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How Speculation for Its Own Sake Pays Billions

The absurdity of the tsunami of money crammed into speculators’ bank accounts is illustrated in the fact that the 25 highest-paid hedge-fund managers vacuumed up a collective $11.6 billion in 2014 — and that was considered to be a bad year for them by the business press. Stratospheric though that total is, it is barely more than half of what the top 25 took in a year earlier.

All together now: Awwww. Yes, somehow these speculators will have to get by on a paltry average of $467 million.

Institutional Investor’s Alpha magazine — one can hear their editors’ teeth gnashing at their heroes’ bitter fate — lamented that 2014 was the worst year since the 2008 stock meltdown for hedge-fund managers in announcing its “Rich List.”

Nonetheless, some observers might believe that these moguls earned somebody serious money to collect such enormous paychecks. But that wasn’t necessarily the case. For the sixth consecutive year, hedge funds fell short of the average stock-market performance, returning a composite average of three percent. Perhaps the 25 hedge-fund managers who hauled in the most money for themselves were better? Not really. Alpha reports that the hedge funds of at least 12 of the individuals on its top 25 list posted gains below the 2014 average.

The S&P 500 Index, the broadest measure of U.S. stock markets, gained 11.4 percent in 2014 and the benchmark Dow Jones Industrial Average gained 7.5 percent. So somebody throwing darts, or parking their money in a passive fund that tracks a major index, would have done as well or better in many cases. Despite their subpar performances, hedge-fund managers continue to receive an annual fee of two percent of the value of the total assets under management and 20 percent of any profits. The fee gets paid even when the fund loses money.

So it’s heads, Wall Street wins and tails, Wall Street wins. And hedge funders pay less in taxes. Much of their income is classified as capital gains under U.S. tax law, and the tax rate on capital gains are much less than on regular income.

Imposing austerity on others is a job never finished

What is that hedge-fund managers do to “earn” such enormous sums of money? Let us take a look. The top person on the 2014 list is Kenneth Griffin of Citadel Capital, who hauled in $1.3 billion for the year. Citadel makes lots of money through computerized high-speed trading — buying and selling securities in microseconds to take advantage of momentary price changes. Apparently allowing computers to do the work leaves Mr. Griffin with time to pursue his hobby of widening inequality still more.

Not content with the fact that his 2014 earnings are equal to the combined median wage of 26,000 U.S. workers, he contributed $10 million to an Illinois campaign that seeks to cut workers’-compensation benefits, make it illegal for employees to contribute to political campaigns through their union, abolish prevailing-wage laws and render union dues collections much more difficult. He’s also contributed millions to the Koch brothers’ war chest. Mr. Griffin’s firm also owns a stake in ServiceMaster, a company that profits from the privatization of public services by firing employees and rehiring them at lower wages.

A Huffington Post article, noting that Mr. Griffin is also a major donor to Chicago Mayor Rahm Emanuel, nonetheless reports that he believes Mayor 1% is too soft on public employees despite the mayor’s attacks on pensions and teachers. The article said:

“Griffin, alone, could fund all of Chicago’s pension liabilities for [2014] (estimated at $692 million) and still have $208 million [from his 2013 income] left to scrap by on. Yet Griffin is terribly worried that the mayor is being too soft on retirees. He castigated Chicago and Illinois politicians for not making ‘tough choices,’ blaming Democrats who control city, county and state government for not fixing pension, education and crime problems.”

Second on the hedge-fund list is James Simons of Renaissance Technologies. Although Alpha reported that he no longer runs his firm on a day-to-day basis and “spends a good chunk of the year on his 226-foot yacht,” Mr. Simons hauled in $1.2 billion in 2014. His firm employs physicists, others scientists and mathematicians to develop models for its computerized trading. Alas, speculation pays much more than scientific research that might benefit humanity.

Buy, strip, profit, repeat

Third on the list is Raymond Dalio of Bridgewater Associates, who took in $1.1 billion in 2014. He specializes in bond and currency speculation. Fourth on the list is William Ackman of Pershing Square Capital Management, who is what the corporate media likes to call an “activist investor.” In other words, someone who buys stock in a company and immediately demands massive cuts so he can make a large short-term profit is an “activist investor” because he does this more loudly than others.

Mr. Ackman hauled in $950 million in 2014. Forbes magazine, as consistent a cheerleader for the corporate overclass as any institution, summed him up this way last year:

“[H]edge fund billionaire William Ackman has tried to destroy a company that sells diet shakes, played a prominent role in nearly driving a 112-year-old retailer into the ground [and] helped launch a hostile takeover of a pharmaceutical company in a way that the Securities & Exchange Commission is reportedly examining for potential violations of insider trading law. Now, Ackman is suing the U.S. government.”

He is suing the U.S. government because it is taking the profits from federal housing-loan programs Fannie Mae and Freddie Mac to recoup money used to bail them out rather than handing the profits over to speculators such as himself. Never mind that the government spent hundreds of billions of dollars bailing out speculators. Among his most recent exploits, he was involved in two separate deals that would have moved a U.S. corporation’s headquarters to Canada so that it could avoid paying taxes, savings that would be earmarked for speculators’ wallets.

No summation of hedge-fund greed would be complete without a mention of Paul Singer, another entrant on the Alpha list. The vulture capitalist specializes in buying debt at pennies on the dollar and then demands to be paid the full face value, regardless of human cost. Among other exploits, he has seized an Argentine naval ship, demanded $400 million from the Republic of the Congo for bonds he bought for less than $10 million and compelled the government of Peru to pay him a 400 percent profit on the debt of two banks he bought four years earlier.

The outsized renumeration of financiers is due to the disproportionate size of the financial industry. A rough calculation estimates that in 11 business days speculators trade instruments and contracts with a value greater than all the products and services produced by the entire world in one year. In other words, a year’s worth of gross world product is traded in about two weeks on the world’s stock, bond, derivative, futures and foreign-exchange markets.

Such frenzied trading, often involving high-speed computers and ever more exotic betting, has little to do with actual economic needs and much to do with extracting money by ever more imaginative needs. Such is a system that values financial engineering more than human life.

Pete Dolack writes the Systemic Disorder blog. He has been an activist with several groups.

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Pete Dolack writes the Systemic Disorder blog and has been an activist with several groups. His book, It’s Not Over: Learning From the Socialist Experiment, is available from Zero Books.

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