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Too Much

THIS WEEK

What would you be doing right now if you had happened to win big in last month's record-breaking Mega Millions lottery? Most of us see questions like this as welcome opportunities for some idle daydreaming, nothing more. We're never going to win the lottery. We know it.

But some Americans win the equivalent of a record-breaking lottery haul year after year after year. We call these fortunate souls hedge fund managers. The single most fortunate among them, we learned just over a week ago, has walked off with $7 billion for his last two years of labor. That's over ten times the $656 million won in that most recent record-smashing lottery drawing.

The key difference — besides size — between a lottery jackpot and a hedge fund windfall? The mere mortals who win lotteries pay over twice as much of their winnings in taxes as the folks who run hedge funds.

In this week's Too Much, we have lots more about the great and grand — and still ongoing — scam the hedge fund industry is so brazenly visiting upon us.

 

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GREED AT A GLANCE

Makers of ever more expensive toys for exceedingly rich boys are cheering on the trend to ever longer luxury yachts. No mystery why: The bigger the yacht, the more space for toys. Like submarines. Charles Kohnen founded the sub-making company SEAmagine 16 years ago, at a time, he notes, when “yachts weren't big enough to hold submarines.” Now his California-based business is booming, and Kohnen credits that success directly to mega yachts. Explains the underwater enthusiast: “A submarine — it's not just a jet ski.” A mega millionaire can snatch up a top SEAmagine sub for just $3 million, plus another $20,000 or so for annual upkeep. SEAmagine's competitor, U.S. Submarines, has a model in the planning stages that will run $78 million — and stretch 213 feet long . . .

Ed ClarkOur big banks have just taken still another step to deliver thoughtful, caring, sensitive service to their customers — who happen to be rich. Wells Fargo has become the latest banking giant to announce a “boutique” unit for families worth at least $50 million. Each “financial advisor” in Wells Fargo’s new Abbot Downing boutique “will serve only 10 to 15 families.” What about service for the rest of us? The squeeze continues. Last week, in Boston, a news report detailed how Sy Gellerman, an 86-year-old with Parkinson’s, now pays $26 a month in fees to make two $30 withdrawals a week from his Eastern Bank account. In Trenton, New Jersey, school worker Patti McMahon now has to pay a $5 fee to cash a check at her TD Bank branch, even if the check originates from TD Bank. TD Bank CEO Ed Clark pulled in $11.28 million last year . . .

New boutiques for the super rich are also popping up in West Africa. In Abidjan, an Ivory Coast city, the Zino’s boutique specializes in fine watches and jewelry. Notes store director Jean Miguel Darde: “Ninety per cent of our customers can walk in and spend $35,000 in one visit without thinking about it.” In Nigeria, cascades of petrodollars have convinced Porsche to just open its first luxury auto dealership on the continent outside South Africa. A second Porsche showroom will likely be opening in Angola’s Luanda, now the world’s most expensive city.

 

 

 

 

Quote of the Week

“Many world religions began in times and places of greater inequality, always advocating more equality in one way or another.”
Danny Dorling, University of Sheffield social geographer, Compass, April 3, 2012

 

 

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PETULANT PLUTOCRAT OF THE WEEK

lan MulallyAlan Mulally has pocketed $148.3 million since becoming Ford CEO in 2006. Does this tidy take-home qualify Mulally as overpaid? Ford's chief actually gets few queries about his pay — by far the highest in the global auto industry — from the fawning business press. He disdainfully swats away pay questions that do come his way with formulaic cant. The “vast majority of my compensation,” Mulally insists, stands “at risk.” Risk certainly does afflict Ford workers. Some 120,000 of them have lost jobs under Mulally's reign. Ford customers face risk, too. Ford vehicles, reports Bloomberg, have “plunged in quality rankings.” And Ford shareholders are also risking plenty. Their shares dropped 36 percent last year. With all this risk in the Ford Motor world, all these Ford stakeholders might well wonder, what makes Alan Mulally — and Mulally solely — so deserving of spectacular rewards?

