Archive for January, 2011

US growth hits highest level in five years

Friday, January 28th, 2011 | Finance News

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WASHINGTON (AFP) – The US economy grew at its fastest clip for five years in 2010, the Commerce Department reported Friday, as the country bounced back from recession and fears of a double-dip recession ebbed.

Growth hit 2.9 percent for the year, reversing the 2.6 percent contraction seen in 2009.

Releasing figures for the end of what was a turbulent year for the world's largest economy, officials reported a late surge in consumer spending and an improving trade balance that pumped growth up to 3.2 percent in the last quarter.

Consumer spending grew 4.4 percent over the final three months of the year, while exports rose 8.5 percent.

The White House lauded a "sixth straight quarter of positive growth."

President Barack Obama's top economic adviser Austan Goolsbee said it was "a further sign that the economy continues to gain momentum as it recovers from the worst recession since the Great Depression."

"We are on the right path, but have a lot more work to do to accelerate growth so that we are creating the jobs we need."

The prospect of Americans spending, earning and exporting more boosted economists' hopes that the jobless recovery may be coming to an end, despite the fact that the last quarter's growth of 3.2 percent missed their expectations.

"The main concern is that growth could remain too weak to stimulate a sufficiently high rate of job creation to reduce stubbornly high unemployment, but today's GDP data at least take a step in the right direction," said Chris Williamson, chief economist with Markit.

"Talk of a jobless recovery may prove misplaced in 2011."

The figures appeared to signal a turning point for the economy, which for much of the year had struggled to escape the recession's orbit.

Throughout 2010 growth was driven by businesses rebuilding inventories that had been run down during the height of the crisis.

That process -- always assumed to be a temporary economic boost -- now appears to be coming to be coming to an end.

"Inventory building subtracted 3.7 percentage points (in the fourth quarter) after adding significantly to growth over the previous five quarters," said Zach Pandl of Nomura.

But economists were encouraged that spending and exports are picking up the slack.

"The bottom line is that we have a healthier mix of components heading into 2011," said Brian Jones of Societe Generale, citing "a much more favorable mix between final demand and inventories."

The White House said it would continue to try and encourage that mix.

Goolsbee said the administration would focus on helping businesses "to invest and hire here at home, investing in education and infrastructure, and promoting exports abroad."

Republicans meanwhile claimed some credit for the rise in growth, after taking control of the House of Representatives earlier this year.

"This uptick is no doubt due in part to the certainty that Washington has given the private sector through the recent tax deal and the newly elected House Republican majority," the office of House majority leader Eric Cantor said in a statement.

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2 men get 4 years in prison in $240M tax scheme

Friday, January 28th, 2011 | Finance News

SEATTLE – Two Seattle-area men have been sentenced to more than 4 years in prison after pleading guilty to helping a Hollywood mogul and other wealthy clients avoid paying $240 million in taxes.

Prosecutors had requested 6 years in prison for Quellos CEO Jeffrey Greenstein of Mercer Island and his tax attorney, Charles H. Wilk, whose lawyers sought two years in prison. The men were sentenced Friday.

Both pleaded guilty in September to charges of conspiracy to defraud the government and aiding in the filing of a false tax return. They agreed to pay the IRS $7 million in penalties and to speak to their graduate schools about business ethics.

The government says Quellos' clients didn't know about the scheme and have paid back taxes. Those clients included Haim Saban, who licensed the Power Rangers from Japan in the 1990s.

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Paulson’s $5 billion payout shocks, raises questions

Friday, January 28th, 2011 | Finance News

BOSTON (Reuters) – Billionaire hedge fund manager John Paulson, whose bet against the overheated housing market made him one of the world's wealthiest people, became a lot richer last year.

By earning an estimated $5 billion in 2010 thanks to bets the economy would recover, the 55-year old investor likely set a new record for the $1.9 trillion hedge fund industry's biggest-ever annual payday. He beat his own record, which he set in 2007 with a $4 billion haul made off the subprime bet.

The Wall Street Journal first reported Paulson's payout in its Friday edition, and investors familiar with Paulson's portfolios said the number is likely correct given the manager's asset size and his recent profitable bets on Citigroup and gold.

For Paulson, the payday comes after he reversed deep losses in his funds halfway through the year, and it may put to rest lingering talk that his investing prowess was limited to a lucky bet during the subprime era, investors said.

"He did it on the short side and on the long side," said Brad Alford, founder of Alpha Capital Management, which invests with hedge funds. "He proved that he can really do it all."

Other prominent managers like Appaloosa Management's David Tepper and Bridgewater Associates' Ray Dalio likely also earned 10-figure paychecks, the Journal reported.

EYEBROWS RAISED

But Paulson and other managers' eye-popping earnings are sure to raise new questions about how managers are paid in an industry known for charging hefty fees that often guarantee generous payouts even if returns were merely average.

Last year, the average hedge fund gained 10.5 percent, lagging the Standard & Poor's 500 index by 15 percent and falling short of their own 19 percent return in 2009, data from Hedge Fund Research show. But managers will collect 2 percent management fees and about a 20 percent cut of their gains.

By definition, this raises the payouts for managers at the industry's biggest firms.

In Paulson's case, the fact that his 17-year old firm Paulson & Co oversees about $35 billion fattened up his payout. To be fair, Paulson also invests his entire fortune in his funds and since his gold fund gained 35 percent, his investment gains added billions to his payout.

For other managers, including ones who lost money, however, the industry' payouts may seem less fair, investors and analysts said.

"People are fine with hedge fund fee structures as long as they are making great returns," said Stewart Massey, who invests with hedge funds at Massey, Quick & Co. "But where they get antsy is where managers have middling returns and the managers are still making a lot of money."

As hedge funds look for new investors, experts say that investors' demands on pay will hold more sway. A push from some investors to set a so-called hurdle rate, or minimum accepted rate of return, for manager pay, or to reward them only if they exceed certain benchmarks may gain traction.

ROAD TO BIG PAYDAYS

The big paydays at hedge funds are likely to confirm that hedge funds can be modern-day gold mines on Wall Street and spark even more movement from the world of banking and mutual fund management into this asset class.

"Many of these big hedge fund managers are now earning more than professional athletes," said Kenneth Murray, president of Mercury Partners, which recruits staff for hedge funds. "And they can do this for the rest of their lives, unlike sports stars who have to find another job after the age of 35.... 100 percent, hedge funds are the places where everyone wants to be."

But he and other recruiters agreed that the hedge fund industry's biggest payouts really will be limited to its biggest stars, noting that working at a hedge fund is no longer a sure way to easy riches.

As the industry matures, these people said that it is becoming harder for newcomers to break in and that portfolio managers need to bring long records of top performance before getting a job. Also with investors becoming pickier, it is harder to raise a lot of money.

"If you've been in the game and successful, you may be set for life, but for everyone else it is becoming tougher," Murray said.

(Editing by Robert MacMillan)

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