I’m not an accountant so I don’t know much hedge funds and sub-prime mortgages (except that one has made a lot of people very rich and one has made a lot of people very poor – or at least poorer than they were before) but I was astounded to read on the front page of the International Herald Tribune today that one hedge fund manager in the US, John Paulson, made US$3.7 billion (yes, billion, not million) by betting against mortgages and some of the complex financial products that held them.
Meanwhile, thousands of homeowners in the US (and probably in other parts of the world too) are being evicted from their homes as the banks foreclose on them.
How can someone make US$3.7 billion by betting on mortgages? And the article said that two other fund mangers made almost US$3 billion each by doing the same.
The story went on: “Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again. Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad.”
If hedge fund managers can make over US$10 billion by ‘betting’ on other people’s mortgages (whatever that means – I really don’t understand how you can ‘bet’ on a mortgage), then doesn’t that suggest something is wrong with the system?
I do know enough about accounting to know that debits must equal credits, so if their funds have been credited to the tune of US$10 billion, then someone else’s (or many someones) must have been debited the same amount.
But they have earned that for doing what? Nothing it seems except placing a bet.
The Chief Investment Officer of the bond fund Pimco, William Gross, was quoted in the story as saying: “There is nothing wrong with it – it’s not illegal.”
He added: “But it’s ugly.”
It’s more than ugly – it’s obscene.
With so many millions of people starving in the world, trying to survive from one day to another on a dollar a day or less, these hedge fund managers are making more money in an hour than most people make in a lifetime.