Will $1 trillion toxic waste plan enrich hedge fund billionaires?
Mar 25th 2009 2:30PM
Updated Dec 4th 2009 11:27AM
On Monday, the stock market rose 498 points, a move that many attributed to the announcement over the weekend of a plan to buy $1 trillion in toxic waste that uses government loans to lure investors -- such as hedge funds -- into buying extremely risky securities.
That sounds like the same thing that got us into the financial crisis in the first place. It also sounds like the sort of thing that hedge funds do for a living -- and those hedge funds are making a handful of skilled people into billionaires.
I think it's absurd for people to connect the daily fluctuations in the stock market with a single headline, though it does make it easier for the media to explain when it fails to interview the biggest buyers and sellers of the day to discover the reasons for their transactions.
Since the market lost 115 points yesterday, where were the headlines like this: Investors like the plan 23 percent less on Tuesday than they did on Monday?
While 2008 cost investors worldwide $50 trillion, the top 25 hedge fund managers were making a cool $11.6 billion. Two of the biggest winners were James Simons ($2.5 billion in 2008 compensation) and John Paulson ($2 billion). Simons and Paulson were big winners in 2007 as well. In the case of Simons, there is a big mystery about how he makes money, but a lawsuit from a few years ago suggests he did it through buying limit order book data , which lets him bet on falling stock prices. Paulson's victory is less mysterious -- he bet on the collapse of subprime mortgages and on banks that held toxic waste.
What does this have to do with the government's plan to buy toxic assets? Such hedge funds and private equity firms are the very people whom the plan is trying to lure into buying toxic waste. Simply put, the plan could make the very richest very much richer. It will certainly benefit the firms -- like the overly powerful PIMCO -- that win government contracts to manage the public-private investment program (PPIPs) that will buy the toxic waste.
To the six reasons that I think Geithner's plan is a bad one, I'd add a seventh now -- hedge funds and private equity firms won't participate because they fear that there'll be a public outcry over their compensation if the plan makes them even richer. And that could force them to pay back the money they make.
And from their perspective, hedge fund managers like Simons and Paulson seem to be doing just fine without these headaches. So I would bet they'll steer clear -- as will any other firms that are making money without help from the government.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing.