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Hedge Fund Titans Are Treating Us Like Pawns in Their Economic Chess Games

Hedge funds exploited the misfortunes of those caught beneath currency, housing and internet bubbles, and got paid by the boatload.
 
 
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Recently, two important and related events occurred. The first is that hedge fund kingpin Cerberus Capital Management was considering buying Blackwater, the notoriously Orwellian security contractor that has become the scourge of Iraq and America alike. And the second event? As soon as the news was reported, the deal was killed.

Neither company, you see, likes the publicity. Plus, with Blackwater in its portfolio, Cerberus would have more than lived up to the origin of its name, which comes from Greek mythology. Yes, Cerberus is the three-headed demon dog that guards the gates of Hell.

"We do our best to avoid the spotlight," secretive Cerberus founder Stephen Feinberg reportedly told his staff in a memo earlier this year, "but unfortunately, when you do some large deals, such as Chrysler and GMAC, it is hard to avoid."

True, Stephen, true. When you bail out two of the worst environmental and economic offenders in the automotive business (and subprime debacle, in the case of GMAC), and then follow that up by looking into acquiring what passes for a private army with itchy trigger-fingers and a suspicious habit of corruption and cost overruns, well yeah, people will talk.

The irony is more than sweet; it is transparent, at least for private equity groups, hedge funds, and those that follow and capitalize upon them. As for you, if you find such talk about what on the surface looks like a financial organization to be alarmist, then it might be time you read up on hedge funds. As I wrote last year, private equity groups and hedge funds play both sides of the global economy, its destruction and reconstruction, its war and its peace, its bears and bulls. And they do so by manipulating markets, multinationals and the media with practically zero governmental regulation or oversight, to the tune of paydays that redefine opulence and waste.

Like the similarly invested Milo Minderbinder said in Joseph Heller's brilliant novel of war and capitalism Catch 22 : "Anyone who would not steal from the country he loved would not steal from anyone."

Take John Paulson, for example, who took home $3.7 billion last year, which is stunning considering that, as of June 2007, his hedge fund Paulson and Co. had $12.5 billion in assets under management. By my crude math, Paulson walked away with about a third of that worth by himself. George Soros and Renaissance Technologies' James Simons were right behind Feinberg, with $2.9 billion and $2.8 billion respectively, while average compensation for hedge funds' top 25 managers cashed in at $892 million in 2007, an explosive increase of 68 percent over the previous year. In other words, one could say in all confidence that hedge funds, whose financial instruments range from conventional stockpicking to proprietary quantitative computer modeling, are getting paid megabucks during a panic-stricken time of economic collapse, endless war and repressive stagflation.

What one could argue, with an increasing degree of confidence, is that those things are all inextricable.

Take Soros, a grandfather of the hedge fund industry, who made his name as the man who "broke the bank of England" by currency speculation, which is to say manipulation. In 1992, after shorting more than $10 billion worth in pounds, Soros' cutthroat maneuver forced the bank to devalue its currency, a move that netted him over a billion alone. Similar moves against Thailand's riggit incited former Malaysian Prime Minister Mahathir bin Mohamad to call Soros an economic war criminal who uses the misfortunes of those beneath his speculation to acquire money for himself. But at least Soros is sharing some of his ill-gotten goods: He's a well-known progressive who's backing Obama, and for that he has been rewarded with intense scrutiny and attacks from the hypocrites at Fox News and elsewhere.

The same, however, cannot be said about his peers. Paulson's Wikipedia entry is a mere stub, while Simons' entry talks more about his philanthropy and autism research than it does his political views or financial instruments. Meanwhile, their official sites are as indistinct as they are secretive. One would imagine that Simons, after scoring $2.8 billion in 2007 alone, could afford an upgrade of Renaissance Technologies Corp.'s practically blank site, and the same goes for Paulson and Co. That is, for people who are making Hummers full of cash off of the American economy and its vicissitudes, Paulson and Simons are sure acting like players who don't want anyone else snooping around their game.

