Making a Million an Hour Means never having to say you're sorry

(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.

Fuzzy Treasury Math and Its Consequences

(Note: A version of this appeared on AlterNet earlier this week). If it sounds too good to be true, it’s probably false. Especially if it involves math, the Treasury Department, and two disparate political camps championing two different economic doctrines.

Yet, so goes the current telling of the deficit story. When the Congressional Budget Office (CBO) proclaimed that its projected deficit for 2013 had dropped to $642 billion, there was nary a question asked about how that number was conceivable.

Real-wage stagnation, epic student debt, more low-paying half-jobs accepted out of desperation than moderate-paying full-ones being created, health costs out of control, an ongoing Congressional war over sequestered funds, more federal debt being created even if tempered by zero-interest-rate policy and yet, the media jumped on the make-believe-bandwagon of an incomprehensible turn-around in the government’s books, where the deficit had grown as a direct result of debt created to float the banking system. Somehow the deficit had magically nearly-halved from around $1.1 trillion last year.

A battle of philosophies

When the deficit was announced to have undergone some kind of Fastest Loser diet, Keynesian types were thrilled that their philosophy was validated. The wondrous number, the ‘smallest shortfall since 2008’,  proved fiscal stimulus would ultimately boost the economy.  (Leave aside that John Maynard Keynes was actually an asset manager and successful speculator.) 

Where there is truth to part of this  (austerity never helped anyone but those not impacted by it) it ignores the fact that a vast portion of stimulus has been mirrored by a policy of cheap money, asset bubble manufacturing and providing a parking spot for Treasury and bank debt on the Fed’s books. Nearly 80% of the Treasury debt created since the financial crisis of 2008 has not been raise to even plug a deficit, but to float a flawed financial system. Still, blind acceptance that any federal stimulus helps the population and not its financial institutions does economics and more importantly, the country, a disservice.

Free-market types also considered the reduced deficit a philosophical triumph. By not overly helping or regulating the market (score another one for watering down the already tepid Frank-Dodd Act), the economy is marching back to normal on its own. See! So more budget cuts of social, but not corporate, welfare are necessary.

But blind-belief in the headline figure weakens their cause, too. A true free-marketer would be against the Federal Reserve propping up the treasury department and the debt market by printing money, buying lots of new treasuries, or allowing banks to park them on their books (to the tune of more than $1.5 trillion worth in excess reserves) and by buying $85 billion in toxic assets per month from banks shifting their rotting positions to the Fed, thereby freeing up space to speculate in other ways, in a well-orchestrated accounting gimmick.

Those debates of course will continue on. Meanwhile, there’s the matter of what sparked them - the CBO’s estimate of the 2013 deficit, the number that measures what the government takes in vs. what it spends. Examining it, shows that not much has changed in the past three years. 

First, a hat tip to Karl Dennniger at Market Ticker for boldly going where much of the media seemed too complacent or clueless to go.  According to Denninger’s analysis of Treasury data, since September 28th 2012, “there has been a net $762.6 billion of new debt added to the Federal balance sheet, not the $488 billion the Treasury Department claims.”

He shows how the Treasury’s cash statement indicates that “At the current run rate … the deficit on a cash basis this year is $1.188 trillion” compared to $1.210 trillion last year, or,  about the same.  If you include figures through the end of April, that run rate produces a deficit of about $1.307 trillion.

Regarding the $642 billion headline deficit number, simple logic (and a read of the news) showed that neither US debts, nor its largest expenditures had dropped.  At first, I just assumed the Treasury Department was excluding something major from the figures that the CBO was using - but the math doesn't work even if it excluded lots of costs or pumped up lots of revenues.  

The Truth is In there

The evidence of the real deficit projection lies in the Treasury's own report of receipts and outlays, the Monthly Treasury Statement which compiles activity from the start of the current fiscal year (October 2012) through April 2013. 

A cursory look at this report reveals items that ulimately don't support the CBO’s cheery projections. (Warning: there’s some math coming up.) Take Table 1. Its shows there have been $1.603 trillion in budget receipts so far for fiscal year 2013 vs. $2.090 trillion in outlays. This indeed produces a value for a current deficit (outlays minus receipts) of -$487 billion.

The same table (and also Table 2) shows there were $1.383 trillion in receipts for the same period in 2012 and $2.103 trillion (about the same as this year) in outlays. Combining those figures, we do get a  comparative deficit this time last year of -$719 billion.  Okay, so far, so on point with the headline cheer.

