Congress Grills Hedge Fund Titans, Gently

In the entire history of the American republic, no lawmaker in Congress had ever witnessed a scene quite like this. There last Thursday, at the witness table of a packed House hearing room, sat the nation's -- maybe the world's -- five most highly compensated individuals.

Rep. Elijah Cummings, a veteran Baltimore politico, sized up the five. John Paulson, James Simons, Philip Falcone, George Soros and Kenneth Griffin all share a common line of work: They run hedge funds. Last year, they all made over $1 billion -- each -- in income.

Even more incredible: Cummings and his House colleagues had heard, earlier in the hearing, that a single tax loophole -- that involves investment fund profits -- will save hedge fund managers and their private equity fund manager cousins $31 billion off their personal tax bills over the next 10 years.

"A school teacher or a plumber or policeman makes on the average of $40,000 to $50,000 a year, yet they have to pay 25 percent tax,” Cummings would observe to hedge fund superstar John Paulson. "You make a billion doIlars, yet your rate can be as low as 15 percent. Is that fair?"

According to the hedge fund industry trade journal Alpha, Paulson made $3.7 billion last year. Despite that fortune, he and his fellow hedge fund kingpins, as billionaire investor Warren Buffett has pointed out repeatedly over the last year, pay taxes at a lower overall rate than their office receptionists.

Fair? Certainly not. But this unfairness may actually obscure the significance of what's really going on behind America's financial hedges, where individuals like John Paulson are making more in one single year than normal mortals could make in over 25,000 years.

This astounding reality takes us far beyond questions of fairness. This reality reflects foolishness -- of the highest order. Any nation that lets income concentrate to a John Paulson-like extent, as financial analyst Fabrice Taylor noted last week in the Toronto Globe and Mail, is inviting economic disaster.

None of the lawmakers at Thursday's hearing seemed eager to explore the impact that grotesquely top-heavy distributions of income are having on our current economic situation. That's a problem. If we don't start focusing on income distribution, Taylor believes, economic recovery will remain a long way off.

"To get consumers spending," he explains, "you obviously don't want to concentrate income and income growth in a very small number of the population. After all, there are limits to how much a single person can spend."

Taylor asks us to consider two scenarios: one with $100 million divided among 10 households, the other with $100 million divided among 1,000. How would these scenarios likely play out? The first, says Taylor, will see "more speculative financial markets;" the second will see more consumers buying cars.  

At one point in Thursday's hedge fund hearing, Cummings did seem to be on the verge of exploring the foolishness of letting billions concentrate at the top of America's economic ladder.

"My neighbor on his way to work this morning said to me," Cummings noted, "how does it feel to be going before five folks who have got more money than God?"

Cummings went no further down that road. Nor did any of his fellow lawmakers.

Last week's House Oversight Committee hearing did, to be sure, do some serious good. Witnesses like Stanford University's Joseph Bankman and former SEC chairman David Ruder made persuasive cases for closing hedge fund tax loopholes and subjecting hedge funds to meaningful federal regulation.

And billionaire George Soros aptly skewered the "market fundamentalism" -- the notion that markets always know best -- that has helped usher in our current crisis.

But the hearing, as introduced by Committee Chairman Henry Waxman, had a broader mission: To "ask what could go wrong in the future so we can prevent damage before it occurs."

By accepting, as a given, the legitimacy of billion-dollar incomes, the committee left that question largely unanswered, and left America's perilously intense concentration of income once again unchallenged.

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