Paulson's game is especially interesting: He made his billions after devising complex, and unexplained, financial instruments to profit from the housing collapse and increasing foreclosures. While Joe and Jane American were getting kicked to the curb at home and on the job, Paulson was breaking the bank wide open. He's not totally heartless: After all, he donated $15 million, or about two-hundredths of his bonanza, to a nonprofit designed to keep homeowners in their houses. (Whattaguy!) Even worse, after he nailed his big payday as the housing Ponzi scheme, and the hedge funds who built it up, collapsed last August, Paulson hired none other than Alan Greenspan, whose perversely slashed interest rates following 9/11 kickstarted the housing meltdown, to be his exclusive financial Nostradamus.

Greenspan, as time has illustrated, is peerless at driving an economy into the ground, while Paulson, as the balance sheet explains, is proving to be talented at profiting off of it. That is how inextricable these things are.

All of which brings us to our current crises of speculation, now that the dream of affordable housing and cheap credit is all but dead with a "for sale" sign stabbed through its heart. Right now, the money is in food and oil, which by no accident happen to be exponentially shrinking resources in the crosshairs of global warming. As land dries up across Earth, and so-called Third World entities like India and China enter the First World's overstretched hyperconsumption, demand for everything is exploding while stores are shrinking. And as resources shrink, so do benefits and wages for the middle class.

In fact, while hedge funds and private equity groups exploited the misfortunes of those caught beneath currency, housing or internet bubbles, the rest of us watched as the American Dream was being dismantled piece by piece. The $20 an hour wage that had allowed access into the American middle class is now devolving: As a recent article in the International Herald Tribune explained, since the 1970s "the percentage of people earning at least $20 an hour has eroded in every sector of the economy, falling last year to 18 percent of all hourly workers from 23 percent in 1979 -- a gradual unwinding of the post-World War II gains." In 2007, a hedge fund manager had to take home at least $360 million, more than 18 times what s/he had to pull down in 2002, to be considered a player. The American family, by contrast, had to earn more than the median $60,500. And as the former is going up like a rocket, the latter is sinking like a stone.

And if things get any worse, stones might be all that average families have to eat in the coming decades as the climate crisis amplifies and destroys what's left of America's breadbasket. As it is now, prices for everything from wheat, rice, corn and more are skyrocketing, squeezing First World offenders like America with double-digit increases and Third World victims like Haiti, and Egypt with food riots and destabilized infrastructures. While big-box retailers like Wal-Mart and Costco are limiting purchases of food staples here at home, overseas the so-called silent tsunami of market-based starvation is already under way. It is no accident that the food and oil crises have reaped fat checks for companies trafficking in energy: Exxon's first quarter profit from 2008 was a galling $10.9 billion, the world's second-highest ever, behind only its fourth quarter 2007 profit of $11.7 billion). Meanwhile, agrichem titan Archer Daniels Midland (ADM) and other food producers have gotten into the energy game, as well as the lucrative food game they already own. Capitalizing on the switch to ethanol, which exists only because of the rampant speculation on oil, ADM now makes billions from growing corn not to put into our bodies, but our fleet.

So, how long do we have before the whole thing explodes into a global conflagration? A better question to ask is this: Who will profit off of that explosion? By destabilizing everything from the currency and housing markets to resuscitating wastrels like Chrysler, GMAC and Clear Channel -- and even down to possibly buying up its own private armies -- hedge funds, private equity groups and other secretive, unregulated financial institutions have gone, ironically enough, utterly transparent. It is now easier than ever to see, by their acquisitions, paydays and disgraceful hires, how the rest of us are mere pawns in their economic chess games. We can see our dystopia clearly in the distance, as temperature records are broken by the month and hostile takeovers, whether in Iraq or on Wall Street, leverage death and depression for the sake of profit.

And it may look like science fiction still, but give it time and it may look like home. And this time around, you won't own it. It will own you.

Scott Thill runs the online mag Morphizm.com. His writing has appeared on Salon, XLR8R, All Music Guide, Wired and others.

 
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