Hands Up If You Made Billions of Dollars Out of The Credit Crisis
Hedge fund 'masters of the universe' face Congressional grilling over their role in the global credit crunch
WASHINGTON - The five best-paid hedge fund managers - who between them made
$12.6bn last year, even as the financial world began to crumble around
them - were hauled before the US Congress yesterday and assailed over
their huge salaries, their tax perks and their contribution to the
credit crisis that has engulfed the globe.
In a piece of public theatre that reflected not just the present crisis, but
also a decade or more of vastly increased income inequality, the five men
declared themselves innocent of causing the market meltdown and insisted
that their riches reflected hard work and investment insight.
As one Congressman, Elijah Cummings, put it, "these are five citizens who
have more money than God", and he proceeded to tear into them over
rules that have allowed them to pay a fraction of the tax an ordinary
teacher, firefighter or plumber might pay.
Philip Falcone, whose Harbinger Capital is one of the world's biggest hedge
funds, stressed his humble beginnings as one of nine children living in a
three-bedroom home in Minnesota. "My father was a utility
superintendent, my mother worked in a local shirt factory," he said. "I
take great pride in my upbringing and it is important for people to know
that not everyone who runs a hedge fund was born on Fifth Avenue."
Although many hedge-fund managers live lives of conspicuous consumption, they
prize their privacy as tightly as they cling to the rules - or lack of them
- that enable them to keep their trading strategies secret. Their
testimonies under oath in the giant, high-ceilinged, oval committee room on
Capitol Hill yesterday took them out of their natural habitat, and for all
their status as masters of the universe, several seemed intimidated.
John Paulson - who suddenly joined the ranks of billionaires after betting in
2005 that Wall Street was awash with overpriced investments in mortgages
that millions of Americans would ultimately be unable to pay - was told more
than a dozen times to speak up so he could be heard. Jim Simons, the
mathematical genius whose Renaissance Technologies is among the most
respected fund groups in the world, was told to stop "mumbling".
The hearing was the latest in what wags on Wall Street are calling the Waxman
Witch Trials. The House oversight committee, whose chairman, Henry Waxman,
has subpoenaed all the main players in the crisis, previously humbling Dick
Fuld, chief executive of collapsed Lehman Brothers, and the bosses of credit
rating agencies who, according to Mr Simons, "allowed sow's ears to be
sold as silk purses".
Mr Waxman said yesterday: "Our four previous hearings have looked at
failure. Today's hearing has a different focus. The five hedge fund managers
who will testify today have had unimaginable success."
Across the world, hedge funds have been blamed for their role in the collapse
of banks, many of which suffered in their final stages from a crisis of
confidence which some managers said was caused by short-selling of the
company shares. Yesterday's panel, to a man, described the hedge funds who
sell short (that is, place bets on a share price going down) as helping
bring efficiency to markets by highlighting bad companies, but most agreed
more regulation of the industry would be desirable, as would greater
disclosure of their positions.
But the pugnacious Ken Griffin, of Chicago-based Citadel group, held out
against the tide. Disclosing more would "be like asking Coca-Cola to
disclose its secret formula". And he told Congressmen not to repeat
mistakes from the past, when political talk of greater regulation pushed the
derivatives market largely overseas. "It breaks my heart," Mr
Griffin said, "when I go to Canary Wharf and look at the thousands and
thousands of highly paid jobs in the London derivatives market, jobs that
belong in America."
George Soros, one of the hedge fund industry's elder statesmen, said he had
come out of retirement to manage his fund, in the face of a financial
tsunami that was threatening substantial losses to his personal fortune.
The philosopher, the geek, the quiet man, the player and the buyer: The men
behind the hedge funds
Soros Fund Management
Paid last year - $2.9bn
Famed as "the man who broke the Bank of England", after netting more
than $1bn by betting the pound would fall out of the Exchange Rate Mechanism
in 1992, the 78-year-old has attacked unfettered free market capitalism as
being at the root of today's crisis.
Paid last year - $2.9bn
The world's most expensive hedge fund manager, 70, charges clients 5 per cent
a year, plus a whopping 44 per cent of returns beyond a certain level. His
fund runs "black box" programmes that harvest tiny profits from
millions of automated trades.
Paulson & Company
Paid last year - $3.7bn
Having run an obscure fund for 14 years, the 52-year-old last year made what
rivals called "the greatest hedge fund trade of all time". As a
result he traded up in the Hamptons, the upstate playground for New Yorkers,
and bought a lakeside compound for $41m (£27.8m).
Harbinger Capital Partners
Paid last year - $1.7bn
The 47-year-old made his fortune trading junk bonds in the Eighties. His firm
was founded in 2001 and made another fortune last year betting against
sub-prime mortgages. His two funds boasted 114 and 176 per cent returns in
Citadel Investment Group
Paid last year - $1.5bn
Last year, it looked as the 40-year-old might become one of the world's
biggest financial players after buying up so many distressed funds, banks
and brokers. Now he is fighting to save his fund after losing 35 per cent of
it this year.