Each year The New York Times creates a furor by publishing a list of the highest paid CEOs. (This year the top 10 averaged $30.3 million in total compensation.) And each year “the paper of record” misses the real story: Yes, CEOs of public firms certainly are paid ridiculous sums, even compared to corporate chiefs in other rich countries. But the true robber barons run hedge funds and private equity companies. They make billions, not millions, and they do it not by running businesses, but by siphoning wealth away from companies, consumers, students and governments.
Just take a look at what the top 10 hedge fund managers “earned” in 2013…
That means these top hedge fund moguls earned nearly 59 times more than the top CEOs. Here’s America’s new math for a new Gilded Age:
- In 2013, George Soros made $1,923,077 per hour!
- In one HOUR Soros makes as much money as the median American family earns in 37.7 years. (Yep, one hour of his time is “worth” 37.7 years of your family’s.)
- The top 10 hedge fund managers earned as much in one year as 334,902 elementary school teachers or 271,575 registered nurses.
- Hedge fund managers pay a lower tax rate than teachers or registered nurses because of a special tax loophole called “carried interest.”
Financial Strip Mining
Hedge funds and their close cousins — private equity firms and the proprietary trading desks at large banks — are financial strip miners. Rather than create new products and services, they tear wealth away from the real economy, and from us.
Let’s start with high-frequency trading (see my summary). By trading in microseconds, the strip miners are able to reap enormous profits by skimming money away from slower-moving traders like mutual funds and pension funds. In the time it takes to press the button on E*TRADE, a high-speed trader can get between the buyer and seller and extract a few pennies. Do this millions of times per day and you can make a good living. For example, Ken Griffin and his Citadel hedge fund returned over 300 percent in 2007 through high-frequency trading.
Another tactic is to create financial products that are designed to fail so you can collect the insurance on them. John Paulson, number four on the hedge fund list, did just that during the height of the housing bubble, in collusion with Goldman Sachs. Through the infamous Abacus deal, Paulson made a billion dollars by rigging the game and was allowed to keep it all. Goldman Sachs was fined $550 million for not telling investors what Paulson was up to.
One of the biggest strip mining efforts takes place when private equity funds and hedge funds buy up companies using borrowed money, which they then put on the books of the target company. They then use the target company’s cash flow to pay off the debt and pay themselves enormous fees and special dividends. Their profits are sheltered by a special “carried interest” tax loophole, which allows the financial honchos to pay 19 points below the standard income tax rate for high earners. The odds are high that the top hedge fund earners listed above pay a lower tax rate than you do, given the loopholes open to them. (Think Mitt Romney and Bain Capital.)
To pay for the enormous incomes earned through these leveraged buyouts, the strip miners’ companies raid pension funds, cut wages and benefits, sell product lines, reduce R & D and ship jobs abroad. The CEOs of the target companies become junior partners in the rape of their own companies through golden parachutes and enormous stock options.
Hedge Funds, Debt and Our New Financialized Economy
As hedge funds and private equity funds squeeze wealth from the rest of the economy, our wages stagnate. We then take on debt to buy homes and send our kids to school.
This financial strip mining process also destroys public services. Interest payments are tax deductible, which means that as debt payments flow into the financial sector (and then, of course, to tax havens abroad), corporate tax payments fall. It’s estimated that off-shore accounts are costing us over $150 billion a year in lost tax revenues — which is more than enough to provide free tuition at every public two- and four-year college in the country.
As tax revenues erode, state and local government face a perpetual financial crisis, which for the financial strip miners is like finding a rich new seam of money. Hedge funds rush in with predatory lending schemes to “help” state and local governments repair infrastructure. (And many of those schemes are pegged to LIBOR interest rates which we now know were illegally manipulated by the biggest banks.) Los Angeles, for example, spent over $200 million on Wall Street fees last year, which is $50 million more than L.A spent on its entire street repair budget.
The strip miners also press for privatization of public services, a lucrative area for hedge funds. As AlterNet’s Kristin Rawls reports, hedge funds are jumping into the charter school business to take advantage of special tax breaks and special provisions that allow overseas investors to gain citizenship.
Thanks to a little discussed law passed in 2000, at the end of Bill Clinton’s presidency, banks and equity funds that invest in charter schools and other projects in underserved areas can take advantage of a very generous tax credit – as much as 39 percent — to help offset their expenditure in such projects. In essence, that credit amounts to doubling the amount of money they have invested within just seven years. Moreover, they are allowed to combine that tax credit with job creation credits and other types of credit, as well as collect interest payments on the money they are lending out – all of which can add up to far more than double in returns. This is, no doubt, why many big banks and equity funds are so invested in the expansion of charter schools. There is big money being made here — because investment is nearly a sure thing.Charter Schools: A Marketplace for Profits or Ideas?
So why do the major media miss this story?
No one wants to mess with the big hedge funds and private equity firms. After all, any one of them could buy up The New York Times in a heartbeat and turn it into a cooking magazine. And, I can tell you from personal experience these guys are touchy — when first writing about the John Paulson Abacus deal, his lawyers threatened to sue me.
They don’t want the public to know how they earn their money. They want us to continue to believe that they are just smarter than the rest of us — that they earn it fair and square — and are shrewd risk takers whose work makes America great. To smooth it all over, they donate wings to public libraries, endow chairs at universities and even donate to environmental causes. And, of course, they’re not shy about buying political influence from both political parties.
All of this is because they fear we will ask the most fundamental question: How much value do they really produce for the US economy?
In their heart of hearts, they know the answer — not much.