Explaining Southern California's economy

Can we expect to see more of the Winklevoss twins in LA?

America's Tyler Winklevoss and Cameron W

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Tyler Winklevoss and Cameron Winklevoss at the start of the men's pair final during the 2008 Beijing Olympic Games in Beijing. The twins have started a venture capital fund and are looking to establish an office in L.A.

Cameron and Tyler Winklevoss — the Harvard-grad Olympic-rowing twins who infamously jousted in court with Mark Zuckerberg over who really had the core idea for Facebook — have begun the post-Facebook lives. Sort of. Their post-Facebook lives are being funded by an estimated $65-million cash-and-stock settlement the received from suing Zuckerberg and Facebook. 

With that dough, they're started a venture-capital fund, Winklevoss Capital, and as the Wall Street Journal reports, joined forces with their old Harvard classmate Divya Narendra on an initial $1-million investment in an semi-exclusive stock research site called SumZero

But they might also be spending some time apart. The Winklevii just bought a house in Hollywood last month for $18 million, reported Canyon News:

Tyler Winklevoss will remain in the 8,000 square foot home as they launch the West Wing of their venture capital company.... Cameron will remain mainly in New York City, where they have signed a five-year lease for their company's office.  

The two-story modern home with a jetliner view of Los Angeles was recently constructed as the house that had been on the lot before was bulldozed and modified. It is reported that the Winklevoss twins are in Los Angeles because they believe it is currently a great place for techies instead of Silicon Valley, where many firms are located. 

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Risky investments: No way to save pension funds

CA's Gov't Pension Fund To Report Loss Of One Quarter Of Its Holdings

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The California Public Employees' Retirement System building in Sacramento, California.

Last year, I wrote about Calpers, the big California pension fund ($235 billion), and its problems with conventional investment strategies:

The investment environment for pension funds isn't actually very good right now. Bonds are yielding historically low rates and the stock market is bucking around like an old Ford pickup truck on a back road in Texas. The Federal Reserve has done everything it can to push investors into riskier assets, like stocks, but so far, the markets haven't been able to maintain any kind of sustained rally.

This means that pension funds are increasingly diversifying into high-risk/high-return stuff, like hedge funds and private-equity. This is an oversimplification, but hedge funds try to make money even when markets are going south, while private equity invests in startup companies and gets involved in the turnarounds of underperforming established ones. The payoffs can be big. But so can the losses. 

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Gas prices: It's about the efficiency, people!

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Corey Bridwell/KPCC

Gas prices at a Chevron station in Pasadena, CA.

As the price of oil pushes higher and gas prices ascend nationwide to levels we're already seeing in California, there's been unleashed a fury of discussion about "Why, oh why?" this is happening. Speculation on oil futures has been blamed (Hedge funds!), as has the threat of an Israeli strike on Iran's nuclear sites or a temporary shutdown of the Strait of Hormuz by Iran itself.

Neither makes much sense to me, although there may be elements of the true story in each. Speculators can drive prices up just to bet on them falling, so you have to factor in a certain amount of volatility there. As for Iran's naval capabilities...well, the Strait could be closed for maybe a few days, possibly even a week. But it wouldn't take long for the U.S. Navy to sink pretty much everything Iran has that floats.

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The Federal Reserve is a hedge fund that pays its employees NOTHING!

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Federal Reserve Bank Board Chairman Ben Bernanke delivers remarks at the Fed Sept. 15, 2011 in Washington, DC.

The New York Times' Steven Davidoff — the Deal Professor — argues that the Federal Reserve is actually the world's most successful hedge fund. But it's not like any other hedge fund. It creates its own money and doesn't care about profits (hedge funds borrow lots of other people's money and are OBSESSED with profits). It also pays its employees squat for making about $77 billion in 2011. 

By the usual hedge fund rule of "2 and 20" — a 2 percent management fee plus 20 percent of the profits — the Fed's staff should be dividing up more than $14 billion on profits, exclusive of whatever it might charge to run $3 trillion in assets (2 percent of that would be $60 billion).

Here's Davidoff:

I call the Fed a hedge fund because it is operating like one, leveraging its balance sheet to earn huge profits. The main difference between a hedge fund and the Fed is that the Fed effectively creates its own money, so it doesn’t have any borrowing costs, meaning yet more profits. Remarkably, the Fed’s profits are also an afterthought. The Fed is trying to stabilize and increase the United States economy in the wake of the financial crisis, and its profits are a nice byproduct.

Still, these earnings blow away any other hedge fund profits.

The Fed employees who manage this operation receive a federal salary for their efforts. The money is well above the pay of the average American but still relatively modest compared with those in the financial industry. The top salary class at the Federal Reserve has a maximum of $205,570 a year. Ben S. Bernanke, the chairman of the Federal Reserve, earns $199,700 a year, while the other members of the Federal Reserve board earn $179,700.

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Steven Cohen wants to buy the Dodgers, but people who worked for him keep getting arrested

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One of the potential bidders for the Dodgers, due to be sold out of bankruptcy by April 30, is Steven Cohen, a secretive and monumentally successfully hedge fund billionaire. I've already written about how he made his money. I've also speculated on why he might want the Dodgers. What I haven't dealt with is that possibility that he could wind up in jail.

That's probably overstating the case. However, Cohen's firm, SAC Capital Advisors, has seen a number of former employees get in hot water with the Securities and Exchange Commission over insider trading. And the heat just got turned up a few notches. As part of an ongoing investigation into insider trading at hedge funds, the FBI has arrested three SAC Capital alumni (and they aren't the first to face prosecution). This is from CBNC's John Carney:

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