Eliminating Risk by Suppressing What had been Learned at Staggering Cost


The New York Times (1/04, “Hedge Fund Pay Roars Back” by Nelson D. Schwartz and Louise Story”) brings us what seems to be mistaken, that the world has left the economic crisis behind us: “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 in an interview.

“Mr. Tepper’s country is very different from the one that is shutting down schools and planning interest-rate increases that will cause further thousands to remain jobless and lose their homes.

“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 earning in the hedge fund industry by AR: Absolute Return + Alpha magazine which comes out Thursday. His investors [in the fund] did not do badly either.

“The runner-up in the ranking was George Soros, the Hungarian émigré who has become better known in recent years for supporting Democratic candidates and making political headline than for picking stocks. His fund, Quantum Endowment, grew 29% 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 of 2008. Then the bottom fell out of the industry, handing even top hedge funds double-digit percentage losses.

“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.

“But in a startling comeback, top hedge fund managers rode the 2009 market rally to record gains, with the highest-paid earning a collective $25.3 billion, according to the survey, beating the old 2007 high by a wide margin. The minimum individual payment on the list was $350 million in 2009, a sign of how richly compensated top hedge fund management 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 as widening gulf between winners and losers, industry experts said. ‘These guys are the exceptions. You’re talking about the top people at top firms.’

“The earning 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.

“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 the late 2008 and early 2009, correctly assuming that the government would not permit bigger institutions to fail.”

Basically they were betting that the big banks would stay in control of the government, and that the government would continue to ignore all that had been learned during the Great Depression under Roosevelt, and in Canada from the nationalization of the Bank of Canada in 1938, the ban placed under Roosevelt through the Glass-Steagall law of 1935 that forbade banks to acquire interests in other “financial pillars” like brokerages, insurance and mortgage companies, since the banks would use the cash reserves needed for their own businesses as base bank capital for the creation of their own money. This they would lend to the government who for some three decades after the war has borrowed from their own nationalized central banks what they need for such social and infrastructure investment at near-zero cost. The statutory reserves which had been brought in Canada requiring the banks to deposit with the central bank a portion of their capital on which they received no interest, provided, if the market became too overheated an alternative to just raising interest rates which hit anything that moves in the economy. That too suited the deregulated banks for high interest rates that knock out entire sectors of the economy make possible for the mightiest banks to pick up depression bargains and then run up record profits as the economy recovered. Without the bust of the economy alternating with the boom the pattern would not fly.

And to maintain this lucrative boom-bust shake-out-and still bigger boom required burying our history centuries of economic scholarship, the abandonment of elementary logic. Who needs logic, history, serious instead of phony mathematical analysis if you maintain control of the entire boodle – with its boom-bust boom patterns?


– from COMER, April 2009