However. Just below Table 1 comes some small print. The Treasury Department appears to have changed some accounting methods: "The deficit figure differs by $2.23 billion due mainly to revisions in the data following the release of the Final Monthly Treasury Statement."  There’s no clarity on how those revisions worked and they are small in the scheme of things, so let’s raise an eyebrow and move on – to the good part.

The Fuzziness

Even if the rest of this year's receipts continue to come in 16% greater than they did last year (which is what this table shows so far) - and there’s no particular reason why they should -  we'd get total receipts of $1.603 trillion plus an additional $1.237 trillion. That equals $2.839 trillion in total receipts for 2013. Remember that number for a moment.

Now, consider that even if  the rest of this year's expenditures remain flat to last year, there would be $3.538 trillion in total outlays for 2013. Subtracting that $3.538 trillion in outlays from $2.839 trillion in receipts, yes, we do get a total deficit projection of around $698 billion, about $56 billion higher then the figure the CBO announced, but what’s $56 billion give or take between friends?

Yet there’s more.  There’s Table 2. According to Table 2, expenditures won't be flat; they will be higher, and reach $3.684 trillion.

Subtracting $3.684 trillion from $2.839 trillion, we get an expected deficit of $846 billion, not the $642 billion figure that the media spread. Again, what’s about $200 billion between friends? But, adding in the extra debt from Denninger’s analysis of reports, that isn’t in this report, of $275 billion could put the real deficit figure closer to $1.12 trillion, where it’s been for the past three years.

There’s always some danger in working with numbers and estimates. The financial crisis predicated on mortgage prices and related assets rising quickly after speed bumps (which is what former Treasury Secretary, Hank Paulson said they'd do in 2007) showed us that. Numbers can be massaged and shrouded with suppositions.

But, that’s not the full case here. This is a case of performing addition and subtraction using the Treasury’s own report. And doing so, even absent wondering about assumptions or potential illusions, reveals a discrepancy between the recent headline deficit number and the one in the report.

Before we can discuss whether government stimulus works or not (and more importantly how programs are designed and who they benefit; sometimes people, often banks and corporatios), we should ask why some people are so eager to accept numbers or be right about the forest, that they run smack into the trees. Let’s at least see the main tree, here – the actual deficit figure - and then, we can move onto economic doctrine discussions. 

Real Danger of “Obamacare”: Insurance Company Takeover of Health Care

Election rhetoric shuns the big picture in favor of the bigger platitude. Now that The Show is over, we are left with the equivalent of a Sunday morning hangover following a binge of promises and lies. We leave the theatre of political spectacle on steroids for the real world of unstable economy, a globally and publicly subsidized financial sector, and increased costs of living on everything from food to education to health-care; outpacing declining median incomes. The average cost for health insurance for a family is $15,745 per year vs. a median income of $50,502, or about half post-tax take-home pay.

“Obamacare” is the name commonly used for the Patient Protection and Affordable Care Act (PPACA) of 2010. The very moniker is indicative of how name-and-image-centric our world has become; Medicare was never called “Johnsoncare” when President Johnson signed it into law in 1965 and Johnson was not exactly a man of small-personality. At any rate, Obamacare or the PPACA ranks as one of the most misrepresented issues from the campaign, by both sides of the ever-slimming aisle.

The Tea-Party Conservative types get it embarrassingly wrong when they call it a “government takeover of health care.” Likewise, Progressive Obama-supporters are deluded in accepting it as the most sweeping healthcare reform since Medicare. (Side note: I wish the word ‘sweeping’ could be retired from politics until it actually means -sweeping.)

Here’s why. The PPACA does nothing to restructure the health insurance industry, anymore than the Dodd-Frank Act restructures the banking industry. This means everything else it attempts to do, positive or negative, will be vastly overshadowed by an industry accelerating to morph itself into a acquisition machine in order to circumvent anything that even smells like a restriction, including laws that exist and ones to come.

How? By doing the same thing energy and telecom companies did after they were deregulated in 1996, and that banks did after they were summarily deregulated (after moving that way for decades) in 1999. They are merging, consolidating, eliminating competitors, and controlling their domain. They are manufacturing power.

