The Root of All Evil

There is only one way to keep proper score in the financial world, but the figures are sometimes hard to get your mind around. In a really bad market, a hedge fund manager receives more than twenty times the asset fees of a Vanguard index fund. If the markets are more cooperative, the manager takes a cool fifth of any investment return above a nominal benchmark, making his total compensation orders of magnitude higher. How much higher? The year the meltdown started, 2008, Alpha magazine's annual survey reported that the average compensation for the hedge fund managers on its list had reached $892 million--about $100 million higher than the gross domestic product of the nation of Liberia. The list's top earner, Paulson & Co. founder John Paulson, had taken home $3.7 billion, roughly comparable to the total earnings of all corporate divisions of Prudential Financial Services--America's 95th largest company. Five of the hedge fund managers on the list made more in that one year than the $1.2 billion that J.P. Morgan Chase had paid to purchase all of the stock of Bear Stearns Cos. Not for the first time, the bottom manager in Alpha's rankings took home slightly more than the pay of the CEOs of Merrill Lynch, Goldman Sachs, Travelers Group (Smith Barney), Lehman Brothers, JP Morgan Chase and Morgan Stanley--combined. Of course, Greenwich had other claims to financial supremacy. It boasted its own clearing firm, the Interactive Brokers offices on Pickwick Plaza. For sheer volume of trades, IB rivaled any of the wirehouse clearing operations, but its specialty was catering to the exotic investment tastes of its hedge fund clientele, routinely executing orders (at prices one-eighth the cost of the cheapest discount brokers) in Mexican futures, Spanish blue chips, Australian CFDs and securitized global real estate in 12 foreign markets. IB's currency desk facilitated the transfer of billions borrowed in Japanese yen at essentially zero interest due to the country's never-ending efforts to boost its domestic economy with low interest rates--and then, with a few keystrokes, shifted the borrowed money into high-yield sovereign debt on the other side of the world, filling hedge fund portfolios with bonds issued by Brazil, Iceland, Greece and the Czech Republic--sloshing money into and out of economies on a hair trigger, leaving in their wake the Asian financial crisis of 1997, the near-bankruptcy of the Mexican government, a disastrous run on bonds issued by the Greek government, pulling their money out and leaving nation of Iceland into effective receivership. So many of the hedge ecology's rank and file employees earned $1 million+ incomes that in a typical year Greenwich's 62,000 residents paid three times more in state income taxes than the combined populations of Hartford (the state's largest city), New Haven (its capitol), plus Bridgeport and Waterbury. The city was home to fewer than 1.8% of the state's taxpayers, but its residents provided 13% of Connecticut's total income tax revenues. And most of all, Greenwich had the homes…