 

 

Stat of the Week

A new calculation by the New York Times values Apple CEO Tim Cook’s 2011 compensation at $635 million. The median pay that went to 100 top CEOs for the year: $14.4 million.

 

inequality by the numbers

Hedge funds

 

 

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IN FOCUS

In a Crackpot Economy, Endless Jackpots

At what point will our world wake up to the fantastically rewarding scam that our hedge fund masters of the universe have been running?

No single individual in the United States had a more lucrative year at the office in 2011 than Raymond Dalio. Working out of his Bridgewater Associates headquarters in Westport, Connecticut, the 63-year-old hedge fund manager pulled down a sweet $3.9 billion.

The typical American worker, by contrast, ended 2011 earning just under $40,000. That typical worker would have had to labor over 97,000 years to equal what Dalio made in just one.

The irony here: By the hedge fund yardstick, the United States actually became a little more equal in 2011. The year before, in 2010, the typical U.S. worker would have had to labor over 120,000 years to make as much in compensation as the year’s top-earning hedge fund manager.

For these stunning hedge fund compensation totals, we can thank the AR financial trade journal. AR has been tallying up hedge fund pay ever since the start of the 21st century, and the magazine’s new figures for 2011 appeared just over a week ago.

Hedge fund managers, AR informs us, experienced a bit of a downshift in 2011. The top 25 hedge fund only collected a combined $14.4 billion for the year. That total does run higher than the $11.6 billion the top 25 collected in 2008. But last year that top 25 amassed nearly $22.1 billion.

By any rational benchmark, of course, hedge fund manager rewards remain positively stratospheric. Back in 2002, a hedge fund manager needed to earn $30 million to enter the hedge fund industry’s top 25. In 2011, a downer of a year for hedge fund managers, that entry level stood at $100 million.

How do hedge fund industry movers and shakers justify such incredible windfalls? Top hedge fund managers make hundreds of millions of dollars, the industry line posits, because they bring such incredible smarts to the table.

Hedge fund industry superstar James Simons, industry apologists love to note, used to chair a university math department. Simons and his fellow hedgies, we’re told, have honed the tools of “quantitative” analysis. Their super sophisticated statistical models can work a magic the rest of us can't possibly comprehend.

But the investing gains from this magic, the hedge fund industry line continues, should nonetheless gladden us all. High hedge fund earnings, the industry’s friends and flacks insist, mean a better tomorrow for Main Street.

signup“My customers are pension funds, teachers,” as superstar hedgie Raymond Dalio noted in one recent interview, “and I’m going to say that they are very grateful.”

Most Americans have a hard time evaluating these hedge industry claims, mainly because hedge funds operate almost entirely behind closed doors that average American never get to enter beyond.

You can’t, after all, just walk off the street into a stockbroker’s office and invest in a hedge fund. To enter hedge fund land, you either have to be a person of means — with at least $1 million available to invest — or an institutional investor, a college endowment, for instance, or a pension fund.

Hedge funds, at base, amount to mutual funds for deep pockets. Normal mutual funds face all sorts of federal regulations designed to protect the general investing public. Hedge funds don’t serve the general investing public and face precious little regulation. Federal law assumes that deep-pocketed investors have the sophistication to protect their own interests.

This regulatory hands-off leaves hedge fund managers almost totally free to invest anyway and in anything they want. They can buy new-fangled speculative assets they think will soar in value. They can also “hedge” their bets, by laying down financial wagers that a particular asset’s value is going to sag.

For all this investing and hedging, hedge fund managers demand majestic levels of compensation. They typically charge clients by a “2 and 20” formula. Investors pay the hedge fund wizards who manage their money an annual fee that equals 2 percent of the total money they invest, plus 20 percent of any profits that selling their invested assets might bring.

The biggest hedge fund industry stars charge even more. The clients of Tudor Investment’s Paul Tudor Jones II pay a 4 percent management fee and cough over 23 percent of any investment profits their money makes. SAC Capital Advisors kingfish Steven Cohen grabs away 50 percent of all investment profits.

Hedge fund clients gladly pay these exorbitant fees. Hedge fund managers, they believe, possess a secret wisdom that reliably delivers spectacular investment returns. But hedge fund managers, in real life, have no secret wisdom. And they don’t reliably deliver spectacular returns.

