ought to be feeling generous these days, that ought to be 80-year-old billionaire Charles Johnson. The ballclub he owns, the San Francisco Giants, has won two World Series in the last three years, and his club’s value has jumped eight-fold, to $786 million, since 1993. But Johnson isn’t sharing anything. Last fall he contributed more to the campaign to kill a new state tax on millionaires than any other deep pocket in California. Now he's squeezing his ballpark concession staff. The 800 workers make $11,000 a year and haven’t seen a raise since 2009. They may soon strike. Johnson, for his part, continues to mint money. Earlier this month, he rented out his ballpark — for $500,000 — to a hedge fund manager who spent an afternoon running the bases with his buddies.

Copper Beach
The world's hedge fund capital. That’s what they call Greenwich, Connecticut. Now they can call Greenwich the hometown of America’s most expensive piece of residential real estate. Five U.S. properties have sold for at least $85 million since 2011. The current asking price for this 50-acre “Copper Beach” estate in Greenwich: $190 million. Built in 1896, the estate’s manse boasts 12 bedrooms.

Web Gem
Why Housing Matters/ Housing currently constitutes America’s largest form of privately held wealth. This United for a Fair Economy infographic probes how housing as a commodity — traded in global markets the wealthy control — intersects with housing as a globally recognized human right.
The 'Performance Pay' Charade: Let's End It
How do corporations justify the millions they stuffing into CEO pockets? We’re just paying for performance, the standard refrain goes. Absolute nonsense, counters Michael Dorff of Southwestern Law School, the author of the upcoming University of California Press book, Indispensable and Other Myths: The True Story of CEO Pay. Dorff has a simple fix for escalating CEO compensation: abolish “performance pay.” At best, he told Dow Jones Newswires last week, stock options and other performance-pay incentives have CEOs thinking more about their own personal rewards than long-term enterprise sustainability. At their worst, “pay for performance” deals encourage criminal behavior.

Take Action
on Inequality
Tell Apple CEO Tim Cook it’s time Apple stopped dodging taxes on the billions in profits the company has parked in offshore tax havens.
inequality by the numbers
Top ten incomes

Stat of the Week
The typical U.S. CEO pulled in $9.7 million last year, the Associated Press reported last week, a 6.5 percent hike over the 2011 chief exec median. The typical U.S. worker last year took about $39,900, a 1.6 percent increase over 2011.

