While the investigation of Goldman Sachs is all over front page of newspapers, in one of the back pages of LA Times today is an article about CalPERS, the California government employees pension fund, making a new deal with one of its management firm. This is hailed by lawyers as a 125 million dollar savings for the pension fund over the next 5 years. Of course the management firm was found to be paying middlemen about 125 million in recent years which of course came out of the pension fund's money. And if they saved 125 million, how much are they paying them in the first place? I think you can put all the money in a mutual fund that matches the SP500 and forget about any of these investment expenses of hundreds of millions and you would have made more money in the long run.
The SEC is, of course, trying to get some reputation back by going after Goldman Sachs after they failed to catch anyone, including Bernie Madoff. The truth is hedge funds, futures and options all should be outlawed. They are just same as gambling. They do not create value. The only people who always make money are the brokers and those with inside information or can manipulate the market. Unlike stocks which help companies expand and thus eventually enlarge the economy, hedge funds and options are zero sum games. One side makes a bet and the other side accepts the bet, and if a stock or commodity goes up, one side wins and the other sides loses. In order for hedge fund managers to make money they have to find someone who will bet with them and can afford to lose. Who are these people? Well, pension fund managers come to to mind. These people get a base percentage of assets to manage them and then gets a percentage of returns also. So since if they lose their shirts they still get a base percentage, they may as well gamble and hope to hit a homerun and get a percentage of higher profit as well. That's not managing. That is gambling with other people's money. At the end of the day, no value in the economy is added, just money exchanging hands. But in many cases the hedge funds make money and a public pension fund (ie taxpayers' money) loses money.
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