Highest Wall Street pay tops $1 billion a year

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Highest Wall Street pay tops $1 billion a year

By Patrick Martin

9 June 2005

 

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The highest paid US hedge fund operator made more than $1 billion in

2004, the first time a Wall Street financial manager has topped the

billion dollar mark in annual income, according to a survey published

last week by a trade publication. Edward S. Lampert made $1.02 billion,

while his firm, ESL Investments, raked in a 69 percent return on

investment, largely due to Lampert's deal-making in the merger of Kmart

and Sears.

 

While thousands of Kmart and Sears workers have lost their jobs—Kmart

announced hundreds of additional job cuts this weekend with the closing

of customer cafeterias in 188 stores—the price of Kmart stock soared

after the merger. Lampert is now chairman of the merged company as well

as chief of ESL Investments. His income more than doubled, from $420

million in 2003.

 

Hedge funds are private investment firms that cater only to millionaire

clients and pay stratospheric fees to the managers. The typical hedge

fund formula is " 1 and 20, " meaning the manager collects a fee of 1

percent of assets plus 20 percent of all profits. Some particularly

successful managers have received fees as high as 50 percent of

profits.

 

According to the survey by Alpha, a magazine published by Institutional

Investor that follows hedge funds, the average compensation for the top

25 hedge fund managers was $251 million, over $6 billion combined. This

figure has nearly doubled since 2002.

 

Besides Lampert, others in the top 10 of hedge fund managers included

James Simons of Renaissance Technologies, $670 million; Bruce Kovner of

Caxton Associates, $550 million; Steven Cohen of SAC Capital Advisors,

$450 million; David Tepper of Appaloosa Management, $420 million;

George

Soros of Soros Fund Management, $305 million (Soros was number one in

2003, with $750 million); Paul Tudor Jones II of Tudor Investment

Corp.,

$300 million; Kenneth Griffin of Citadel Investment Group, $240

million;

Raymond Dalio of Bridgewater Associates, $225 million; and Israel

Englander of Millennium Partners, $205 million.

 

These gargantuan incomes dwarf even the huge salaries and bonuses paid

to corporate CEOs. Edward Lampert's income is 200 times the salary of

the typical Fortune 500 CEO ($5 million a year), which is, in turn, 200

times the salary of the typical worker ($25,000-$30,000 a year). Here

we

have the upper crust of the financial oligarchy that dominates American

society.

 

The $6 billion combined income of the top 25 hedge fund managers is

more

than the entire budget of the city of Chicago. It is more than the

gross

domestic product of 33 of the 51 countries in Africa. It would provide

full four-year college scholarships for 60,000 students. It would pay

the annual salaries of 200,000 workers making the median wage—or

600,000

making the minimum wage.

 

This $6 billion rewards activities that are counterproductive and

parasitic from the standpoint of the interests of society as a whole.

Lampert and his counterparts at other hedge funds produce nothing. They

perform no useful labor. They devise methods through which, by the

manipulation of paper and electronic assets, the rich get richer while

the economy as a whole grows more indebted, conditions of life

deteriorate, and working people are impoverished.

 

The hedge fund managers are one element in the formation of what the

New

York Times described Sunday as the American " hyper-rich, " a layer of

wealthy that " have even left behind people making hundreds of thousands

of dollars a year. " The top 0.1 percent of American taxpayers had at

least $1.6 million in annual income, and an average income of $3

million, an increase of 150 percent since 1980. The share of US

national

income held by this tiny layer—145,000 households out of nearly 150

million—came to 7.4 percent in 2002, double the level of 1980.

 

According to figures compiled by the Times, the hyper-rich are reaping

the lion's share of Bush's tax cuts, even compared to the " merely

rich, "

those with incomes between $200,000 a year and $1.6 million. The 400

wealthiest taxpayers—those making $87 million a year or more—pay the

same share of their income in federal income tax and Medicare and

Social

Security taxes as those making between $50,000 and $75,000.

 

One figure provided by the Times is particularly striking: it compares

how much the top 14,000 households, the richest 0.01 percent, gained

for

each new dollar earned by the bulk of taxpayers, the bottom 90 percent.

From 1950 to 1970, for every additional dollar earned by working class

and middle-class people, the hyper-rich gained an additional $162. But

from 1990 to 2002, for every additional dollar earned by the bottom 90

percent, the top 0.01 percent gained $18,000.

 

Such figures not only prove the existence of a financial aristocracy in

the United States, they demonstrate that this social layer profited

under Clinton and the Democrats as well as under Bush and the

Republicans. Both parties carried out policies that enriched the

privileged few at the expense of the mass of working people.

 

The assets under management by hedge funds have risen from $400 billion

in 2000 to more than $1 trillion in January 2005—a figure which itself

expresses the staggering increase in the wealth of the super-rich,

since

only the wealthy can find entry to these funds.

 

The runaway growth of hedge funds is not only an example of parasitic

wealth accumulation. It is also an extremely destabilizing economic

factor. The flood of capital into this form of speculation, despite the

exorbitant fees taken by the managers, is driven by the poor

performance

of more traditional, relatively more stable investment vehicles: the

stock market has stagnated for the past two years, while bond rates

remain at historical lows.

 

The hedge funds themselves have faced increasing difficulty in this

environment. According to figures compiled by UBS Investment Research,

while hedge fund assets reached an all-time high, fund managers' fees

declined 21 percent from 2003 to 2004. (The combined fees of the

thousands of hedge funds worldwide were still a massive $44.8 billion.)

 

These funds, largely unregulated, play a growing role in the

functioning

of the stock, bond and currency markets. Under conditions of major

financial shocks, hedge fund operations can become an enormously

destructive force in the markets.

 

Because they are highly leveraged, their impact on day-to-day trading

far outweighs the actual size of their assets. Griffin's Citadel

Investment Group, for instance, accounts for more than 1 percent of

daily trading on the New York, London and Tokyo stock exchanges.

Another

of the top 10 funds accounts for 3 percent of trading in New York

alone.

 

Hedge funds were originally devised as a means of guarding against the

risk of a sudden fall in asset values, by balancing purchases of one

kind of assets, expected to rise in value, with the purchase of another

kind of asset that generally rises when the other asset falls. Thus, a

corporation might hedge against fluctuations in the value of the dollar

by buying euros, since the fall in one currency will generally be

mirrored in the rise of the other. Many of the more than 8,000 hedge

funds now operating, however, are nothing more than large one-way bets,

which can be easily lost if the markets move in a different direction.

 

As the New York Times Magazine noted in a generally admiring profile of

one hedge fund operator, also published June 5, " What got lost over

time

was the idea that hedge funds were supposed to hedge. That was

primarily

because of the powerful bull market that began in August 1982 and ended

in March 2000. Investors took outsize risks and invariably wound up

being rewarded, because the market was going straight up. The bull

market forgave a lot of investing mistakes. Hedging seemed

unnecessary—even a little silly. "

 

The result: " A vehicle developed to help reduce individual risk has

heightened risk to the system. "

 

See Also:

Record number of US millionaires

[8 June 2005]

--

 

 

 

" As democracy is perfected, the office of president

represents, more and more closely, the inner soul

of the people. On some great and glorious day the

plain folks of the land will reach their heart's

desire at last and the White House will be adorned

by a downright moron. " --- H.L. Mencken (1880 - 1956)

 

 

Not dead, in jail, or a slave? Thank a liberal!

Pay your taxes so the rich don't have to.

 

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