November 12, 2008 -- A Capitol Hill witness table will become Billionaire's Row on Thursday, when five of the nation's top hedge fund managers appear to answer lawmakers' questions.
Among other topics, the five investment chiefs slated to appear before the House Oversight and Government Reform committee can expect to be asked about their regal remuneration – each reportedly earned over $1 billion last year.
Collectively, the five men -- John Alfred Paulson of Paulson & Co., George Soros of Soros Fund Management, James Simons of Renaissance Technologies, Philip A. Falcone of Harbinger Capital Partners, or Kenneth C. Griffin of Citadel Investment Group – reportedly manage roughly $120 billion. None could be reached for comment.
In recent years, being a hedge fund manager has been just about the most lucrative career in the world. The mavens of a secretive, high-stakes industry, they commanded from their investors fees and commissions that sent their incomes soaring into the hundreds of millions, even billions.
Hedge fund managers typically pay a tax rate on that income well below what most Americans pay, because the tax code treats a manager's commissions and a worker's salary differently. In the past, managers have waged successful multi-million-dollar lobbying efforts to fend off congressional efforts to increase their income tax burden.
Another likely area of interest for lawmakers Thursday is whether hedge funds played a role in the current crisis. Some hedge fund managers – though not necessarily those before the committee -- bet big on mortgage-backed securities in recent years, inflating demand for the poisonous products whose collapse sparked the current meltdown. Witnesses at the hearing, which will also include academics, are expected to differ on the issue.
Regardless of fault, most hedge funds are seeing losses like everyone else, and many face ruin. Experts are predicting a "bloodbath" in the coming months with 30 to 60 percent of hedge funds dying as a result of the economic crisis, as their investments collapse and investors withdraw their money. (Not all are feeling pain: John Paulson, who is expected to testify Thursday, reportedly has several funds turning profits despite the abysmal market.)
Because hedge funds are largely unregulated and privately controlled, few specifics are made public on exactly whose money they invest and where they put it.
Observers say the era of the uber-wealthy, secretive hedge fund king may be over. "So much for all that," wrote financial columnist Jesse Eisinger for business magazine Portfolio. Eisinger and others predict the government will move to regulate hedge funds, managers' fees will drop from their stratospheric heights – and the IRS will tax those fees just like they would Joe the Plumber's salary.