A Hedge Fund Manager's Rant

I currently manage a medium sized hedge fund (long/short equity).

The current populist uproar is absolute insanity. I don't know how else to
say it. You are never going to legislate away greed. Period. It is part of
the human psyche. That's all there is to it. You can either fight it, or use
it. Incentives work. This is why.

Let's step back a minute and think about why and how this happened:

1. Starting back in the 1970s Congress addressed discrimination in
mortgage lending (which was really a serious problem) with the Home Mortgage
Disclosure Act of 1975. This approach was to open lending statistics by
requiring banks to disclose the details of their lending by geography and,
eventually, demographics and income level. This was a stroke of genius.
Large banks were shamed into good citizenship. The act did have the effect
of elevating a number of "civil rights" personalities (Jesse Jackson, for
instance) as they used shrewd public relations to expose some rather
egregious practices by large banks when it came to mortgage lending. These
same personalities, names you doubtless recognize, in some cases, adopted
more aggressive tactics, some that borderline on blackmail and extortion
today. I leave it to you to determine if this downside outweighs the upside
of truth in lending practices. I, for one, think that forcing disclosure
like this was enlightened. It was to be the last of its kind.

2. The Community Reinvestment Act really was a serious break with the
legislative practice before the legislation. Suddenly, you have a small
number of people determining where dollars will flow based on some political
definition of who is worthy. The early definition could be right as rain in
terms of who is deserving, needs a leg up, has been wronged, etc. etc. but
once you go down this path, you are truly ****ed. Once you start dictating
capital flows based on political worthiness (an entirely subjective and
whimsical standard) you have opened the door to all kinds of mess. Play
stupid games....

3. ...win stupid prizes. In the 1980s and 1990s Congress literally had a
hornet's nest up its *** with mortgage regulation. Almost 400 bills in the
101st Congress contained the word "mortgage." This doesn't seem like a big
deal until you realize that the housing ranged from 7-20+% of GDP in a
quarter. Absorb that. Something like 1/5 of quarterly GDP. Now put in place
mechanisms to literally pour trillions of dollars into the system to
encourage "The Dream of American Home Ownership." Think of it. You have a
small group of regulators/legislators (less than 100 people are making major
decisions about how much Freddie or Fannie will lend, or what their capital
ratios will be raised to, or what interest rates should be) controlling a
massive portion of the economy. You suddenly have price fixing for a sizable
fraction of the GDP. To compete with Fannie and Freddie, their subsidies,
their tax breaks, their implied government backstop and their downward
pressure on interest rates, you have to take on more risk for less money.
Hello Countrywide. (Just a bit of history, Countrywide was explicitly
founded to collateralize the only loans left to non-GSEs- those not already
being siphoned by Freddie Mac and Fannie Mae). GSEs held 1/3 of all
residential mortgages by 2001 or so. ONE THIRD. GSEs were run by political
hacks, installed there as a reward for political services rendered. These
are facts.

4. Banking and Insurance regulation is, and always has been, daft. The
blind focus on capital ratios, reserve ratios and the like, and the pedantic
concentration on definitions of risk that results in notional insured
figures being counted in capital ratio calculations but credit default swaps
not counted in this way was insanity. Of COURSE massive capital is going to
flow into the exception you, regulator, have explicitly written into the
regs. Now you are shocked and surprised that people wrote Credit Default
Swaps like there was no tomorrow? Incentives matter. Period.

5. The market for talent is global, and you can't legislate it away. Like
it or not there is a metric ***-ton of money in finance. The power to
create, move or allocate wealth is very valuable. It always will be. You
aren't striking a blow for social justice by enacting the first salary caps
in the modern history of the United States. You are guaranteeing that
finance experts will flee. The hiring binge going on right now as the likes
of UBS suck out talent is just amazing. UBS, with the support of the Swiss
Government, is offering 10 year permits to execs and their families who
relocate to Switzerland, not to mention the ability to negotiate your
personal tax rate for the next 10 years up front in some Cantons. You can't
determine what finance execs will be paid, folks. You can only determined
WHERE they will be paid. Who exactly do you think is going to pull the
United States out of this mess. Big Auto?

So, let me get this straight, Mr. or Ms. Congressional/Executive Scumbag..

