Hedge Fund Managers Are the Heroes of this Crisis

Savvy hedge fund managers are the heroes of the financial crisis—and regulators are smart enough to realize it.

Legislators have a big regulatory gun locked and loaded, and they are aiming at just about everyone. Recent targets have included a who’s who of finance: ex-Federal Reserve Chairman Alan Greenspan, Treasury Secretary Henry Paulson, SEC Chairman Christopher Cox, and numerous Wall Street bankers, including Richard Fuld, former head of now-bankrupt Lehman Brothers.

So one might have imagined that last Thursday when House Democrat Henry Waxman demanded testimony from five hedge fund managers - each with 2007 income of more than a billion dollars - heads would roll. The morning buzz was that the Committee on Oversight and Government Reform hearing would be grand theater with dramatic opening statements and searing questions. Room 2154 of the Rayburn House Office Building was packed.

We can excuse a few toady moments in exchange for some confidence that during its financial manhunt Congress can tell friends from enemies.

But when Representative Waxman announced the call to order, he didn’t shoot down anyone. Instead, he surprised the crowd by praising his five billionaire witnesses, extolling their virtues and their profits. He announced that while “four previous hearings have looked at failure, today’s hearing has a different focus.” He then used a word no one on Capital Hill had mentioned in several months: “success.”

Success? Oh, yes.

No one has been more successful in recent years than fifty-two-year-old John Paulson, president of Paulson & Company. He testified that his funds have made money in fourteen of the previous fifteen years, including this year - when many markets have been sliced in half. His Credit Opportunities Fund was up nearly six hundred percent in 2007. Paulson now manages $36 billion, more than the massive Fidelity Equity-Income Fund. And he does all of this with just seventy employees.

Last year, Paulson personally made a reported $3.7 billion. It is almost impossible to imagine that much money. Ten million dollars a day? Ten times more than the annual income of Tom Hanks and Oprah Winfrey - combined?

The other four men didn’t do much worse. In just one week, Philip Falcone of Harbinger Capital Partners, Kenneth C. Griffin of Citadel, James Simons of Renaissance Technologies, and George Soros of Soros Fund Management made as much as the total salaries of all 538 members of the House of Representatives. For the entire year.

Representative Waxman called the performance of these five men “unimaginable success.” Other committee members echoed him. For the first time in months, a Congressional hearing transcript included more “successes” than “failures.”