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April 2007

What Does James Simons do?

The New York Times states that hedge fund manager James Simons earned $1.7 billion last year. Noted economist Brad DeLong wonders what hedge fund managers are doing to earn their money: "There is some question as to what the hell they are doing that is worth [that kind of money]. The answer is damned mysterious.” 

In Mr. Simons's case, if a three-year-old Bloomberg article can be believed, since 1988 his fund earned "almost 35 percent a year after fees". (The Times article states that last year, the fund was up 44% after fees.)

Yes, one would like to know what kind of risks Mr. Simons's fund is taking. Yes, Long Term Capital Management also had a few good years before utterly blowing up.

But 35 percent/year for 15 years or so? I'd take it.

And I wouldn't begrudge Mr. Simons some generous compensation. As one investment advisor put it, "If you pay peanuts, you get monkeys."

Michael Lewis on the subprime mortgage problem

Michael Lewis asks three excellent questions about the subprime mortgage problem.

1) If the subprime home-loan market was a cynical conspiracy, why did so many of the putative conspirators wind up taking so much of the risk?

2) Why does the most financially obsessed and presumably well-informed character on earth, the American Investor, insist on playing the fool?

3) Why in this new drama is it so easy to imagine borrowers in a different role, other than the one in which they are currently cast: The Victim?

Read the whole thing.

"Republican" economic policy vs. "Democrat" economic policy

From time to time we see attempts to compare how well the economy has performed under Republican presidents versus Democrat presidents. An example is this multi-entry extravaganza at Angry Bear. Michael Kinsley's analysis is here.

I've always thought such comparisons are at best extremely problematic and at worst completely useless. The problem is that most of the stupidest government actions have short-term benefits, but their large, painful costs don't appear until years, even decades, later. Inflationary pressure that begins late in LBJ's presidency becomes something Nixon has to deal with. Serious inflation under Carter becomes something Reagan has to deal with. Underfunding of defense and national security under Clinton becomes something GW Bush has to deal with.

Another example: it's taken almost 40 years for the bill from the dopey unindexed AMT to come due but now it has. While there's a certain grim satisfaction in watching Democrats from high-tax states try to fix the AMT, especially given their announced pay-as-you-go reform, it really isn't funny.

But perish the thought that I am partisan about this. This post is prompted by a Wall Street Journal editorial (may require subscription) about the action of a Republican governor. Florida governor Charlie Crist, in combination with a Republican legislature, enacted a

. . . "reform" designed to lower the price of insurance by making the state a larger player in the market and undercutting private insurers. The new law allows state-run Citizen's Property Insurance -- intended to be an insurer of last resort -- to compete directly with private companies. . . .

Large numbers of homeowners are now turning to Citizen's, which itself is only able to offer lower premiums because of its implicit taxpayer guarantee, and because its actuarial assumptions reside in la-la land. Citizen's likes to say it will have $8 billion with which to pay claims, but it rarely notes that much of this is a line of credit. Between such credit and its bonding authority, what Citizen's really has is the potential to rack up huge liabilities that will have to be paid by someone when the next storm surge comes ashore.

Right now Crist looks like a hero. But if some future governor--maybe a Democrat--has to confront a staggering cost from this foolish policy, will that governor be responsible?

At the very least, such "Republican vs. Democrat" comparisons should be computed on an almost program by program basis. Which would be enormously difficult. And which I haven't seen done.