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How Dracula Hedge Funds Are Sucking Us Dry

What notion of economics or ethics justifies the fact that it would take the average family more than 35,000 years to earn as much as the top hedge fund managers earn in one year?

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Why am I so sure they're ripping us off? I’ve had the dubious honor of exploring some of their biggest deals, including the "Greatest Trade Ever,” in which hedge funds bet against the housing bubble and won big. It turns out those bets were rigged. Hedge funds brazenly colluded with big investment banks to create securities that were designed to fail, so they could bet against them. So far the SEC has forced Goldman Sachs to pay $500 million in penalties and JP Morgan recently coughed up $153.6 million. This was to settle charges that these banks failed to inform investors that hedge funds had a heavy hand in constructing securities so that they would fail. 

In fact, we can now show that hedge funds helped to prolong the housing bubble, deepen the crash and profit along the way. No matter what their apologists say, those hedge fund profits came from trash securities that never should have seen the light of day. Not only didn’t they create positive value for the economy, they created billions of losses that led to bailouts, unemployment and massive public debt. Whether any of them engaged in outright fraud, we leave to the courts. It doesn’t matter. It was a monumental economic rip-off, whether legal or illegal.  

To add enormous insult to our grievous injuries, these hedge funds managers only pay a 15 percent federal income tax rate (instead of 35 percent) on nearly all of their obscene incomes. That’s because of a tax loophole that allows them to declare their income as capital gains -- they call it “carried interest.” The Obama administration and many in Congress claim they will do away with this loophole. Hedge fund groupies say it won’t matter anyway because these financial sharpies will just restructure their hedge funds in ways that will allow them to avoid paying taxes like the rest of us.  

Why on earth should hedge funds pay lower rates that the rest of America? They certainly can’t demonstrate that they add value to our economy. The only claim they honestly can make is the one that has surfaced many times throughout human history: We are powerful. We set the rules. We deserve what we get...and more...and more. And politicians with their hands out will always find ways to help.   

Why are we putting up with this?

A groundbreaking study by Michael Norton of the Harvard Business School and Dan Ariely of Duke University provides some important insights. Using a nationwide survey of more than 5,000 respondents, they discovered that most Americans have no idea how skewed our income distribution really is. Virtually everyone surveyed believes our wealth distribution is much fairer than it actually is. And when people were asked to come up with their ideal wealth distribution, 92 percent chose the wealth distribution of Sweden! ( PDF)  

More amazing still was that it doesn't matter whether you are Republican or Democrat, rich or poor, black or white, male or female.  Everyone wants more economic fairness.   

And yet, we get more and more inequality, led by hedge fund elites.  

As the study strongly suggests, the key to unlocking our pent-up desire for fairness is to develop a widely shared understanding of just how skewed our income distribution really is. And that starts with shining a blazing bright light on hedge funds elites, who will enjoy the sunshine about as much as Dracula does.  

Les Leopold is the executive director of the Labor Institute and Public Health Institute in New York, and author of The Looting of America: How Wall Street's Game of Fantasy Finance Destroyed Our Jobs, Pensions, and Prosperity—and What We Can Do About It (Chelsea Green, 2009).

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