Pay of Hedge Fund Managers Roared Back Last Year - April, 2010

As the United States plunges deeper and deeper into an economic quagmire, a small group of men on Wall Street continue getting richer and richer as they dig deeper into the nation's wealth. From the Pentagon to Wall Street, trillions of US dollars have either been stolen or simply taken as "bonuses" since the early 2000s, as many government linked corporations have moved offshore. The rats seem to be jumping ship. Could it be a sign that the rest of us need to be wary of? In an RT interview, William Engdahl (link provided below) discusses the recent crisis engulfing Greece and the falling Euro, both of which he climes to be orchestrated by Washington and Wall Street. The Max Kiser video report (link also provided) contains within it an interesting report about a London-Washington based conspiracy from the late 1990s that kept global gold prices low to artificially boost the value of virtual money (paper currency).



Pay of Hedge Fund Managers Roared Back Last Year

April, 2010

The Lazarus-like recovery of the nation’s big banks did not benefit just the bankers — it also created huge paydays for hedge fund managers, including a record $4 billion gain in 2009 for one bold investor who bet big on the financial sector. The manager, David Tepper, wagered that the government would not let the big banks fail, even as other investors fled financial shares amid fears that banks would collapse or be nationalized. “We bet on the country’s revival,” Mr. Tepper, who describes his trading technique as a mix of deep analysis and common sense, said Wednesday in an interview. “Those who keep their heads while others are panicking usually do well.”

That strategy handed Mr. Tepper, a plain-spoken Pittsburgh native who first made his name at Goldman Sachs, the top spot on the annual ranking of top earners in the hedge fund industry by AR: Absolute Return+Alpha magazine (subscription required), which comes out Thursday. His investors did not do badly, either — Mr. Tepper’s flagship fund gained more than 130 percent last year. The runner-up in the ranking was George Soros, the Hungarian √©migr√© who has become better known in recent years for supporting Democratic candidates and making political headlines than for picking stocks. His fund, Quantum Endowment, grew 29 percent in 2009, earning Mr. Soros $3.3 billion in fees and investment gains. Hedge funds — the elite, lightly regulated investment vehicles open to a restricted range of investors — enjoyed a winning streak during the buyout boom that preceded the financial crisis in 2008. Then the bottom fell out of the industry, handing even top hedge funds double-digit percentage losses. In turn, the earnings of the top 25 fund managers in the 2008 survey tumbled 50 percent.

At the time, some market experts questioned whether the industry could continue to charge hefty fees — a manager typically receives a substantial portion of the fund’s annual appreciation — for such uneven performance. After all, hedge funds were supposed to protect investors against market volatility, not subject them to it. But in a startling comeback, top hedge fund managers rode the 2009 stock market rally to record gains, with the highest-paid 25 earning a collective $25.3 billion, according to the survey, beating the old 2007 high by a wide margin. The minimum individual payout on the list was $350 million in 2009, a sign of how richly compensated top hedge fund managers have remained despite public outrage over the pay packages at big banks and brokerage firms.

Even so, big gains were not a constant among hedge funds last year. Many struggled to show gains, signaling a widening gulf between winners and losers, industry experts said. “There are the haves and the have-nots,” said Sandy Gross, managing partner of Pinetum Partners, an executive recruiter for hedge funds. “These guys are the exceptions. You’re talking about the top people at top firms.” The earnings figures reflect AR magazine’s estimation of each money manager’s portion of fees as well as the increased value of his personal stake in his fund. For many of the top 25, the big personal gains in 2009 came after steep losses in 2008. Half of the top 10 managers in 2009 lost money the year before, including Mr. Tepper, whose flagship fund, Appaloosa Investment Fund I, dropped 27 percent in 2008.

Undaunted by that drop — and by the bankruptcy and liquidation of Lehman Brothers — Mr. Tepper loaded up on the preferred shares and bonds of the big banks in late 2008 and early 2009, correctly assuming that the government would not permit bigger institutions to fail. It did not hurt that the Treasury Department was a fellow investor, buying preferred stock and warrants to help steady the faltering balance sheets of the banks. The government has since sold many of its bank stakes at a considerable profit. Mr. Tepper, who manages about $12 billion for investors, also benefited from a successful investment in bonds of American International Group, the giant insurance company that was also rescued by the government.

In retrospect, investing in major banks might not seem so risky, but Jim McKee, a hedge fund researcher for the consulting firm Callan Associates, said it was a tougher call to make than simply buying up distressed mortgage bonds, which Mr. Tepper did in addition to buying bank debt. At the time, Mr. McKee said, “it was questionable whether the banks would be around. That was definitely a braver bet.” Besides Mr. Tepper, the losers turned winners in 2009 included Steven Cohen, Edward Lampert, Kenneth Griffin and Philip Falcone. Mr. Griffin enjoyed an especially sharp turnaround, earning $900 million as his flagship funds jumped 62 percent in 2009, compared with a 55 percent plunge in 2008. A spokeswoman for Mr. Griffin declined to comment.

Three managers among the top 10 — Mr. Soros (No. 2), James Simons (No. 3) and John Paulson (No. 4) — were back-to-back winners, having profited during the lean times of 2008 as well as in the booming market of 2009. Mr. Paulson attracted fame for betting against subprime mortgages at a time when many of his rivals had not even heard of the now notorious class of assets. That secured him the No. 1 spot in 2007, when he earned $3.7 billion, the biggest annual take for a hedge fund manager until Mr. Tepper eclipsed him last year. Mr. Paulson was an especially adroit trader, making huge profits on bets against bank stocks in 2008 and then buying them back after they were beaten down. A spokesman for Mr. Paulson said he was not available to comment.

This year it will probably be harder to achieve the kind of outsize returns enjoyed by Mr. Paulson in 2007 and Mr. Tepper in 2009, given the recent run-up in both stocks and bonds. “Last year, there was a great opportunity in debt. It was very, very undervalued,” said Carl C. Icahn, the legendary investor known for his aggressive corporate takeovers, who ranked No. 6 on the list with a personal gain of $1.3 billion. “Today, it’s fully valued. There are still great opportunities in bankrupt companies, but dealing with bankruptcies is an arcane art and much more complicated than simply buying distressed debt.” Finding new opportunities is not the only challenge facing even the most successful hedge fund managers. In Congress, there is growing pressure to treat some earnings of hedge fund managers as income instead of capital gains, which are taxed at a lower rate. Nevertheless, running a hedge fund will remain the best way for aspiring stock-pickers to make billions on Wall Street, even if they will have to hand over more of their profits to Uncle Sam. “It’s certainly not going to drive them to some other field,” Mr. McKee said.


In related news:

From Lithuania, a View of Austerity’s Costs

If leaders of the world’s many indebted countries want to see what austerity looks like, they might want to visit this Baltic nation of 3.3 million. Faced with rising deficits that threatened to bankrupt the country, Lithuania cut public spending by 30 percent — including slashing public sector wages 20 to 30 percent and reducing pensions by as much as 11 percent. Even the prime minister, Andrius Kubilius, took a pay cut of 45 percent. And the government didn’t stop there. It raised taxes on a wide variety of goods, like pharmaceutical products and alcohol. Corporate taxes rose to 20 percent, from 15 percent. The value-added tax rose to 21 percent, from 18 percent. The net effect on this country’s finances was a savings equal to 9 percent of gross domestic product, the second-largest fiscal adjustment in a developed economy, after Latvia’s, since the credit crisis began.

But austerity has exacted its own price, in social and personal pain. Pensioners, their benefits cut, swamped soup kitchens. Unemployment jumped to a high of 14 percent, from single digits — and an already wobbly economy shrank 15 percent last year. Remarkably, for the most part, the austerity was imposed with the grudging support of Lithuania’s trade unions and opposition parties, and has yet to elicit the kind of protest expressed by the regular, widespread street demonstrations and strikes seen in Greece, Spain and Britain.

To be sure, Mr. Kubilius has many critics here and abroad. Government austerity in the midst of a recession runs counter to the Keynesian approach of increasing public expenditures to fight a downturn. That was the path most countries chose. But Mr. Kubilius and his team say that with a budget deficit of 9 percent of G.D.P., a currency fixed to the euro and international bond markets unwilling to lend to Lithuania, the government had no choice but to show the world it could impose its own internal devaluation by cutting public spending, restoring competitiveness and reclaiming the good will of the bond markets.

Another motivation was to conform to the rules of membership for the euro currency union, which Lithuania hopes to join by 2014. Indeed, outside of Ireland, no country in Europe has come close to replicating Lithuania’s severe spending cuts without the aid of the International Monetary Fund. Ireland passed the most austere budget in the country’s history, and public sector pay cuts were a centerpiece of the government’s reform effort. The Finance Ministry has forecast growth of 1.5 percent this year, and this week Moody’s increased its outlook on the Lithuanian economy to stable, from negative. “From a credit rating perspective, Lithuania has put itself on positive trajectory,” said Kenneth Orchard, a senior credit officer in Moody’s sovereign risk group. As European nations consider what the social and political costs will be when they take steps to cut public sector spending, Lithuania offers a real-time case study of the societal trade-offs.

