Hedge Fund StuporHeroes

Frank Partnoy at the Daily Beast has written an encomium( meaning lavish  praise of a person or thing) to the Five Hedge Funders that each a)had to appear before Congress this past week and b)had to bear the burden of earning at least $1billion this past year  for which they paid capital gains taxes at most while the plebes (you and I) got stuck for the the higher income tax rates.

But let Frank’s full-some praise take full form:

“No one has been more successful in recent years than fifty-two-year-old John Paulson, president of Paulson & Company. He testified that his funds have made money in fourteen of the previous fifteen years, including this year – when many markets have been sliced in half. His Credit Opportunities Fund was up nearly six hundred percent in 2007. Paulson now manages $36 billion, more than the massive Fidelity Equity-Income Fund. And he does all of this with just seventy employees. Last year, Paulson personally made a reported $3.7 billion. It is almost impossible to imagine that much money. Ten million dollars a day? Ten times more than the annual income of Tom Hanks and Oprah Winfrey – combined?

The other four men didn€™t do much worse. In just one week, Philip Falcone of Harbinger Capital Partners, Kenneth C. Griffin of Citadel, James Simons of Renaissance Technologies, and George Soros of Soros Fund Management made as much as the total salaries of all 538 members of the House of Representatives. For the entire year.”

Frank goes on to describe what amounts to his SuperHeroes of Finance. By the way,at a minimum of  $1billion per year these  Hedge Funders commanded at least 25,000 time the US Average wage of just over $40,000 per year in 2007. If we assume 2-times factor for each standard deviation in improved decision-making, this means that  these hedge funders should be 12500 times better in making decisions than the average US wage earner, Mr Plebe. So indeed these guys are SuperHeroes because they are paid as if they are infallible in their financial decision-making(these heroes are 12500 times less likely to make a wrong financial decision then Mr. Plebe and his ilk).

Unfortunately, in this regard, Frank has a slight problem. John Paulson and has made money in only 14 of the last 15 years. Mr. Paulson must have delegated the investment decisions for his funds that one year to some Mr. Plebe. Otherwise he has an infallible financial record.  And Frank goes onto describe some of the infallible things these Financial Superheroes have done for the US economy:
“The hearings sought to praise these men, not to bury them, for the valuable role their funds have played in the markets. They have reduced risks and stabilized prices by buying low and selling high. They have been an early warning signal by uncovering bad news. They have generated value for investors by pressuring entrenched managers to focus more on shareholders. In a recent Journal of Finance study I co-authored with professors from Columbia and Duke business schools and Vanderbilt law school, we found that hedge fund activists generated large positive returns to investors for precisely these reasons.”

In effect, these Financial Superheroes are gamers. They know and take advantage of the growing regulatory weaknesses in the increasingly secretive International Financial Markets and Systems for huge gains. Don’t be stupid – they don’t warn the appropriate authorities that the Financial Markets are going to derail; but rather create schemes to make sure money from the ensuing slaughter.  ….  And then, after the fact, they may deign to pass along “a warning”.

Lets be absolutely clear – these Financial StuporHeroes are nothing more than freeloaders and raiders of the Commons.  And of course their $billion dollar pay packets can be pointed to by the Boards of Directors at say Country Wide Financial as the reason that they had to pay departing and tainted CEO Anthony Mozilo $110million in severance pay. And of course there is a pecking order of executive compensation at only $10’s if not $100’s of millions that is completely justified in the light of our Financial StuporHeroes annual pay packets – collaborative and team decisions be damned.

So all praise for our Financial Hedge Fund StuporHeroes, they made  $billions while billions of others have to suffer  their gaming of the Financial System which remains locked and uncontrollable  at the brink  of a horrific economic and social precipice. But remember these Financial StuporHeroes did not use monstrous leverage and suspect derivatives to achieve these laudable ends – or so we are told.