Friday, September 03, 2010

On Hedge Funds

This is the second post in  a series devoted to giving hedge fund managers advice from teachers.  It's only fitting, since they offer so much advice on education.

This week's entry is written by special guest blogger Reality-Based Educator.

Since so many hedge fund managers have entered the education reform business and begun giving policy advice to mayors, governors and presidents on how to operate a school system, run schools and educate children, NYC Educator thought it would be a good idea for educators to give hedge fund managers and other Wall Streeters investing and financial advice.

When he asked me to offer a post in the series, I knew EXACTLY what advice I wanted to offer the hedge fund managers/education reformers.

My advice is less financial and more educational.

Keep bringing those hedge fund business ethics and values to public education.

That's right - more of those please.
Take the way you guys rig your pay so that you take a 2% management fee, 20% of the profits, but none of the losses of all those risky bets you make.

A "heads you win, tails you don't lose" pay strategy - that is BRILLIANT!

That means you can make all kinds of short-sighted, get rich quick bets and investments and care less whether there is any long-term downside risk.

Then take the way you get taxed. 

Why pay federal income tax rates on the money you make when you can pay lower capital gains tax rates instead?

These investment advisors and hedge fund managers can take advantage of this tax structure because they are often compensated through a scheme that, in part, pays them according to the returns on the fund. The industry standard for hedge fund managers is “two and twenty,” which is shorthand for an “overhead” fee of 2% of capital under management plus carried interest (often called a “carry”) of 20% of the returns on the fund. Thus a $100 million fund earning 20% would pay its fund manager $2 million for overhead and $4 million in carry. The carry portion of their compensation is treated under the tax code as capital gains for the fund manager and is taxable at the much lower capital gains tax rate of 15%.

That too is simply BRILLIANT!

I mean, why pay taxes like ordinary Americans when you can rig your pay to a win-win and scam taxpayers to boot?

Why let anybody know what is going on behind the curtain when you can hide it all?

Heck, worked for Bernie Madoff, that most infamous of hedge fund managers, for all those years.

Now how do you apply all these fine upstanding values to public education?

Oh, lots of ways.

You can own for-profit education management organizations that run charter schools.

Even better, you can declare yourself a "non-profit" and try to skirt tax rules (to be fair, Imagine Schools, a "non-profit" education management organization, has already tried this, but why not try it too?)

Then you can pay yourself a huge salary to run the schools, maybe even more money than the mayor and the chancellor, even though all you're managing is three or four charter schools.

And when anybody looks at you askance over the pay, you can say "We've let the market dictate the pay scale."

But of course you do NOT pay your teachers much of anything and you work them 60+ hours a week. 

After all, these people went into education and everybody knows you can't make a good living in that racket - not unless you're running a couple of charter schools, of course.

So your teachers deserve to be exploited and abused.

And every few years, as your employees start to ask for raises and benefits and things like that, you can lay them off by sending them a Fed Ex letter in the mailsaying their services are no longer required.

Finally, if you actually have to show improvement at your school and you are like the majority of charter schools across the country (i.e., no better, sometimes worse than the traditional public schools around them), you can engage in some mark-to-model test score data collation.

This is what financial institutions like JP Morgan Chase, Bank of America and Citigroup do when calculating stuff on their books.

The pricing of a specific investment position or portfolio based on internal assumptions or financial models. This contrasts with traditional mark-to-market valuations, in which market prices are used to calculate values as well as the losses or gains on positions. Assets that must be marked-to-model either don't have a regular market that provides accurate pricing, or valuations rely on a complex set of reference variables and time frames. This creates a situation in which guesswork and assumptions must be used to assign value to an asset.

These assets are typically derivative contracts or securitized cash flow instruments, and most do not have liquid trading markets.

Now where I grew up, we used to call "Mark-To-Model" by a different term.

We called it "Making It Shit Up!"

But on Wall Street they have delicate ears and so they call it by the more family-friendly Mark-To- Model term.

Regardless of what you call it, the results are the same.

You can give whatever value you want to the stuff your giving value to - whether it is crap mortgages bundled into CDO's or test scores you have to report to the state.

And then voila - the actual test score results get marked to model and suddenly look a whole lot better.

This is what Joel Klein and Michael Bloomberg, two big fans of hedge fund manager ethics, have done with their own test scores now that the state has revealed them as "inflated."

That's the nice thing about taking business ethics and hedge fund practices and bringing them to education.

They open up a whole new world of possibilities and profits for hedge fund managers and you guys get to act all selfless and and community-oriented to boot,just like these guys.

But as you do in your day jobs at the hedge funds, you can continue to steal, cheat, deceive, mislead and exploit to your heart's content.

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