The top three hedge fund managers each earned over $1 billion (U.S.) last year, according to New Yorker writer John Cassidy. Hedge funds manage money for private clients, who pay exorbitant fees — three per cent for annual management services, and 30 per cent of profits — in the hopes of earning exorbitant returns. The funds do not make so much as a sandwich, let alone add anything useful to society.
Michael Sabia, the head of BCE, looks to pocket a mere $31 million for arranging the $34.8 billion takeover of his company by the Ontario Teachers’ Pension Plan and two American private equity firms (who between them get 41 per cent ownership of BCE) in the biggest takeover bid in Canadian history. Perhaps Sabia is off to join a hedge fund where he can realize his true earnings potential.
Meanwhile the Canadian Centre for Policy Alternatives report Rising Profit Shares, Falling Wage Shares shows that average wages for Canadians after inflation have not increased for 30 years. In that period the economy grew by 72 per cent, and labour productivity by over 50 per cent. While some wages went up, others went down, and on average people are no better off than they were 30 years ago.
U.S. hedge fund and private equity managers have been taking their income as capital gains, and paying tax at a 15 per cent rate instead of the normal income tax rate of 35 per cent. The Democratic Congress has taken up the issue. Why should the $1-billion-a-year earner pay a smaller percentage of tax than a regular worker?
Hedge funds make levered bets. A fund puts down $1 billion of its own money, and borrows $2 billion more from a bank. Then it bets than a stock will go up or down, a currency will plunge or rise, or that a commodity price will increase or fall. U.S. hedge funds are limited partnerships where clients and managers put money together to create a fund with a mandate to make more money than the average yearly advance of the stock market.
Private equity firms use their own capital as leverage to borrow even more capital from financial institutions. Private equity firms take ownership positions, and want to manage companies, not just make bets. They specialize in downsizing, off-shoring, and other techniques designed to squeeze employees, and communities, in order to boost stock prices.
The ability of both hedge funds and private equity firms to borrow money is the secret to their ability to grow. Access to bank credit allows principals and managers to pay themselves fabulous rewards. Curtailing the excess power of hedge and private equity funds means taking on the banks.
Leveraged buyouts have been a main feature of the economic landscape in Canada in recent years. Foreign takeovers financed by domestic banks have even got Canadian capitalists such as Gordon Nixon of RBC worried enough to call for more tax breaks for corporations.
Way too much money for some, not even a raise for average workers. This is the result of the return to laissez-faire in economic policy by Canadian governments, following the U.S lead.
Financial institutions shape the economy. Canada can choose to regulate mergers and acquisitions directly, and impose a serious competition policy to control growth of monopoly enterprises. The Bank of Canada worries about wage hikes (which are non-existent) leading to price inflation. It seems oblivious to bank lending that fuels asset inflation — inflated share prices for takeover targets such as BCE — and promotes runaway compensation packages for executives cooking up mergers and acquisitions.
The NDP has picked up on the prosperity gap, and will be pushing for a debate on bank profits and service charges.
Presenting a critique of the financial sector is off limits to the Liberals, Conservatives, and Greens.
Manufacturing job loss is the direct result of laissez-faire economic policy. The summer recess is a good moment for the NDP to be asking the tough questions about where we go as a country, with hedge fund and private equity managers, who are making out like no other bandits in the history of the world, making the decisions about what firms survive, who loses her job, and which Canadian communities go under.