Making a Million an Hour Means never having to say you're sorry
Tuesday, May 28, 2013 at 10:19AM (Note: A version of this book review featured on Truthdig last week.) Les Leopold’s latest book, “How to Make a Million Dollars an Hour: Why Hedge Funds Get Away With Siphoning Off America’s Wealth,” is necessary, alarming and really funny. His talent for deconstructing complex financial terms and topics constitutes a public service. What he reveals in a sardonic and appropriately irreverent tone, is more ominous. We exist in a political-economic system that allows people who manufacture nothing and bet on everything to control the financial destinies of the rest of the population with impunity, and make stupendous amounts of money doing it. Because, as Leopold writes, “Making a million an hour means never having to say you’re sorry.”
That inanity is what makes Leopold’s book so timely, especially now, when the powers-that-be are pretending we’re back to our pre-2008-financial-crisis status—and that’s a good thing. Hey, the stock market's hitting all-time highs—that’s never happened ahead of a major catastrophe before!
His “handbook” approach to a pretty arcane topic is hilarious and horrifying. His lively chapters are divided so that they read like a twelve-step Capitalists Anonymous program on how to achieve wealth nirvana. There’s Step 2, “Take, Don’t Make,” which asks how can these hedge fund managers who create absolutely nothing tangible be rewarded so outrageously for it? There’s Step 7, “Don’t Say Anything Remotely Truthful”—well, that speaks for itself. And Step 9, “Bet on the Race After You Know Who Wins,” gets to the heart of how these managers, who inspire a plethora of reverential business magazine profiles and books, aren’t doing anything particularly daring or even smart. Hell, it’s not hard to find the bodies if you’re the one burying them.
Leopold opens with comparisons of wealthy categories of humans from top entertainers to sports legends to CEOs (including bank CEOs). Only then does he reveal the ones who warrant the book’s title—the top 1 percent of the top 1 percent elite hedge fund managers who bag billions of dollars per year, and millions of dollars per hour, making 100 times more than the top bank and insurance CEOs. Some even approach $2 million an hour such as David Tepper did in 2009, or John Paulson did in 2010 (well, $2.4 million an hour).
Rhetorically Leopold asks, “What on earth do hedge fund managers do to justify making all that money?” To answer, he carefully debunks all sorts of reasons that hedge fund managers and their followers give to explain how valuable they are. Some of these non-reasons include their contribution to financial innovation and fixing price deficiencies in the market. To which, Leopold responds, “So what?” (Thank you, Les!)
In fact, because of the mega amounts of leveraged capital these funds have at their disposal—courtesy of the banks that help fund them—they are much more likely to jump ahead of trades and force the market to move as they want, then massage it into some kind of free-market-philosophy-inspired equilibrium.
The truth is that hedge funds are risk breeders and carriers, not diffusers. They operate in a relatively unconstrained manner, hiding their positions and strategies to remain “competitive.” Leopold does an excellent job of exposing the ways they manipulate our economy behind that curtain, where the only doctrine they follow is the one that makes them the most money.
Take the irony of Tepper’s Appaloosa hedge fund that bet against free-market ideology and for government bailouts, by betting that after the 2008 financial crisis began the government would not let the big banks fail. He was right. In 2009, he made $4 billion. He profited from us bailing him out. As Leopold writes, “The bailout saved the entire hedge fund industry from utter collapse.” And these guys didn’t even hold FDIC-insured deposits or insurance polices. Think about that.
In Step 3, “Rip Off Entire Countries Because That’s Where the Money Is,” Leopold recalls George Soros’ epic hedge fund bet against the British pound when the European Exchange Rate Mechanism was coming into being. He made $1 billion, while British citizens got economically hosed. More recently, MF Global (which operated like a hedge fund) made similar bets, only it used more complicated derivatives to do so. And there’s a host of hedge fund and other forms of speculation slamming various European countries again. This is in addition to the harm that the big banks with hedge fund support did when they collaborated to disperse toxic assets to smaller banks across Europe. Those banks either went bust (along with the assets) or got European Central Bank bailouts depending on their political connections. The results are economic havoc and austerity measures across Europe.
Leopold provides a compelling history of risk deterrents and risk enablers. After World War II, politicians and bankers wanted a more stable financial framework, which they believed would also benefit them. Before that, the Great Depression brought about the Glass-Steagall Act that curtailed Wall Street’s ability to take risk, or its leaders to get overly compensated for creating it. From the 1940s to the 1970s, the world was calmer. Then, 1970s and 1980s deregulation and tax havens for the über-wealthy ushered in dozens of financial crises.
Finally, the repeal of Glass-Steagall in 1999 led to the behaviors that caused the most recent crises. Leopold presents an often-overlooked aspect: how big banks teamed up with hedge fund managers generally. Banks created Collateralized Debt Obligations, and hedge fund managers “managed” them, buying equity in them to entice more investors, countries and pension funds into the game. The timing was special. The junk creation and dispersion machine accelerated after home prices fell and loans faltered in 2006. That’s when the most connected hedge fund managers bet against the CDOs for which they were selecting deteriorating assets. AAA rated slices of CDOs became junk and the whole house of cards collapsed.
In Step 6, “Rig Your Bets,” Leopold asks, “Why gamble unless you’re the house?” He explains how hedge funds like Magnetar fleeced the markets. The deals they managed racked up $40 billion in losses for investors while their managers made billions. They worked with nine banks including Merrill, Citigroup, UBS and JPMorgan. It so happens that JPMorgan—whose chairman and CEO, Jamie Dimon, is often lauded for being a risk management god—did one of Magnetar’s riskiest deals in May 2007, a year after housing prices started to decline. The bank didn’t disclose to CDO investors its special role: selecting pools of 2005 and 2006 mortgages destined to fail. (Because, Department of Justice, in case you don’t get to read the whole book, they were already failing. Insider Information. Look it up.)
The same thing happened with Goldman Sachs and hedge fund billionaire John Paulson. Goldman dumped its most risky assets into its last Abacus 2007 deal, the only deal of the series, Leopold notes, for which a client selected the assets. That client was Paulson. He and Goldman then shorted those assets (devised ways to sell them, forcing the prices lower, which led to profit when they fell). The manager of the deal, ACA Management, thought Paulson would go long (buy) the assets and so bought a big chunk of the deal. In the end, investors lost $1 billion, Paulson made $1 billion. Today, those Abacus securities are worthless.
Leopold also covers such topics as Bernie Madoff and the Galleon hedge fund implosion, for which Raj Rajaratnam, once worshipped as “a great American hero,” got an 11-year prison sentence. All he was doing, though, was old-school insider trading on Goldman Sachs stock and other sundries. But these men didn’t use the system to their advantage as well as the likes of Paulson. And despite their disgrace, the financial world remains unchanged.
As Leopold laments, “The economic collapse of 2008 should have been a silo-busting event.” Only it wasn’t. That fall, progressives voted for Barack Obama, who turned out to so not be FDR, and whose election was partly sponsored by Wall Street.
Toward the end of the book, Leopold offers tips on how to stop this siphoning, rigging and the resulting wealth dislocation and global economic instability. But I can’t help wondering whether things are just too far gone. So, I asked Leopold: Do we need a greater depression followed by World War III to rattle the framework? Are these people simply sociopaths—operating in an enabling environment run by sociopath apologists—so disconnected from the rest of humanity that, like the mean little king in “Game of Thrones,” they believe in their own magnificence and their right to destroy anything in the name of financial “efficiency”?
“Good question,” Leopold responded. “I think the way forward is to start taking their toys away. One major route is to build more public state banks. Right now a trillion dollars of our state and local tax dollars are floating through Wall Street banks in every state except for North Dakota, which has a public bank. Building statewide, not-for-profit banks in state after state would begin to construct an alternative financial path that would directly challenge the money game as played on Wall Street.
“Second, we have to fight hard for a financial transaction tax that 11 other countries in Europe are putting into effect,” he continued. “A small sales tax on financial trades of all kinds would put a major dent in the hedge fund game. It would wipe out the high frequency traders by turning their hidden, privatized tax into public revenues.
“And finally we’ve got to destroy the carried interest loophole which give the swindlers a tax break for being swindlers,” Leopold noted. “I don’t think we need to wait for Armageddon to make progress. I’m counting on one simple fact—Americans really are pissed at Wall Street. The more they find out the angrier they become. We need to keep getting the word out about how high finance actually works.
Cheating, Hedge Funds, Money, Wall Street 
Reader Comments (5)
Great stuff, and thanks for all the info.
Most people aren't aware, nor does the subsidized "business press" ever explain, that the largest hedge funds are typically owned by the largest banks (e.g., from best data available, the largest hedge fund in 2007 was estimated to be JPMorgan Asset Management, owned, of course, by JPMorgan Chase.
The next largest group of hedge funds are directly owned by the super-rich, although such ownership is typically opaque due to the lack of any regulation of hedge funds.
A reporter at Bloomberg News, awhile back, did an excellent story on the how ABS, the American Bureau of Shipping, acted as a holding company for for-profits, while it was a non-profit. The reporter mentioned that they moved billions offshore to a hedge fund, while perhaps not realizing --- as he didn't mention it --- that the hedge fund in question is owned by Morgan Stanley!
Of course, the structure of the hedge fund is one of the five or six chief instruments of financial manipulation used, since a hedge fund may have an unlimited number of investors, thus obscuring its actual ownership (as in majority investor, etc.).
Just as there can be an unlimited number of uncovered credit default swaps bought (naked swaps) and sold, i.e., an unlimited number of "unregulated" insurance policies for both fraudulent gain and almost infinite thievery and manipulation of bonds, etc.
Just as there can unlimited number of futures contracts bought and sold, again allowing for an incredible amount of financial speculation and manipulation.
Just as there can unlimited number of naked short selling of publicly traded stocks of small businesses, thanks to the DTCC's Stock Borrow Program (for which they have been sued in court over, and that includes stock which isn't even in play!).
Add to that the LIBOR rates' manipulation, and the macro picture looks completely rigged indeed!
Thanks again for a great blog post, Ms. Prins!
Sorry, one item I forgot to mention: a spate of books, of the Wall Street-financed variety, came out at the time of the economic meltdown, circa 2008/2009/2010.
It is curious how so many of these books are either written by a hedge fund guy, and/or published by a book publisher which is owned by a hedge fund? Needless to say, these books are so completely misinformational in nature, and hopelessly redirecting the reader's attention and focus away from the truth of the matter, as explained by Ms. Prins in the above posting.
(E.g., Next time you read a book by the publisher, Libri GmbH, look up the publisher's owner of record.)
Thanks for pointing that out SD....yeah, the publishing industry is just that - an industry - , that runs on the fumes of finance, and many of those funds that have invested in publishing houses do so with ramifications on content...as I discovered researching All the Presidents' Bankers, one of the men running the House of Morgan in the 1920s, Tom Lamont, received lots of favorable press (some of it was put to good populace use, some much more self-serving), cause he was invested in various publications. It hurt in the run up to the Crash of 1929 and its aftermath from an objective events perspective, but after WWI, it was helpful in trying to get Americans to support Woodrow Wilson's League of Nations idea, which ultimately died, when Congress remained against it, and Harding became president.
And yet another hedge fund guy (and neocon) soon to be appointed by President Obama to replace Robert Mueller III as the new FBI director: James Comey, formerly of Bridgewater Associates.
(From a puff piece on Bridgewater Associates in The New Yorker.)
http://www.newyorker.com/reporting/2011/07/25/110725fa_fact_cassidy?currentPage=3
Another new member of Bridgewater’s management committee is James Comey, the firm’s top lawyer, who served as Deputy Attorney General in the Bush Administration between 2003 and 2005.
. . .
He (James Comey, that is -- s_d) was tired of corporate politics and craved a setting where people spoke truth to power, but, he said, it took him a while to get used to dealing with Dalio.
[s_d note: Speaking truth to power in the world's largest hedge fund? What a load that is!]
Moyers: America's Gilded Capital and Losing Democracy to the Predator Class
"The political class has reached some kind of critical mass in the 21st century. There is something going on in Washington that needed to be called out. I do not think it can be sustained, and I think it is indecent. It is not how Americans want their government and their capital city to be."
I strongly recommend that you watch this inside look at the culture of unwarranted privilege, unprincipled greed, and self-delusional narcissism amongst the ruling elite in Washington and New York.
http://jessescrossroadscafe.blogspot.com/2013/08/moyers-americas-gilded-capital-and-end.html