Selling Them Short

By Dana Milbank
Friday, November 14, 2008

"He is not fighting for Joe the Plumber," Barack Obama said of John McCain during the campaign. "He's fighting for Joe the Hedge Fund Manager."

Perhaps it was inevitable, then, that yesterday, a mere nine days after McCain's loss, House Democrats hauled in Joe the Hedge Fund Manager to testify before Congress. Actually, they hauled in a billionaire's row of them: John, George, Philip, James and Kenneth the Hedge Fund Managers. Their average earnings last year: reportedly $2.5 billion apiece.

They were in for the populist treatment. House Oversight and Government Reform Committee Chairman Henry Waxman (D-Calif.) pointed out that some of their income is taxed at the 15 percent rate. "That's a lower tax rate than many schoolteachers, firefighters -- or even plumbers -- pay." The audience chuckled.

"Jesus Christ!" Rep. Elijah Cummings (D-Md.) bellowed when his turn came to make the same point. "The median hourly earnings for a plumber -- we've been talking about plumbers here a lot lately -- was $20.65 per hour." And yet, he added, "Joe the Plumber is being taxed at a higher rate than Joe the Investment Banker. . . . I'm sure people like Joe the Plumber and others would like to try to get into that category."

The hedge fund managers did their best to perform the regular-guy routine -- not an easy thing to do when you made $1.7 billion last year, as Philip Falcone of Harbinger Capital Partners is reported to have done.

"I was born in Chisholm, Minnesota, population 5,000, on the Iron Range in northern Minnesota," Falcone said. "I was the youngest of nine kids who grew up in a three-bedroom home in a working-class neighborhood. My father was a utility superintendent and never made more than $15,000 per year, while my mother worked in the local shirt factory."

This, he said, proved that "not everyone who runs a hedge fund was born on Fifth Avenue." He added: "That is the beauty of America." This patriotic child of the Iron Range asserted that hedge funds are "part of the solution to our economic turmoil."

Actually, they're more often labeled as a cause of the turmoil, because of their unregulated status, their unknown investments, and short-selling that has accelerated the collapse of the mortgage market. That may explain why even the Republicans on the committee were disinclined to defend the witnesses' 10-figure earnings.

Rep. Mark Souder (R-Ind.) used his time to go after George Soros for his liberal politics. "I just want to say, Mr. Soros, we've had deep disagreements over the years on the heroin needles promotions and your promotion of different, what I believe are backdoor legalization of marijuana," the congressman declared. "Your intervention in the drug area has been appalling."

Tom Davis (Va.), the soon-to-retire ranking Republican on the committee, suggested that the hedge fund industry's unregulated status would not stand. With as much as $1.5 trillion under hedge funds' control, he said, "public employees and middle-income senior citizens, not just Tom Wolfe's masters of the universe, lose money when hedge funds decline or collapse."

The masters of the universe tried to be ingratiating, without yielding on anything that would cost them too much money. A few hinted that they could live with a higher tax rate than the 15 percent capital gains rate that much of their income is now subject to. They also made noises about reporting their investments to federal regulators -- but not, heaven forbid, the public. "To ask us to disclose our positions on the open market would parallel asking Coca-Cola to disclose their secret formula to the world," protested Kenneth Griffin, who hauled in a reported $1.5 billion last year managing his and other rich people's money at Citadel Investment Group.

Their product, however, costs considerably more than Coca-Cola; often investors need $5 million to play. "I have a material, several-billion-dollar investment in Wellington and Kensington, and I have a investment in the several hundred millions of dollars in our other funds," Griffin said matter-of-factly.

Cummings found such wealth to be "a staggering amount of money -- and I'm not knocking you for it." He'd better not: A good amount of it goes to Democratic campaign accounts.

"My question," Cummings said, "is whether this is fair. A schoolteacher or a plumber or a policeman makes on the average of $40,000 or $50,000 a year, yet they had to pay 25 percent tax. You make $1 billion, yet your rate can be as low as 15 percent."

"Our tax situation is fair," replied John Paulson, said to have taken home $3.7 billion last year from Paulson & Co.

Griffin suggested that the congressmen think of him as Philip the Chef, not Philip the Hedge Fund Manager. "If you and I were to start a restaurant together, and I was to be the chef and operator, and you were to put up the capital . . . I will get long-term capital gains."

Rep. John Tierney (D-Mass.) was not satisfied about "your analogy about the restaurant," because "the money you earn for being a chef gets taxed at a regular-income rate." Tierney argued that "when you're managing other people's money, you're in effect the chef of that process."

"Well, let's go back to the story of the chef," Griffin proposed after more back and forth.

"I just don't want to take the chef analogy too far," Tierney cautioned.

All the talk of plumbing and cooking must have made James Simons ($2.8 billion from Renaissance Technologies last year) thirsty. He was working on his second bottle of Deer Park bottled water when he interrupted the proceedings with a request of the chairman.

"I'd like to excuse myself for a moment; I'll be right back," he said.

Even masters of the universe must answer calls of nature.