Investment bankers are roaming the world to exploit this hot new opportunity. That’s one reason insurance companies don’t even call themselves that anymore. Now, they are ‘managed health care’ companies. Call yourself a managed health care company, and you can buy everything from other insurance companies to hospitals to clinics to doctors. The more consolidation, the more fees bankers rake in, and the more premiums and medical reimbursements and health care procedures, each company can control.

The result of 1996 energy deregulation was a glut of crime-spawned bankruptcies like Enron. Likewise WorldCom led a pack of telecom degenerates in the production of tens of billions of dollars worth of accounting fraud. The final repeal of Glass-Steagall ignited a merge-fest of investment and commercial banks, their linkages ensuring that taxpayers, whose deposits have been protected since the New Deal, provide a safety-net upon which they can mint toxic assets loosely based on over-leveraged home mortgages, and engage in risky, speculative activity; big banks don’t go bankrupt when they fabricate values or lose big on stupid bets, they get federally subsidized in all sorts of ways.

You know who else is similarly too big to fail? The insurance industry. UnitedHealth Group, the nation’s largest health insurer covers 50% of the insurable population in over 30 states. Blue Cross-Blue Shield, covers 100 million people through a constellation of 38 sub-companies. They, and other insurance companies are growing in breadth. When companies consolidate, the result is less transparency, less competition, and more possibility for fraud and shady behavior. Every. Single. Time.

Obamacare and Accounting Fraud

By January 2014, the PPACA will require insurance companies to list their prices on competitive exchanges. In Obama-theory, this is supposed to reduce premiums via competition. But what if, say, only three companies control nearly all of the premiums? Consider the fact that it costs the same $3 to extract your money from a Chase, Bank of America or Citigroup ATM (if you don’t get it directly from the firm you bank at.) They constitute a monopoly that defies anti-trust inspection (thank you, Department of Justice.) What incentive would any of them have to charge less? None. That’s why they don’t.

Managed Health Care companies don’t just administer private, but government health insurance policies as well. The http://www.healthcare.gov website says that under the PPACA, the life of the Medicare Trust Fund will be extended to 2024 as a result of reducing waste, fraud, abuse, and slowing cost growth. President Obama promised to reduce Medicare fraud 50% by 2012 according to the site – but if he did, he forgot to mention it during the campaign period. 

To supposedly combat price hikes, the PPACA calls for a new Rate Review program, wherein insurance companies must justify premium hikes of more than 10% to a state or federal review program. Given that banks aren’t supposed to hold more than 10% of the nation’s deposits in any one institution, and three do, this isn’t a comforting constraint.

While it is positive that the PPACA requires coverage of people with pre-existing conditions and prohibits lifetime caps, it can’t control what people pay for insurance, because it doesn’t limit actual premiums, which have risen 13% on average since the Act was passed.

The medical cost ratio limitation the PPACA instills; that 80% of premiums must be used for medical care in the case of individuals and small groups, and 85% in the case of large groups) to supposedly ensure companies operate on a more efficient premium in vs. premium out basis, is a joke. Its punch line is accounting manipulation.  Call everything a medical cost; even buying another company, and the ratio is meaningless.

WellPoint got the Joke

WellPoint got that joke immediately. The largest for-profit “managed health care” company in the Blue Cross and Blue Shield Association, it began trading publicly on December 1, 2004. Depending on the state, it operates under Blue Cross and Blue Shield, Blue Cross or Anthem. 

After the PPACA was passed, in March 2010, WellPoint allegedly reclassified certain administrative costs as medical care costs in order to meet the law’s new medical loss ratio requirements (which requires insurers spend at least 80% or 85% of premiums on health care services, depending on the type of plan, individual or group respectively.)

A month earlier, WellPoint announced its Anthem Blue Cross unit would raise insurance rates for some individual policies in California up to 39%. Federal and California regulators are still investigating this, but the premium hikes remained.

WellPoint is also one of Wall Street’s favorite “managed health care” companies; cause it keeps getting bigger through acquisitions that pay hefty fees to the bankers involved. On October 23^rd, WellPoint got approval from Amerigroup’s shareholders to acquire Amerigroup, a Medicaid-focused health insurer, in a $4.9 billion cash deal. The deal makes WellPoint the nation’s largest Medicaid insurer, and provides it greater access to Medicaid patients who also qualify for Medicare.