One example: Kenneth Griffin, the hedge fund manager at Citadel, personally pulled down $700 million in 2011, and the two big funds he manages each gained over 20 percent for the year. But those same funds lost 55 percent in 2008.

Another example: John Paulson took home $4.9 billion in 2010, that year’s highest hedge fund manager windfall, after his investments in gold returned over 35 percent. Last year, Paulson’s bets on Bank of America went the wrong way and gave clients in one of his funds a 52.5 percent haircut.  

Some hedge fund managers do, to be sure, seem to deliver consistent results. SAC Capital Advisors founder Steven Cohen, for instance, trumpets “double-digit returns for the better part of two decades.” One apparent driver of this consistency: insider trading. Seven former SAC Capital employees have either pled guilty to criminal charges or settled fraud charges in civil proceedings.

Most other hedge funds don't have rap sheets. Nor do they show anything close to consistently positive results. Those institutional investors that have placed pension and endowment dollars in these funds have been coming up short.

Over the last five years, the New York Times revealed last week, the ten public employee pension funds with the highest share of their dollars invested in hedge funds and other “alternative investments” only gained an average 4.1 percent a year on their money. The ten pension funds with the least share of their dollars plowed into hedge funds returned an average 5.3 percent.

The only consistent gainers from the billions that institutional investors have dumped into hedge funds: hedge fund managers. The ten pension funds most invested in hedge funds paid almost four times more in investment management fees than the ten pension funds with the least hedge fund exposure.

California’s giant state pension system, notes Times analyst Julie Creswell, saw its fees nearly double, to over $1 billion a year, after the system “increased its holdings in private assets and hedge funds to 26 percent of its total in 2010, from 16 percent in 2006.”

What does this California pension system have to show for these lofty fees? A modest 3.4 percent annual return over the last five years.

And California’s public employees actually did better than clients for the hedge fund industry as a whole. Industry-wide, hedge funds lost their clients 5 percent of their money in 2011, according to the Hedge Fund Research Composite Index, a tally that tracks almost 2,000 hedge fund portfolios

“Boring low-fee index funds,” notes one Forbes analysis, “continue to run circles around many investing titans.”

But these titans continue to pull in hundreds of millions year after year. Why? The assets they manage have become so huge, the financial journal AR points out, that the income that their 2 percent management fees generate has become a “huge profit center” in and of itself.

And if hedge fund manager investing labors should actually produce “performance” gains, the 20 percent chunk of these gains they grab gets preferential treatment in the tax code, the notorious “carried interest” loophole.

On the bulk of their earnings, the nation’s top-paid hedge fund managers pay federal income tax at just the 15 percent “carried interest” rate, not the 35 percent that applies to ordinary income in the top tax bracket.

Congress has so far done nothing to stop this preferential treatment. In fact, Congress is moving in the wrong direction. A bipartisan majority has just passed legislation — the Jump-start Our Business Start-ups Act, or JOBS Act — that will free hedge funds in the future to more aggressively market their wares.

This new marketing flexibility will likely add to the over $2 trillion in assets now under hedge fund management — and add even more to the paydays of hedge fund superstars.

About that possibility, a great many of our pols seem absolutely giddy — and why not? In the third quarter of 2011 alone, notes the AR financial trade journal, hedge fund manager Kenneth Griffin and his spouse deposited $300,000 into the super PAC that conservative political strategist Karl Rove runs.

 

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New Wisdom
on Wealth

Graham Morehead, CEOs and the Candle Problem, Nature, April 2, 2012. A revealing essay on the scientific research on why huge rewards for CEOs always seem to backfire.

William Lazonick, How High CEO Pay Hurts the 99 Percent, Alternet, April 2, 2012. How top CEOs “rake in obscene sums by not doing their jobs.”

Gary Belsky and Tom Gilovich, What Class Divide? Time, April 3, 2012. America actually enjoys a "remarkable level of consensus about ideal wealth distribution." The direction: more equality.

