Hedge fund chiefs blame the system for crisis
Borrowed from the Financial TImes:
Hedge fund chiefs blame the system for crisis
Top hedge fund managers on Thursday defended themselves against charges they had contributed to the economic crisis and warned that excessive regulation would “stifle the best innovative qualities” of the financial markets.
In sworn testimony, five of the highest paid and most powerful hedge fund managers, including George Soros, blamed the crisis on the “financial system itself” as they sought to explain their compensation policies to a committee of sceptical legislators.
James Simons, president of Renaissance Technologies, said credit ratings agencies had facilitated the sale of “sows’ ears as silk purses” because of their “fanciful” ratings of the mortgage-backed securities that lie at the heart of the meltdown.
The hearing before the House oversight committee was the latest in a series of hearings to examine the causes of the financial collapse. Earlier examinations of AIG and Lehman Brothers, the failed insurer and investment bank included harsh questioning of executives who failed to oversee the coming financial tsunami even as they raked in millions of dollars in compensation.
Henry Waxman, the California congressman who chairs the House oversight committee, which is hosting a series of meetings to examine the causes of the financial collapse, said hedge funds’ rapid growth and high leverage were factors that had caused other companies to blow up. Mr Waxman stopped short of blaming the funds - or their trading practices - for contributing directly to the crisis. But he signalled concern over “special tax breaks” that allow managers to treat the vast majority of their earnings as capital gains, meaning some portions are taxed at a rate as low as 15 per cent.
“That’s a lower tax rate than many schoolteachers, firefighters or even plumbers pay,” Mr Waxman said.
Justifying his own pay package, Philip Falcone, co-founder of Harbinger Capital, pointed to his modest upbringing in Minnesota, where, he said, his father never earned more than $14,000 a year.
“It is important for the committee and the public to know that not everyone who runs a hedge fund was born on 5th Avenue - that is the beauty of America,” he said. He added: “This is not a case where management takes huge bonuses or stock options while the company is failing.”
John Paulson, of Paulson & Co, whose bearish views on the mortgage bubble made him the most highly paid fund manager last year, according to some calculations, said his pay reflected returns to investors.
Congressman Tom Davis of Virginia said that it was time to consider “greater standardisation, registration, disclosure and regulatory limitations” for the industry.
Kenneth Griffin, the founder and chief executive of Citadel, did not believe greater regulation was required, and said the greatest failures had occurred in regulated institutions. “We have not seen hedge funds as a focal point of carnage,” he added.