Obscene! Read the whole of this article on how some male US speculators pulled in multi-billion-dollar takings from their activities in so-called hedge funds in 2007, and weep.
The top HF speculator was John Paulson, who took in $3.7 billion in personal income (after expenses) from the fund that he managed. That is more than the GDP of each of 60 nations and territories in 2005, as listed here by Nationmaster. Among those nations was Niger, population 14 million.
The second HF speculator, by 2007 income, was George Soros– $2.9 billion.
The author of the article, David Cho, explained that Paulson,
- amassed his winnings by “shorting” securities linked to subprime mortgages. In a short sale, the investor borrows securities — in this case, subprime mortgages that were widely held by banks, brokerages and other investors — and sells them to another buyer. Later, the investor must buy those securities back and return them to the original lender. As the subprime market collapsed, the value of the securities fell, and Paulson was able to pocket the difference. The lenders were stuck with the losses.
Several hedge fund managers, including Philip Falcone,… also profited from the mortgage crisis by betting that subprime debt securities would plunge in price. Falcone earned $1.7 billion last year. Others made fortunes by betting that the prices of commodities such as oil, sugar and corn would rise.
So basically, the speculative bets these men made helped fuel the massive current rash of foreclosures of the homes of low-income Americans and the even more devastating rise in world commodity prices.
Cho attributed many of the facts in his article to something called Alpha Magazine. I imagine that would be this article there. He explained that the explosion of income by HF managers to this degree is a phenomenon of just the past few years. He described how top donors within the US’s money-drenched political system had recently beaten back an attempt to have these HF manager incomes taxed just as other individuals’ incomes are, at a top rate in the US of 35%, rather than 15%, as they currently are.
He also wrote that Daniel Strachman, described as an HF “consultant”,
- was skeptical of raising taxes on hedge fund managers, saying they should be rewarded for taking huge risks. Most managers have their own money in their funds and suffer massive losses when their investments go bad.
“It’s clear somebody has to win and somebody has to lose,” he said. “It’s not pretty at all because people say, ‘Oh my God. Look how much money these guys are making while people are losing their homes and are complaining about the cost of eggs and sugar.’ But so what? We don’t live in a society that is pretty all the time. That’s why it’s capitalism.”
Capitalism, however, involves choices. These can be made by the relevant governments and citizenries in a responsible way, or in a callous and inhumane way. The way they are currently made within both the US and world financial systems quite clearly falls into the latter category. It is time for deep reform. (But we shouldn’t count on George Soros to fund the campaign for it, I think.)
Some claim that the US is a capitalist country subject only to economic determinism and economic Darwinism, however the US Constitution contains none of this. In fact, its preamble states:
We, the people of the United States, in order to form a more perfect Union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.
Nowhere does the Constitution state that anyone should be unduly rewarded for taking risks, or that it’s okay for people to lose their homes. It states: Promote the general welfare. That’s what the US government is supposed to do, among other things. If we are to live under economic jungle rules, why have a government?
‘hedge fund managers … should be rewarded for taking huge risks’
It’s a lot riskier to work in a mine than to invest in one. I wonder if Mr. Strachman feels that our military and first responders are adequately compensated for the risks that they take.
So basically, the speculative bets these men made helped fuel the massive current rash of foreclosures of the homes of low-income Americans and the even more devastating rise in world commodity prices.
This is a deeply confusing. Why would shorting subprime securities fuel homeowner default rates? No more than betting on the world series affects that outcome.
If anything the collapse in real estate (and the attendant drop in consumer spending should be bad for commodity prices. Similarly, speculators in corn and oil are a drop in the bucket of global demand; they no more “drive world prices” than control the weather.
Speculative buying in all US oil futures is known from the CFTC website to be 65 mm barrels, substantially less than one day of world demand.
In your US-oriented analysis, you’re forgetting that hedge funds like Soros are generally incorporated offshore (in Quantum’s case, curacao)…. most of these markets are london based and beyond the reach of US regulators. Paulson’s fund isn’t even open to US investors.
This is a deeply confusing.
I’d say that’s putting it mildly, Vadim.
I was under the impression that foreclosures are caused by the inability of the homeowners to repay their mortgages. I don’t think that the hedge fund speculation is any more responsible for institutions lending, or homeowners availing themselves of, mortgages that can’t be repaid than are, say, middle-aged white academics and journalists whose home equity was boosted as a result of the housing bubble. I would assume that, in some cases, those losing their homes to foreclosure today were also “speculators”, in that they over leveraged themselves in a booming real estate market assuming that they would be able to cash in as prices continued to rise.
I do think that making billions on such speculation is grotesque. Perhaps Moveon.org should consider returning the donations from Soros?
those losing their homes to foreclosure today were also “speculators”, in that they over leveraged themselves in a booming real estate market assuming that they would be able to cash in as prices continued to rise.
Good point. I bet some of them were even “male”. And yes, for years these male, white speculators reaped billions while home prices skyrocketed beyond the reach of the middle class. Now they’re lobbying for some kind of ‘bailout’ (from what?) and painting themselves as victims of the markets. Very confusing. Next we’ll be asking for a federal bailout of Amaranth (commodity speculators that *lost* 6 billion in 2006)
Nakia Gladden