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Just What Do Hedge Fund Honchos Do For a Million Bucks an Hour?

Les Leopold's new book reveals that hedge funds make their super-profits by doing what the rest of us would call cheating.

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In terms of vilification, I plead guilty. I am one of those who has asked a lot of pointed questions about how he makes his money. One day he might want to explain to the public his role in the infamous Abacus deal which federal investigators said netted him a cool billion dollars. In that trade Paulson worked hand-in-glove with Goldman Sachs to build a financial security that was designed to fail, so that he could bet against it. It was precisely like designing and selling a car that would immediately crash so that the maker and seller could collect the insurance on it. Only in Paulson's world is that a permissible activity.

Well, not quite. Goldman Sachs paid a $550 million fine for misleading investors who lost $1 billion in that toxic deal. But due to the letter of security laws, Paulson got to keep his booty. So, before Paulson gets so high and mighty about all his wonderful contributions to the economy, maybe he could explain what value that shady deal produced for anyone other than himself.

I do thank Paulson for his $100 million contribution to Central Park. But, I'd much rather that money go to the city via fair taxation so that it could benefit all its parks, not just the ones that border the richest real estate on Earth.

JH: OK, so these guys have a ton of money. They're not paying much in taxes. And many of them are heavily invested in politics. Is there a pattern that you can discern in their political spending? There was a coalition of fat cats pushing these crazy austerity policies. These guys don't worry about retirement security or paying for healthcare. But is that typical of the industry?

That's a very good question and I must admit my answer is only anecdotal. As I researched the book, I came across various sources who claimed that hedge fund managers (and their cousins who work the proprietary trading desks inside large banks) put up $1 billion dollars to lobby against new financial regulations.

Also, there are various reports that suggest hedge funds and other large Wall Street donors moved en mass toward supporting many more Republicans in the last federal elections than they had previously.

But of this I am sure: The more the national conversation focuses on austerity, the less it focuses on reining in Wall Street. So it's in the objective interests of elite financiers to promote deficit hysteria.

JH: Did they have a role in shaping the Wall Street bailouts everyone hates? Tell me about that.

Here's a little story I came across that shows the incestuous relationships between the bailout process and hedge funds. In July 2008, it became clear that Fannie and Freddie were in trouble. Treasury Secretary Henry Paulson (no relation to John) goes public with the word that the government was confident that the two large government sponsored mortgage companies were sound. This signaled that stockholders would not be wiped out through a government takeover.

A few days later, Paulson, who formerly was CEO of Goldman Sachs, has a private meeting with his old banking and hedge fund buddies in New York City. He tells them privately the exact opposite of what he said publically -- that he's going to nationalize Fannie and Freddie, which would wipe out the value of its common stocks.

Well, lo and behold, short-selling of Fannie and Freddie immediately skyrocketed after the meeting. A few days later, Paulson made an about-face and nationalized Fannie and Freddie wiping out the value of its common stocks. Those who shorted the stock, whomever they were, made a lot of money. It's all documented in the book.

 
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