Viacom CEO Philippe Dauman topped the USA Today list, with a combined $84.5 million in pay, between a $2.6 million salary, an $11.25 million bonus and a $70.5 million return on stock options in 2010. Hovering near the bottom were executives like Steve Jobs, John Mackey of Whole Foods and Vikram Pandit of Citigroup, whose symbolic $1 annual salaries belie massive net worths thanks to their holding stock in their respective companies. Though Jobs’ $8.3 billion and Mackey’s $1.8 billion dwarf Pandit’s net worth, estimated in the tens of millions, as of this year, Pandit will earn $1.75 million, exceeding what he was earning before the recession hit.

All told, the 175 CEOs that USA Today collected data on made a combined $1.84 billion, with a median annual pay of $8.8 million. This represents a 26 percent jump in annual pay from 2009; average private industry workers, on the other hand, saw pay raises of 2.1 percent over the same period.

Meanwhile, hedge fund managers are making money that makes CEO income look pitiful by comparison. The top 25 hedge fund managers in the U.S. made a combined $22 billion, bolstered by surging gold prices and a generally bullish market. This works out to an average of $883 million in 2010 income for those 25 managers, the third-highest in history.

Far and away the top earner among them was John Paulson of Paulson $ Co., who personally made $4.9 billion in 2010, largely in gold. Other hedge fund managers invested heavily in the emerging lawsuit market, lending millions to law firms heading up major class-action suits. Interest on the loans is passed on to the firm’s clients in additional fees, meaning that many plaintiffs who are victorious in class-action suits end up paying for the “privilege” of winning.

Even assuming Paulson works at the high-end of the industry standard for people working for hedge funds — say, 60 hours a week — his astronomical pay would break down to about $436 per second on the job. It would take him one minute and 48 seconds to earn the median yearly income for American men.

Despite their massive haul in 2010, hedge fund managers continue to exploit a controversial “carried interest” tax loophole that allows them to pay a maximum of 15 percent on the vast majority of their income, as opposed to the 35 percent that others in the top tax bracket are required to pay. Efforts (PDF) to close the loophole in the past have been unsuccessful.

Steven Law, president of American Crossroads, is quoted by the LA Times as saying:

“We operate like a hedge fund,” said Steven Law, a former aide to Senate Minority Leader Mitch McConnell (R-Ky.) and president of American Crossroads, a nonprofit group that funds political ads. “We look for opportunities where we can invest and make a difference.”

Ironically, a November NBC News report suggested that donors to American Crossroads Grassroots Policy Strategies, a 501(c)(4) “social welfare” group that does not disclose its donors under tax law, were hedge fund managers:

A substantial portion of Crossroads GPS’ money came from a small circle of extremely wealthy Wall Street hedge fund and private equity moguls, according to GOP fundraising sources who spoke with NBC News on condition of anonymity. These donors have been bitterly opposed to a proposal by congressional Democrats — and endorsed by the Obama administration — to increase the tax rates on compensation that hedge funds pay their partners, the sources said

Crossroads GPS was very successful this past election cycle, winning in 15 of the 20 races it made independent expenditures in.

1. OK, Consumer Protection Rules are Fine… Just Don’t Enforce Them. The current bill would apply the same rules to providers of consumer financial services or products, whether the provider is a bank or a non-bank financial provider.  The bill would also allow State Attorneys General to enforce those rules.  Lobbyists are pushing hard to amend the bill so that Attorneys General lose their enforcement authority.
2. Letting Non-Banks Play by a Weaker Set of Rules. We know this is coming, so keep an eye out: attempts to give car dealers that make car loans and other major providers of financial services a big exemption from the consumer protection rules.
3. If You Can’t Kill Consumer Protection Now, Starve it to Death Later. One of the keys to effective consumer protection is having a consumer financial protection bureau that is independent. And one of the keys to independence is having an independent source of funding. So be prepared for attempts to take away the bureau’s source of funds.
4. Preventing States from Protecting Their Own Citizens. Under the current bill, the Bureau of Consumer Financial Protection would set minimum standards for the consumer finance market, but states would still be allowed to adopt additional protections. In other words, federal consumer protections would set a floor, not a ceiling. There’s likely to be a fight about that provision.
5. Removing the Derivatives Trading Requirement to Protect Wall Street Profits. Under the current bill, standard derivatives would have to be traded on exchanges or other electronic trading platforms. Expect amendments to eliminate this trading requirement.
6. Stretching the Derivatives “End-User” Exemption into a Hedge Fund Loophole. Be on the lookout for attempts to stretch this exemption.
7. Creating an “AIG Loophole.” Rest assured, there are large “non-banks” out there who would rather not be scrutinized quite so closely.
8. Who Needs to Know What’s Happening at Insurance Companies? Insurance is regulated by the states, not the federal government — and this bill doesn’t change that.  But this bill would give the Treasury Department the ability to collect information from insurance companies so that it can help identify emerging risks before they blow up the financial system — like AIG.
9. Letting Firms Make Loans Without Skin in the Game. It’s cheaper for mortgage lenders and Wall Street to be in the mortgage business if they don’t have to worry about the borrower’s ability to pay — but it’s a lot more costly for Americans to perpetuate the same system that helped cause the housing crash.
10. Preserving “Too Big to Fail” While Pretending to Kill It. The key to preventing future bailouts is to end the problem of “Too Big to Fail.”  And the only way to do that is to make sure that we can shut down big financial firms in a swift, orderly way if they’re on the brink of failure.

