Ah, the life of the rare American Hedge Fund Manager. While you might
be wondering if your home will escape foreclosure, this stealthy
warrior is socking away billions -- thanks largely to the ... mortgage
crisis!
Seldom seen outside his elegant offices in urban banking centers, this
breed of money men, overwrought with of dollars gotten through hidden
deeds, doth tease us into rage ... cash mastery ...
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"1 Man, 1 Year: $3.7 Billion Payout"
"Hedge Fund Manager Won Big by Betting Mortgages Would Fail"
By David Cho
Wa****ngton Post Staff Writer
Thursday, April 17, 2008; D01
The subprime mortgage mess that caused massive losses for homeowners
and banks was a little kinder to hedge fund manager John Paulson.
Betting subprime mortgage securities would sour, Paulson personally
earned $3.7 billion last year.
Yes, you read that correctly. That's billion with a "b."
He wasn't the only one with Titanic-size profits. Two other fund
managers, George Soros and James Simons, who are notoriously secretive
about their investments, earned $2.9 billion and $2.8 billion,
respectively, according to Alpha Magazine's annual list of top hedge
fund earners.
The numbers left jaws agape across Wall Street and Wa****ngton. With
his windfall from last year alone, Paulson could have bought troubled
Wall Street giant Bear Stearns three times over. Or he could have
matched the price Delta agreed this week to pay to merge with
Northwest Airlines and still have $600 million left over.
A few years ago, individual income reaching into the billions of
dollars was unfathomable. In 2002, the first year the magazine tracked
hedge fund compensation, the top 25 managers earned $2.8 billion
combined.
Paulson's feat was even more astoni****ng because he started 2007
managing $6 billion, not a massive pool of money by hedge fund
standards. Over the course of the year, one of his funds earned a
whopping 590 percent return, and another soared 353 percent, according
to Alpha. By the end of December, his funds' assets were worth $28
billion.
He amassed his winnings by "shorting" securities linked to subprime
mortgages. In a short sale, the investor borrows securities -- in this
case, subprime mortgages that were widely held by banks, brokerages
and other investors -- and sells them to another buyer. Later, the
investor must buy those securities back and return them to the
original lender. As the subprime market collapsed, the value of the
securities fell, and Paulson was able to pocket the difference. The
lenders were stuck with the losses.
Several hedge fund managers, including Philip Falcone, who has been
challenging the board of the New York Times Co., also profited from
the mortgage crisis by betting that subprime debt securities would
plunge in price. Falcone earned $1.7 billion last year. Others made
fortunes by betting that the prices of commodities such as oil, sugar
and corn would rise.
Hedge funds are pools of private money, largely generated from wealthy
individuals, pension funds and endowments, used for a wide range of
investments. Usually 80 percent of any gains are given to such
investors, while fund managers take 20 percent, plus an annual fee for
their services. Alpha's list tracks the income that managers receive
after paying their staff members and other expenses.
Some Wall Street analysts who follow the industry said the gigantic
compensation figures may prompt Congress to consider raising taxes on
the business. Last year, several lawmakers introduced bills aimed at
raising the tax rate, usually 15 percent, that fund managers pay on
their gains. None of these efforts became law.
"Wa****ngton is clearly aware of the numbers and has been following the
billions of dollars that are being generated," said Michael Peltz,
editor of Alpha.
Daniel Strachman, a former hedge fund consultant and author of several
books including "The Fundamentals of Hedge Fund Management," was
skeptical of raising taxes on hedge fund managers, saying they should
be rewarded for taking huge risks. Most managers have their own money
in their funds and suffer massive losses when their investments go
bad.
"It's clear somebody has to win and somebody has to lose," he said.
"It's not pretty at all because people say, 'Oh my God. Look how much
money these guys are making while people are losing their homes and
are complaining about the cost of eggs and sugar.' But so what? We
don't live in a society that is pretty all the time. That's why it's
capitalism."
http://www.wa****ngtonpost.com/wp-dyn/content/article/2008/04/16/AR2008041602027.html
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