How Many Rotting Apples Do Hedges Hide?
High-profile prosecutions only hint at the crime and ethical misbehavior rampant in America's most rewarding high-finance suites.
They’re hunkering down at SAC Capital, the hedge fund empire billionaire Steven Cohen has spent over two decades building. Federal prosecutors have been picking off SAC’s current and former second bananas one by one, plea bargaining for information that brings them ever closer to Cohen.
This past March SAC coughed up $616 million, without admitting guilt, to settle a federal civil suit charging the hedge fund with insider trading. A defiant Cohen then went out and plopped down $155 million for a Picasso and $60 million more for a new Hamptons manse, just to show how little he’d miss the $616 million.
Now the feds are chasing Cohen on criminal charges, and SAC has announced the hedge fund will no longer cooperate — on an “unconditional” basis — with government requests for information.
The information already out in public has considerably dimmed Cohen’s “financial genius” aura. The astounding 30 percent annual returns his SAC has been averaging, a vivid Vanity Fair chronicle details this month, rest on a gusher of insider tips that SAC spends hundreds of millions to keep flowing.
Whether prosecutors can prove all this, in a court of law, remains to be seen. But the hedge fund industry’s recurring response to scandal — “every industry has a few rotten apples” — is wearing thin. The hedge fund universe, one Harvard Business Review commentary observes, has become a “crimogenic” environment that encourages those enmeshed in it “to ignore legal and ethical rules.”
We’re no longer “talking simply about the occasional corrupt individual,” adds Preet Bharara, the hard-charging federal prosecutor going after Steven Cohen. We’re “talking about something verging on a corrupt business model.”
That’s certainly the view of Les Leopold, the veteran labor educator who has made demystifying America’s financial order his own personal mission ever since the 2008 Great Recession meltdown threw millions of Americans out of work and wiped out the life savings of millions more.
New Les Leopold bookLeopold’s 2009 book, The Looting of America, zeroed in on America’s big banks and how their chase after fortune crashed an entire economy. His new book, How to Make a Million Dollars an Hour: Why Hedge Funds Get Away with Siphoning Off America's Wealth, refines that story.
Hedge funds, argues Leopold, have played a much larger role in our ongoing economic woes than analysts have generally acknowledged. That doesn’t surprise Leopold — and shouldn’t surprise us. Hedge funds, after all, operate in the shadows, behind layers of secrecy that outsiders rarely get to penetrate.
In fact, most Americans would have a hard time even defining “hedge fund.” Again, no surprise here either. Hedge funds have only been around, in a serious way, the last 30 years. They started gaining traction in the 1980s as wealth started concentrating at America’s economic summit.
Financial industry insiders saw a fabulous new market in this concentration. They could make millions — billions — managing all the cash the titans of America’s new Gilded Age had sloshing in their pockets. All they had to do: promise — and deliver — high investment returns to wealthy investors.
Hedge funds made the perfect vehicle. Like mutual funds, hedge funds take in money from investors and charge a fee for their investing know-how. Unlike mutual funds, hedge funds face precious little federal regulation, since they don’t service the general public, only deep pockets with at least $1 million to invest.
With regulators seldom looking over their shoulders, hedge fund managers can do virtually anything they please with the money deep pockets hand them. They can buy stocks, just like mutual funds, and hope they appreciate in value. They can buy up companies, like private equity firms, and hope to make a killing on a resale. And they can lay bets — on anything.
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Leopold has a useful metaphor for exposing the dangers in all this wagering. Imagine how you would feel, he asks, if total strangers could buy insurance on your home — and collect a windfall if your home burned down. Total strangers with a motive for torching your house? What could be more terrifying?
Well, total strangers can’t buy insurance on our homes. Insurance industry regulations prevent that. But hedge funds can bet on assets they don’t own. They can wade into exotic speculative markets and bet against a company’s share price or a nation’s currency or a mortgage-backed security.
The rewards if the bets pan out? Amazingly huge. In 2010, Leopold calculates, the hedge fund industry’s top ten earners averaged $842,788 per hour.
Rewards this outrageous give power suits at hedge funds an irresistible incentive to behave outrageously. And they do, as Leopold makes plain.
These suits connive to create investment securities certain to fail and then lay bets anticipating the failure. They plant rumors to rig markets. They exploit high-tech wizardry to buy and dump stocks “in nanoseconds, fleecing slower buyers and sellers,” and, in the process, “pocketing a hidden sales tax on our mutual funds, pension funds, and 401(k)s.”
Hedge funds, in short, operate as a “drain on our economy and society.” We need to plug the drain. Imposing a tiny tax on every financial transaction would help do the plugging. Such a levy, says Leopold, could put about $150 billion a year of “downward pressure” on the “inflated incomes” of our financial elites.
The European Union is actually making some promising moves to taxing financial transactions. In Washington, meanwhile, neither the White House nor Congress has so far displayed any interest in following suit.
Our financial apples are still rotting.

New Wisdom
on Wealth
Dorian Warren, McJobs rebellion under way as corporate profits, CEO pay soar, Portland Press Herald, May 21, 2013. Wal-Mart salespeople average $8.81 per hour. Total fortune of the six Wal-Mart heirs: about $100 billion, more than the total wealth of America's least well-off 41 percent.
Rabbi Bruce Warshal, On the road to plutocracy, Jewish Journal, May 21, 2013. We have elections. But the very rich increasingly rule our lives.
Danny Dorling, The unsustainable wealth of the £1 million household, Guardian, May 22, 2013. The massive inequality that nurtures our troubles will not last.
Jordan Weissmann, America’s Top Colleges Have a Rich-Kid Problem, Atlantic, May 24, 2013. At America’s elite colleges, 70 percent of students come from the wealthiest quarter of U.S. families, just 14 percent from the poorest half. But 39 percent of America’s high-achieving students hail from the poorest 50 percent.

The Rich Don’t Always Win: The Forgotten Triumph over Plutocracy that Created the American Middle Class cover
Learn more about this new history of America's first triumph over plutocracy.
new and notable
Shielding the Rich, Endangering the Poor
How Tax Havens Plunder the Poor, ActionAid UK, May 23, 2013. 20 pp.
The Cayman Islands, the world’s most famous tax haven, have a population of 150,000 — but only if you count the Caymans’ 92,000 registered corporations as “real” people. These 92,000 corporations control well over $1 trillion in assets.
“This is a time bomb,” notes Columbia University economist Jeffrey Sachs in the foreword to this welcome new study, “not a financial system.”
Tax havens, Sachs adds, are “eating away at the roots of the world economy, making it increasingly easier for wealthy individuals, corrupt businesses, money launderers, political parties, and, of course, the ever-more-powerful banks, hedge funds, and multinational companies to protect their profits from taxation.”
The biggest victims? Who else? The world’s least wealthy. Recovering the dollars tax havens cost poor nations would raise enough revenue, says ActionAid UK, “to reduce child deaths in the developing world by 230 children every day.”

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