I was reminded of this Thomas Nast Cartoon called “The Brains” by the news this morning that several hedge fund managers took home more than $3 Billion last year. John Paulson made $3.7 Billion. Like the era Nast satirized, we have entered a new gilded age and it will take a new Progressive Era to clean up the mess.
Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers’ own pay and excludes the compensation of their employees. Top hedge fund managers made money in many ways last year, from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Mr. Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.
As I pointed out last month, this new savage capitalism works (in the words of Ben Stein) “not by betting on the markets, but by controlling the markets, by putting so much sell side (and occasionally buy side) firepower in play that they know they will move the markets.” These market manipulations have begun to distort the prices of basic commodities like the aforementioned wheat and oil, leading to the food riots we have talked about in the last few weeks and pain at the gas pump.
The country’s troubles have made it a potential target for speculators seeking to drive down the value of its currency and perhaps cause a run on the banks. In 1998, hedge funds purportedly worked together to attack Hong Kong’s currency and its stock market, an attack that was foiled only when the government bought up a sizable chunk of the stock market. It’s not clear that a similar cabal is gunning for Iceland—the governor of its central bank insists that one is—but the notion is certainly plausible: with a population the size of Pittsburgh and a central bank whose total reserves are less than five billion dollars, the country makes an easy target for hedge funds flush with cash.
As Nast pointed out in his cartoon, it doesn’t take brains to make money in a world of unregulated capital–it just takes money.