You've spent the last two decades pumping trillions upon trillions of
dollars into particular segments of the mortgage market, a major portion of
the U.S. economy, dictating what risks were appropriate, how much would be
paid for assuming those risks and generally underpricing risk in the entire
system for years and years. You've been inflating a bubble and assuring that
the inflation passed to the riskiest portions of the economy. You've been
passing the buck for four decades. Every time the economy tries to correct
itself, you stall, pump borrowed money into the system, and grow the
disaster the country will eventually have to face. You buy votes year after
year by delivering graft now, to be paid for later (after you've long left
office). In effect, nearly one third of the American economy has been run by
central planning for the last five years. During this inflation, you happily
collected taxes on everyone, effectively collecting tax on borrowed money
and inflated assets (none of which you propose to repay- what luck would I
have asking for the real-estate taxes I have paid for years on appraisals
that were pure illusion?) I didn't hear you complaining when you saw
massive, record revenues to the Treasury thanks to the boom the finance
community facilitated and delivered to you, year in and year out. I didn't
see you pointing fingers when we dug in and pulled your *** out of two
recessions. Finance is a massive portion of the economy because it creates
wealth. Period. Your social programs, state and local, are massive bloated
vote-buyers because of our hard work, sweat and craft. (New York State, I'm
looking at you). We work until mid-May for you and your vote purchasing
juggernaut. I accept that. I have for years. This is because what I make
from June to December is more than enough to, not just enjoy the American
Dream and the promises of success and wealth, but to take the capital I
collect over the years and invest it, again and again back into American
business, start-ups, and even your ****ed up GSE mortgage securities (which
my taxes support). We carry the freight. 10% of us pay 70% of all income
taxes. 50% of us pay 97% of all income taxes. We tolerate this because this
is the promise of America. Work hard, pay taxes, and no one will second
guess what you spend your money on in your personal time. No one will tell
you how much is a "fair wage."

Now, now that you have run out of delaying tactics, you want to point the
finger at me?

I came to this country for a reason. I spent 9 years in U.S. universities,
which I busted my *** to get into. I didn't borrow a dime to do it. I paid
every cent myself. I've never so much as accepted a single unemployment
check. I've never availed myself of any government largess that I wasn't
forced to take. I have repeatedly declined to challenge some of your more
deluded tax claims against my income in court, as was my right. Two of these
I clearly could have won, though expensively. What's more, I consider myself
a patriot. I consider it a great privilege to live in the United States and
to be called one of her adopted children. I defend this country, and what
used to be her ideals, to any European socialist moron who cares to engage
me in conversation. I support the troops. Wherever they are.
Unconditionally. I create jobs. Aside from two years where I broke even, I
have made money for my clients and partners every year since I have been in
professional life. This includes 2008 and 2009 YTD. You could house 50
families in reasonable comfort for 10 years on what I have paid in taxes
since I've been here. Actually, now that I've actually done the calculation
just now for this post, you are really pissing me off.

Now you want to call me greedy? Are you ****ing kidding me? After you
****ed this place up? You want to tell me that capitalism failed? What
capitalism? You've socialized/centralized almost half of the GDP. Now, you
want to use me and the paycheck I've earned year after year to deflect
attention from the basic fact that you have been shoving debt on people who
couldn't hope to find within themselves the character to take responsibility
for repaying it? They get a pass and I get, what? A sharp stick in the eye?

And, you want to tell me that $250,000 is "enough?"

I will tell you what is "enough." Me paying for your power grab for the
last decade now. That's quite enough.

Let me just tell you, Congressional/Executive Branch Scumbag, Esq., if you
do this. if you take this turn. I won't even think twice. I will move my
firm to Switzerland, or to London before the year is out. Those employees
who do not follow me, I will have to fire. The corporate taxes I pay will no
longer be yours. Instead, they will go to something useful, like a nice
tunnel through a mountain for high speed trains that actually work. Further,
I will dedicate a substantial portion of my personal time, effort and
capital to frustrating your every attempt to collect personal taxes on me
thereafter- given your draconian anti-expatriation laws. But that's not all.
My job is to make money for my clients, in whatever way I can. I will short
your flagging financial firms mercilessly and remorselessly. I will buy QGRI
puts to bet against any firm that took bailout money. I will buy credit
default swaps on every firm you put your greasy paws on, because I know your
fingerprints are laced with poison. For every boneheaded centralist move you
make, I will be there, profiting from your lunacy. I will never again take a
client who pays taxes in the United States. I will not permit any capital or
profit to be diverted to any such. I will do this because in the same way
you believe it your divine right to punish "greed," I consider it my duty to
punish the stupidity and arrogance that is central planning, and because I
believe in economic freedom. I will divert as many of your resources to my
new home and its relative economic freedoms as I can. I will promote free
markets in this way, and I will never look back. You will have made it clear
that you are my enemy, and I do not forget such declarations.

I take no pleasure in this fight. I did not ask for it. I only asked for
liberty, and the pursuit of happiness. Deny me these at your peril. In the
end, I can only hope I'm not alone.

- Austrian