[On tax rates]
First, let me state the obvious: there is no public policy reason for hedge fund and private equity managers to pay a lower tax rate than teachers, doctors, or lawyers... I suspect that this debate is the result of a quirk in the tax code... No legislator in his right mind ever said, “We have to tax hedge fund managers this way, otherwise they’ll have no incentive to work hard!” So let’s not kid ourselves — the tax code is a gift to the industry. Of course, accountants and some managers will find clever ways to circumvent the new laws, so perhaps the proposed bills won’t generate the revenue they are meant to...The notion that the most profitable industry in the history of mankind (I hyperbolize, but on a per-person basis, this might in fact be true) requires a lower tax rate to take risk and make investments, simply does not square with logic. I know of no manager who would stop working or stop investing as a result.
[Short-termism in business thinking driven by financial markets]
This is a great question: does the presence of short-term-oriented investors such as hedge funds alter the behavior of the companies they invest in? Let me throw a few more questions out there: To what extent does widespread options issuance create an incentive for a CEO to focus on his or her stock price to the exclusion of building long-term business value? Does the ubiquity of earnings estimates cause companies — unconsciously or, ahem, intentionally — to distort their business practices in order to please investors? Does all the money sloshing around hedge fund coffers allow them to throw their weight around and often force managements to make bad business decisions? My answers would be: Yes. A lot. Yes. Yes. Short-term thinking infected Wall Street some time ago, and I would suggest it was performance-obsessed mutual funds that got the ball rolling back in the 1980s bull market.
[Social and labour market effects of hedge funds]
I don’t believe hedge funds necessarily provide a social good, but I also do not believe they are a social evil (generalizations are always dangerous, but bear with me here). And it is unfortunate that the “best and the brightest” no longer seem to want to go into government or medicine or teaching (I did say I’d be generalizing here), and instead seem to gravitate to the best-paying professions... In general, the compensation differential between jobs in finance and jobs in virtually every other part of society is sad.
Wednesday, August 08, 2007
Masters of the Universe
Are people in finance overpaid? Should hedge fund managers be able to pay a lower tax rate, as they do in many cases? I'm sure regular readers can guess my views on these and related questions, but it was interesting to read an interview in the New York Times with hedge fund manager Neil Barsky, which touched on some of these questions. Barsky is certainly a “finance type” and used to be a reporter at the Wall Street Journal, so he's certainly no leftie. Some excerpts: