http://wsws.org/articles/2009/dec2009/hedg-d22.shtml
Hedge fund manager makes $2.5 billion betting on US bailout of
Wall Street
By Andre Damon
22 December 2009
David Tepper, manager of the hedge fund Appaloosa Management, is
set to pocket more than $2.5 billion this year after successfully
gambling that the Obama administration would provide unlimited
public funds to bail out the major banks. According to an article
in Monday’s Wall Street Journal, Tepper’s firm, which specializes
in buying up “distressed” shares and assets, has already racked up
$7 billion in profits this year.
In the early stages of the bank bailout, the Journal reports,
investors were fearful that the government might ultimately
nationalize major banks, which would have wiped out shareholders.
These fears, combined with the virtual collapse of credit markets
and huge losses reported by some of the biggest Wall Street firms,
led to a sharp fall in bank stocks.
But, according to the Journal, when the Obama administration
announced its Financial Stability Plan in early February of this
year, including a virtually open-ended commitment to inject
capital into the banks, Tepper interpreted the plan as a signal
that the government would do whatever was necessary to cover the
bad debts of the financial elite. He took for good coin repeated
statements by top administration officials that they had no
intention of taking control of teetering Wall Street firms.
Thus, when most investors were dumping bank stocks, driving their
prices to bargain basement levels, Tepper directed his traders to
begin buying bank stocks and debt. By the end of the following
month, the flood of cash, cheap loans and other government
subsidies to the banks began to lift bank stock prices, fuelling a
run-up on the markets that has seen the Dow rise by more than 50
percent since its lows in early March.
Tepper bet that the Obama administration would respond to the
financial crash with an unprecedented plundering of the national
treasury, and he bet right.
On February 20, for example, Bank of America stock hit a low of
$2.53. Citigroup had fallen to 97 cents by March 5. Tepper
responded by buying huge blocks of shares and cashing in when
Citigroup shares tripled and Bank of America stock rose five-fold
from its low point.
Tepper, the Journal reports, has generally kept his hedge fund
profitable—it has averaged 30 percent yearly returns—by betting
that markets would recover after major crises. During the Asian
financial crisis of 1997, he bought Russian debt and Korean
stocks, both of which staged major rebounds. He made a killing
when commodity purchases he made in 2007 took off in value amid a
general commodity price boom in 2008. “His biggest scores over the
years have come from buying large chunks of out-of-favor
investments,” the Journal notes.
However, his fund lost more than $1 billion in big bets in 2008,
and its earnings fell 25 percent, worse than the industry’s
average decline of 19 percent. His fortunes turned in 2009 when he
bet everything on the government’s total subordination to Wall Street.
In many ways, Tepper’s success is emblematic of the social layers
that have benefitted from the Obama administration’s financial
policies, even as millions of workers have lost their jobs, seen
their wages and benefits cut, lost their homes and been thrown
into poverty.
This is how the Journal describes Mr. Tepper:
“The husky, bespectacled trader laughs easily, but employees say
he can quickly turn on them when he’s angry. Mr. Tepper keeps a
brass replica of a pair of testicles in a prominent spot on his
desk, a present from former employees. He rubs the gift for luck
during the trading day to get a laugh out of colleagues.”
The newspaper reports that Tepper has turned his attention to a
new investment target, purchasing about $2 billion in
“beaten-down” commercial mortgage-backed securities. He is betting
that the government will make sure that the billions in such toxic
assets on the books of the major banks will rebound, allowing the
banks to eventually sell them off at top dollar.
To put Tepper’s windfall in perspective, his $2.5 billion in
personal earnings this year is larger than the $2.4 billion
allocated by the federal government for homeless assistance
programs. It is equivalent to the medium household income of
50,000 Americans. His hedge fund’s $7 billion profit is greater
than the gross domestic product of 57 of 190 countries listed in
the 2008 CIA World Fact Book.
Tepper’s payout comes alongside an expected $140 billion in
compensation this year for employees of the biggest Wall Street
firms, according to estimates by the Wall Street Journal. The top
50 hedge fund managers took in a combined sum of $29 billion last
year.
Hedgefund.net, writing on Tepper’s windfall, commented that “David
Tepper pulled a John Paulson,” referring to the hedge fund manager
who took home $3.7 in 2008 after betting on the collapse of the
subprime mortgage market.
Paulson made billions betting on the collapse of the market,
Tepper bet on its bailout. This social layer made money on the way
down, and even more on the way up. That these people should
receive such immense sums for activity that produces no real value
is an indictment of capitalism. Tepper’s bonanza demonstrates
further that the entire economic policy of the Obama
administration has been crafted to preserve the wealth of this
parasitical elite.
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