Of these, the consumer financial protection provisions seem to be most under fire by Republicans — despite how insane that political calculus seems.

Hedge fund managers, Weissman said, are in the business of using inside information to make money, a model they’ve successfully translated to Washington, where they’ve built the relationships they are now trading on. “They have lots of money, and they know how to deploy it effectively to gain influence — and that’s through campaign contributions and connected lobbyists. And they’re doing it with a high level of sophistication and success,” he said.

But the piece reads a bit thin to me. There is not much evidence that the architects of financial regulatory reform ever wanted to go after the hedge funds in the first place — meaning there is not much evidence that those lobbyists have had much work to do. By law, hedge funds and private equity firms only allow very wealthy individuals or firms to buy in — investors who understand risk, want a lot of it, and can afford to burn through loads of cash. Many hedge funds suffered major losses or collapsed during the crisis, wiping out hundreds of billions in wealth. But hedge funds neither caused nor worsened the crash, and on aggregate they did not pose a systemic risk. Therefore, Sen. Chris Dodd (D-Conn.) and the other authors of the bill never honed in on them.

Of course, that is not to say that hedge funds will not play a major part in the next crisis. They certainly have before. When the hedge fund Long-Term Capital Management collapsed in 1998, it required a government-supervised bailout and destabilized the Russian and Asian economies. For that reason, Felix Salmon notes that Dodd’s regulatory proposal could use bolstered prudential measures to better hedge fund reporting and monitor risk — provisions Sen. Jack Reed (D-R.I.) plans to introduce via an amendment.

Sen. Blanche Lincoln (D-Ark.) has written an aggressive proposal to regulate the derivatives market. (WDCpix)

This week, Sen. Chris Dodd’s (D-Conn.) financial regulatory reform bill moved to the floor of the Senate. And with that bill close to passage, Wall Street and lobbyists turned their attention to Sen. Blanche Lincoln (D-Ark.) and the Senate Agriculture Committee’s proposal to regulate derivatives, a $450 trillion market and a major source of investment-banking profits.

[Economy1]Derivatives are essentially a type of financial insurance. They let two parties trade a contract derived from the price of some underlying security, currency or commodity. For instance, say you were a major airline. You might go to your bank to purchase a derivative locking in the price of gas, just in case a summertime oil shortage pushed up prices at the pump. In this case, you would be an “end user,” meaning you actually take delivery of the good. About 90 percent of the derivatives market involves financial firms trading derivatives like credit-default swaps back and forth for profit — and just 10 percent involves end users, non-financial firms using derivatives to mitigate risk.

Still, end users have become the unlikely center of the fight on derivatives legislation. With the reputation and credibility of big financial firms weak, companies in industries from agriculture to aviation came forward to say that this legislation might not only dampen big business’ profits but also hurt them. On Tuesday, the U.S. Chamber of Commerce and other business lobbies — via a group called the Coalition for Derivatives End-Users — took to the Hill for a flurry of meetings between corporate representatives of those worried end users and members of Congress.

“The legislation has the potential to take hundreds of billions of dollars out of the economy through margin and capital requirements,” says Cady North, a lobbyist at Financial Executives International and a member of the Coalition for Derivatives End-Users’ steering committee. “We estimate that the bill could require up to $900 billion in capital expenditures.” Moreover, the Coalition argues, the bill will increase the cost of derivatives for end users. (The Coalition declined to provide a list of participating executives or their companies, or a list of the legislators or assistants with whom they met, and the Chamber of Commerce did not respond to repeated requests for comment.)

But there’s just one problem. The Lincoln bill forces financial firms to put up collateral and use clearinghouses when they trade derivatives, but specifically exempts end users from those requirements. Banks are using their end-using clients as proxies to help kill off the legislation, lawyers and lobbyists contend. And for most end users, the opposition to the bill makes little sense.

Other lobbying organizations representing end-using white-collar companies said they had no issues with the legislation. For instance, Michael Griffith, a legislative analyst at the Association for Financial Professionals, which represents 16,000 of “the folks that manage your average companies’ money,” says he has no issues with it. “We’re pretty happy with what the Agriculture Committee approved,” he says. “It has a broad end user exemption on it, and we haven’t had many complaints from our members.”

“I know the banks are screaming about it,” says Brian Kalish, the director of AFP’s finance practice. “[My members are] getting panicky emails from their bankers. But [of] my members, no one’s panicking.”

But this week, some end users got more than panicky emails from their banks. Lawyers and lobbyists say that banks clearly misled companies about how the legislation might impact their business costs. In one case, a derivatives broker told a company that the legislation would force it to pay the same fees and put up the same collateral as financial firms, even where it explicitly would not.

“I’ve heard of a few folks who use derivatives [as end users who] called up their banks to talk about the legislation,” another lobbyist said. “Of course, their bankers told them to expect the whole market getting disrupted, price increases, collateral calls. Now, for most of them, they’re buying swaps to hedge. The legislation specifically exempts them.”

Legislators this week repeated the concern. Senate Banking Committee Chairman Dodd said he sees evidence of the bankers’ influence when end users lobby him. “The end users have been basically used by the major investment banks,” he told the Huffington Post’s Ryan Grim on Tuesday.

Indeed, Lincoln took pains to ensure most end users are not impacted by the legislation. Some firms with “captive finance entities” — financial-products divisions within big, diversified companies, like Cargill — might not qualify as end users on some transactions, and might have to post collateral when they use derivatives to speculate rather than hedge. But they represent a small proportion of end users, who represent a small portion of derivatives users.

Furthermore, the legislation might eventually drive end-users’ costs down. Many derivatives experts — off of Wall Street, at least — believe that Lincoln’s reforms will increase competition and transparency, reducing prices. Robert Litan, a derivatives expert at the Brookings Institution, explains, “In a world of nontransparency, the world the derivatives market is in right now, the way I understand it, if you try to call four or five dealers, to shop around, none give you a real price. They might quote you an indicative price. If you commit, then they give you pricing information.”
The White House concurs. Jen Psaki, the deputy communications director, recently argued, “The unregulated OTC derivatives markets were at the center of the recent financial crisis. The Wall Street banks that dominate this market want to keep it unregulated so they can make money off regular firms.”

The report shows how one hedge fund, Magnetar, originated mortgage-based investment instruments, backed them with the riskiest possible assets and then made massive bets against its own products. Every part of it was perfectly legal, and very little of it came under regulatory oversight.

According to bankers and others involved, the Magnetar Trade worked this way: The hedge fund bought the riskiest portion of a kind of securities known as collateralized debt obligations — CDOs. If housing prices kept rising, this would provide a solid return for many years. But that’s not what hedge funds are after. They want outsized gains, the sooner the better, and Magnetar set itself up for a huge win: It placed bets that portions of its own deals would fail.

Along the way, it did something to enhance the chances of that happening, according to several people with direct knowledge of the deals. They say Magnetar pressed to include riskier assets in their CDOs that would make the investments more vulnerable to failure. The hedge fund acknowledges it bet against its own deals but says the majority of its short positions, as they are known on Wall Street, involved similar CDOs that it did not own. Magnetar says it never selected the assets that went into its CDOs.

The whole thing is worth a read.

For example, Norris points that some stocks actually are up today, among them MasterCard.

He doesn’t explain why. I’m guessing investors figure people are going to have to live off their credit cards more.

At 10 a.m., when the market was still sliding, Norris offered his theories on why stocks are in such turmoil. The panic he refers to is the shakeup in overnight global markets:

First, the world is finally waking up to just how bad the world economy is, and that earnings are going to fall everywhere. Only a couple of weeks ago, some people were claiming the S&P 500 was trading at 12 times next year’s earnings, even if it was around 18 times trailing earnings.

If that is the problem, then this could be nearing an end, and this panic could really mark the bottom. (Fair warning: I’ve spotted bottoms before during this bust — and been ever so wrong.)

Second, this is the hedge fund devastation, as overleveraged hedge funds are forced to sell by falling prices, and then are forced to sell more because they drive prices even lower.

There are rumors that the Fed is liquidating one hedge fund. There are also denials, so I won’t name the fund. But even if the rumor is false, it encapsulates one big worry.

If that is the explanation, this will end when the hedge funds have finally been forced out. Then the rise could be explosive.

Happy following the market. Fortunately, Happy Hour isn’t too far off.

Oversight members meet Monday regarding the bankruptcy of Lehman Bros. investment bank and return the next day to look at the government’s $85-billion bailout of insurance giant AIG.

It’s not known whether new information will surface doing these hearings– former Lehman Bros. CEO Richard Fuld has so far not handed over requested company emails and memos.

The committee’s attention will then shift to hedge fund managers, followed by credit rating agencies. The final hearing, Oct. 23, will be on the role of federal regulators and include former Fed Chairman Alan Greenspan as a witness.

Waxman, who voted for the bailout bill Monday, argues that, “Congress cannot wait until a new administration arrives in January to examine what went wrong and who should be held accountable.”

It’s hard to know what to expect from these hearings. With Greenspan and top CEO’s invited, they could be explosive and spark new probes into executive compensation, hedge fund-friendly tax codes and credit rating agencies that took money from the bond issuers they rated.

Or everybody but Waxman will be on the campaign trial.