US hedge fund bosses scoff at critics
Washington, November 14:
America’s top hedge fund managers staunchly defended the conduct of their secretive, high-risk industry yesterday and warned the US Congress that knee-jerk regulation could push financial jobs across the Atlantic to London.
The billionaire bosses of five leading hedge funds appeared before the house oversight committee to answer charges that their unregulated bets on financial markets have destabilised the global economy.
George Soros, Kenneth Griffin, Philip Falcone, Jim Simons and John Paulson — who have an estimated combined wealth of $29 billion — faced grilling over their low rate of tax and their funds’ minimal level of transparency.
They expressed a willingness to disclose more information about their investments to the securities and exchange commission but insisted any such data remain shielded from the public gaze.
Griffin, whose Chicago-based Citadel Group manages more than $20 billion, told lawmakers that public transparency would be “parallel to asking Coca-Cola to disclose their secret formula to the world”.
He added that periods of regulatory uncertainty had undermined the US’ competitiveness with Britain: “It breaks my heart when I go to London’s Canary Wharf and look at thousands and thousands of jobs there in the derivatives market which belong in America.” The hearing, part of an investigation into oversight of hedge funds, became tense at times when the billionaires were quizzed about their personal wealth. Elijah Cummings, a Democratic Congressman, said a neighbour had accosted him to ask: “How does it feel to go before five folks who’ve got more money than God?” Cummings called on them to explain why their income is often taxed as capital gains at 15 per cent — below the rate paid by a “schoolteacher or a plumber”.
Paulson, who personally scooped more than $3 billion last year when his fund bet against sub-prime mortgages, said the comparison was unfair. “If one of your constituents, whether they’re a plumber or a teacher, bought a stock and held that stock for more than a year, they would pay a long-term rate of capital gains tax.” Hungarian-born financier Soros said he would have no objection to paying a standard rate of tax on all his income. The 78-year-old, who is famed for betting against the pound Sterling as it struggled to stay within the European Exchange Rate Mechanism in 1992, said he was open to greater oversight to ensure that banks and hedge funds do not use excessive leverage by borrowing too heavily on assets.
Soros said the financial crisis had exposed flaws in the present regulatory approach: “The fact that Lehman Brothers was allowed to declare bankruptcy in a disorderly way caused a meltdown in the financial system — a cardiac arrest.”
Simons said credit-rating agencies were the culpable financial players in failing adequately to scrutinise mortgage-backed securities: “They allowed sows’ ears to be sold as silk purses.” The witnesses remained unapologetic about their personal earnings, insisting that hedge fund industry provides liquidity and “outside-the-box thinking” to the financial markets.
Falcone, who made millions by taking short positions in banks, said that he was the youngest among nine children born in a working-class Minnesota town, with a father who never earned anything more than $14,000 a year.