It was the largest cash deal ever, and the largest premium paid for a company in the managed health care realm. As a result, Goldman Sachs (who advised Amerigroup) and Credit Suisse (who advised WellPoint) retained their top positions in the global healthcare deal advisory league table.

The value of Amerigroup, as a company, dropped 34% within two weeks of that agreement, in stark shades of what happened when Bank of America took over Merrill Lynch in the fall of 2008.

This summer, Amerigroup and Goldman Sachs faced a shareholder lawsuit filed by the city of Monroe Employees Retirement System and Louisiana Municipal Police Employees Retirement System. It alleged that Goldman advised Amerigroup to accept WellPoint’s offer quickly, rather than seek other bids, because the bank had structured a complex, and fee-heavy derivatives transaction on the back of the deal. The insurers resolved the suit by tweaking the deal parameters. All parties denied ‘any wrongdoing.’ But where there’s smoke in complex derivatives land, there is fire.

Other Mergers

After the Supreme Court upheld the PPACA, a spate of mergers rippled through the managed health care realm, to ostensibly cope with smaller profit margins and  ‘compliance costs.’  But really, it’s because each firm wants to corner as much as possible of the market, in as many states as it can, to garner more premiums and control more disbursements and prices at the upcoming insurance ‘exchanges.’

In late August, the third largest insurance company in the US, Aetna announced it was buying Coventry Health Care for $5.7 billion. Coventry provides Medicare and Medicaid services, thus the takeover expands Aetna’s Medicare and Medicaid business. Being part of Aetna enables Coventry to grab more consumers on more state-run health insurance exchanges, reducing competition in the process. The Department of Justice is examining anti-trust issues surrounding the deal, but it’s still expected to close in mid-2013.

On October 17^th, UnitedHealth Group issued $2.5 billion of bonds as part of its $4.9 billion acquisition of Brazil’s Amil Participacoes. Bank of America Merrill Lynch, Goldman Sachs, J.P. Morgan Chase & Co., Morgan Stanley, UBS and Wells Fargo Securities were lead underwriters on the deal.

They are not buying international companies in order to increase accounting transparency. Like other multinationals, they are doing so to move profits around and circumvent restrictions and tax laws. They are using cash, or raising extra debt, to do so, rather than to reduce premiums or increase disbursements to medical professionals.

And if you’re keeping score – billion of dollars are flowing from insurance companies – NOT to reduce premiums to patients and NOT to reimburse doctors and NOT to enhance the quality of care, but to simply expand nationally and globally. Meanwhile, their CEOs are doing quite well from all that non-health care related movement.

Total compensation for the bulk of health care company CEOs rose by 14.7% in 2011 by 14.7%, or $11.1 million, to $87 million. Cigna’s CEO David Cordani made $19.1 million. UnitedHealth Group's CEO, Stephen J. Hemsley bagged $49 million in salary, stock options, and other compensation last year. The highest-paid CEO made 94 times the average compensation level of primary care physicians. And none of them had to pick up a single scalpel in the process.

Doctors as profit centers

Not just patients, but physicians have been bled steadily from the current state of insurance company controlled health care through diminishing insurance reimbursements, electronic medical records mandates whereby they spend as much time complying with Kafkaesque controls over their decisions on performing surgeries and providing care, and debt. New doctors are graduating with an average of $250,000 in debt, which, combined with diminishing disbursement and soaring costs, will keep many, underwater. Forever.

According to Dr. Michael H. Heggeness, President of the North American Spine Society, a group of 6500 global spinal and orthopedic surgeons (at which I delivered a speech last month), “The last people, that most of the population feels sorry for are doctors, yet they are in an economic crisis of their own. In 2002, 80% were in private practice, now 70% are in hospitals because they can’t afford to make a private practice work.”

Meanwhile the more hospitals are viewed as profit centers, the more their Chairmen will cut costs to maximize returns, and not care quality. They will seeks ways to sell underperforming assets, programs or services and reduce the number of nonessential employees, burdening those that remain. No doubt the private equity community will be getting more into this game, as insurance companies buy more hospitals, doctors, clinics, and perhaps drug companies, or vice versa, and ‘restructuring’ accelerates.

And if insurance companies can manage doctors directly, they can control not just costs, but treatment – our treatment. It’s not an imaginary government takeover anyone should fear; but a very real, here-and-now insurance company takeover, to which no one in Washington is paying attention.

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