Kim Fowler, Income inequality hurts students' performance, Daily News Journal, April 5, 2012. Growing inequality, explains this veteran Tennessee educator, widens the gap separating the enrichment rich and poor families can provide for their children.

Robert Reich, We Really Are Living In A Plutocracy, Business Insider, April 6, 2012. The former U.S. labor secretary offers a fable for our time.

Angelique Chrisafis, France tightens grip on super rich, Guardian, April 6, 2012. Much Higher taxes on the wealthy would deter businesses from handing out huge CEO salaries, says leading candidate in the French presidential race.

 

 

 

 

 

 

In Review

Chasing Down the Right's Top Tax Lie, Again

Chuck Marr and Chye-Ching Huang, Tax Foundation Figures Do Not Represent Typical Households’ Tax Burdens, Center on Budget and Policy Priorities, Washington, D.C., April 2, 2012

Americans, pollsters tell us, feel massively overtaxed. Why do we feel this way?

We don't feel this way because we pay a greater share of our income in taxes than we did 10 years ago -- or 20, 30, or even 50 years ago. In fact, as a new report released last week notes, a family of four today “in the exact middle of the income spectrum” is paying less of its income in federal income tax than any typical American family of four since the 1950s.

And we're absolutely “undertaxed,” not overtaxed, if we compare ourselves to taxpayers in other developed nations. The United States has just about the lowest overall tax burden in the developed world.

So what explains this sense that we're all crushingly overtaxed? Shrinking paychecks no doubt play a role here. With average weekly wages, after inflation, now running behind their early 1970s levels, every dollar that goes to taxes today simply feels more burdensome.

But we have something else at play here. We have lies — or more accurately, to use Mark Twain's famed formulation, we have “lies, damn lies, and statistics.”

These lies and stats have been coming from an array of anti-tax tax think tanks, flacks, and pols all lavishly bankrolled by an array of mega-rich taxpayers who lust for ever lower tax bills.

These mega rich have learned from history. Americans, that history shows, want the rich among us to pay their fair tax share. Average Americans don't take kindly to legislative efforts that aim cut the taxes rich people pay.

Those eager to cut the taxes rich people pay, given this reality, have only one viable political option. They have to convince average Americans to cut taxes across the board, for everyone. And they can only succeed politically at that task if they first create a general public that feels grievously overtaxed.

Enter the Tax Foundation, the core institution behind the “creation myths” of the anti-tax crusaders. Every year, a few weeks before April 15, the Tax Foundation saturates the media with news releases that relate how long average Americans have to work to achieve “tax freedom” – that is, have “earned enough money to pay this year’s tax obligations at the federal, state, and local levels.”

Media outlets then go on to report to the American people, as CNN Money did last year, dire warnings that "you will need to work 102 days — more than three months — just to earn enough to pay your tax bill."

That happens to be a lie. Average Americans have to work nowhere near that long to pay their taxes, as analysts at the Center on Budget and Policy Priorities patiently point out each and every year right after the Tax Foundation goes public with its latest round of anti-tax "lies, damn lies, and statistics."

This year's annual Center rebuttal makes the same valuable points the Center made last year --  and the year before that and the year before that. The Tax Foundation's basic methodology, the Center details, relies on a basic calculation that grossly distorts the taxes average Americans pay. 

The Foundation produces an "average" tax rate by calculating total tax receipts as a share of total national income. Within a progressive tax system, where tax rates rise as income rises, this makes no sense, not if you want a sense of tax reality as average Americans experience it.

The “average” the Tax foundation ends up computing for this year's tax returns, the new Center analysis points out, stands higher than the taxes that 80 percent of all American taxpayers will actually pay.

The Tax Foundation folks could care less. Their “tax freedom day” report has only one purpose: to demonize taxes. The report's methodology, by wildly exaggerating the tax burdens on average Americans, serves that purpose well.

 

 

 

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Too Much, an online weekly publication of the Institute for Policy Studies | 1112 16th Street NW, Suite 600, Washington, DC 20036 | (202) 234-9382 | Editor: Sam Pizzigati. | E-mail: editor@toomuchonline.org | Unsubscribe.

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