Speed and communication are the most crucial to success, Mr. Kubilius said in an interview in his office last week. “You have to have a dialogue with your social partners, and you have to do the most difficult cuts as quickly as possible,” he said. “I told them this is history. You need to decide now how you want to be described in our history books.” Like Latvia and Estonia, Lithuania rode a boom driven by banking and real estate earlier this decade. Construction came to dominate the economy, and low interest rates spurred a housing boom. Many Lithuanians took out low-interest-rate mortgages denominated in foreign currencies. With the onset of the crisis, house prices plunged, building ground to a halt and quite suddenly thousands lost their jobs and began to default on their debts.

While the quaint cobblestone streets of Vilnius may project an air of prosperity, one does not need to travel far to witness the pain many Lithuanians are feeling. Monika Midveryte, a university student, and her mother are now supporting the family after her father lost his construction job. Now, she said, he sits at home in front of the television drinking his troubles away. “He has no hope.” The psychological toll has been immense. Suicides have increased in a country where the suicide rate of 35 per 100,000 is already one of the world’s highest, local experts say. According to figures collected by the Youth Psychological Aid Center, telephone calls to its hot line from people who said they were on the verge of committing suicide nearly doubled last year to 1,400, from 750.

As the president of Solidarumas, one of Lithuania’s largest trade unions, Aldona Jasinskiene has an acute understanding of how bad things are — not just as the head of her union, but as a mother. For more than a year, her salary has paid the 2,300 litas, about $900, in monthly mortgage payments for her 40-year-old son, who lost his construction job. Ms. Jasinskiene says his mental health is suffering, he is fighting with his wife and his family of four dines on potatoes three times a day. Now, with her own pension having been slashed, she is left with just 300 litas a month to support herself and her 15-year-old granddaughter.

Ms. Jasinskiene said she signed the agreement with the government because unions, which are extremely weak in Lithuania, were not capable of calling the type of general strike well known in other parts of Europe, and because she wanted to do what she could to prevent even deeper cuts. While Mr. Kubilius points to positive signs like renewed growth, busy cafes in Vilnius and upgrades by the credit agencies, from her vantage point, Ms. Jasinskiene sees no upturn. “He is telling you a fairy tale,” she said. “Unemployment is going up and up.” Algirdas Malakauskis, a priest at St. Francis and St. Bernardine Friary, has also experienced the recession’s toll firsthand.

He has had to preside over an increasing number of funerals for people who have taken their own lives. Parishioners now come to him seeking work, and his elderly parents, whose pensions have been cut, are angry. Like a surprising number of people here, however, he has not turned on the government. “You can see they are doing everything that they can to keep the situation stable,” he said. Still, the tough measures have drawn criticism outside Lithuania. “The internal devaluation strategy may have succeeded in delivering short-term stabilization, but at what cost?” asked Charles Woolfson, a professor of labor studies at the University of Glasgow who has expertise in the Baltics. Professor Woolfson points out that deepening social alienation in Lithuania has resulted in the sharpest rise in emigration since the country joined the European Union in 2004. “Then it was the migration of the hopeful,” he said. “Now it is the migration of the despairing.”

There is no greater totem to the excesses of the lending frenzy that gave Lithuania one of the highest growth rates in Europe in 2007 than the sparkling Swedbank office building. Completed just last year, it is 16 stories high and monopolizes the modest Vilnius skyline Swedbank is the dominant bank in Lithuania, and its aggressive lending to first-time home buyers — including Ms. Jasinskiene’s son — continues to be a millstone for many here. “People are angry,” said Odeta Bloziene, who runs a unit within the bank that gives advice to Lithuanians who are having trouble repaying their loans. “But we never run away from our customers.”

In the reception area of the bank’s headquarters, bankers laughed and drank beer from a well-stocked bar as rock music played in the background. It is a far remove from the soup kitchen at St. Peter and St. Paul’s Church in Vilnius, where 500 people a day line up for a free meal of soup and Lithuanian pancakes. Mecislovas Zukauskas, 88, a retired electrician, has lived through the devastations of World War II, the Soviet occupation and, most recently, the death of his wife. He is taking his pension cut in stride. “The government does what it wants to do,” he said. “We can do nothing.”


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