Why are Americans hoarding $3.5 trillion in cash? An interesting question. Let's dig deeper and see if we can find out why.

Here are some interesting facts about the $3.5 trillion:

• After reducing money market accounts by 11% this year, investors hold cash equal to 73% of S&P 500 Index. At its peak in 2007, the buying power was at 62%.
• Estimates are for GDP to increase sixfold to 2.9% in the third quarter.
• In 2007 and 2008, investors placed $1.45 trillion in money market accounts. As of the week ending January 14, that number reached a record $3.92 trillion.
• Investors have added $15.8 billion to domestic equity funds since March.

This morning's revised GDP and still high jobless claims were of no concern to the bulls. After a key DJIA component had news, and after interest perked back up in the financial stocks, traders forgot about selling and just started buying all over again. Seven days in a row of an up market is becoming a normal event, it seems.

Here were today's unofficial closing bell levels:

Dow 9,576.47 +32.95 (0.35%)
S&P 500 1,030.91 +2.79 (0.27%)
Nasdaq 2,028.09 +3.66 (0.18%)

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On Monday, the stock market rose 498 points -- a move that many attributed to the announcement over the weekend of a plan to buy $1 trillion in toxic waste that uses government loans to lure investors -- such as hedge funds -- into buying extremely risky securities.

That sounds like the same thing that got us into the financial crisis in the first place. It also sounds like the sort of thing that hedge funds do for a living -- and those hedge funds are making a handful of skilled people into billionaires.

In 2008, the average stock on the S&P 500 lost 38.5%. John Paulson, no relation to the former Treasury Secretary who is famous for making billions shorting sub prime mortgages in 2007, made almost exactly the same percentage increase as the S&P 500 lost. So in some sense, if you're wondering what happened to your money, ask John. He's got it.

Exactly how well did Paulson do and how did he do it? Paulson Advantage Plus, his largest fund with $7 billion in assets, returned 37.6% net of fees for 2008 -- this means that his pre-fee returns probably topped 40%. Paulson again bet right about the collapse of financial institutions. In early 2008, Paulson shorted Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) -- betting that they'd become insolvent or need to raise additional capital that would dilute shareholders.

Harvard's business school (HBS) has been celebrating its 100th anniversary this year. And it looks to be at the peak of its power. That's unfortunate because five of its most powerful graduates have made significant contributions to absolutely wrecking the global economy. HBS admits people who are natural leaders. Unfortunately, many of the most powerful of these leaders have followed the path of destruction.

Here are five Harvard MBAs who wrecked the economy:

• George W. Bush ('75). The best thing I can say about Bush is that he said he was sorry for all the problems that occurred while he was in the White House. Unfortunately, he seems to believe he was a victim of events outside his control. One of his HBS professors said of Bush "He showed pathological lying habits and was in denial when challenged on his prejudices and biases. He would even deny saying something he just said 30 seconds ago."
• Hank Paulson ('70). As Treasury Secretary Paulson has consistently ignored the severity of the financial crisis -- In June 2006 he gave a speech at HBS in which he said, "this is by far the best global economy that I have seen in my career" -- but this September he was able to sell Congress on an ineffective plan to fix what he finally realized was an imploding economy -- a plan has kept changing. The economy has continued to crash despite his bone-headed efforts to save it.

Hedge funds have had a lousy year, losing an average of 10.8%. But two hedge funds -- big winners in 2007 -- kept making money this year as well. Meanwhile, those two winners mask an awful lot of losers who will probably find their way into oblivion.

The winners for 2008 (at least through September) are run by James Simons (a math genius whose money-making techniques elude explanation) and John Paulson (who made so much money last year shorting subprime). Here are the details:

• Medallion Fund, run by Simons' Renaissance Technologies LLC, has $8 billion in assets and gained more than 58% -- or $1.43 billion in profits; and
• Advantage Plus fund, Paulson's $13 billion investor in takeovers, restructurings and other corporate events, returned 24.6% through September.

Meanwhile, investors are scrambling for the exit for the typical hedge fund, withdrawing $87.5 billion. Total industry assets fell 11% from the peak of $1.93 trillion in the second quarter of 2008 to $1.72 trillion at the end of the third. Hedge fund closures by the middle of 2008 were 15% ahead of 2007. And that may be only the beginning for the world's 10,000 funds.

Isn't capitalism great?

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

With the plunge in the markets, the hedge fund industry has gone into a tailspin. Even top hedge fund managers -- such as Citadel Kenneth Griffin, Paul Tudor Jones, Steven Cohen and so on -- are having troubles. In fact, there's talk of hedge fund failures, consolidation, and increased regulation. For example, hedge funds may lose 15% of overall assets by the end of 2008. Keep in mind that the average hedge fund is down a stunning 18% this year.

Yet, there are some wily hedge fund managers that are striking fortunes. Perhaps the most notable is John Paulson, who manages Paulson & Co. His fund scored $15 billion in gains last year. Basically, he shorted a variety of complex mortgage securities.

Interesting enough, Paulson's hot hand has continued. That is, his funds have seen increases of 15% to 25% so far this year.

In fact, if he can maintain this pace, Paulson will have personally amassed a $3.5 billion over the past two years.
Oh, and Paulson has 70% of his assets in cash right now. In other words, when the markets settle, he'll be a nice position to capitalize on things -- and make even more money for himself.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

According to a piece in the Wall Street Journal [a paid publication], a variety of top-flight hedge fund managers have been going aggressively to cash. Some of the names include Paul Tudor Jones, Israel Englander, John Paulson, David Slager and Steven Cohen. In fact, it looks like Cohen is 50% cash and Paulson is about 75% cash.

These actions may reflect some technical factors. After all, hedge funds are likely to receive an avalanche of redemptions. Something else: the recent changes in short-selling rules have made things much more complicated (hey, when might the SEC decide again to ban the practice?)

Yet, these hedge fund managers have stellar long-term track records and have weathered the recent declines fairly well.

Besides, we have seen a recurring theme of a plunge/surge cycle-which is far from normal. If anything, it's a sign of irrationality. And if this is the case, how can you really make solid investment decisions?

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Streetsmart Guide to Short Selling: Techniques the Pros Use to Profit in Any Market. He is also the founder of BizEquity, a valuation website.

MAJOR PAPERS:

• The Wall Street Journal's "Fund Track" reported that some banks struggling to raise capital may sell their money management units. National City Corporation (NYSE: NCC) is selling its Allegiant Funds, Fifth Third Bancorp (NASDAQ: FITB) is considering selling its Fifth Third Asset Management, and KeyCorp (NYSE: KEY) will possibly sell its Victory Capital Management unit.
• The Wall Street Journal also reported that Andrew Cuomo, the New York state Attorney General, is preparing to file civil securities-fraud charges against UBS AG (NYSE: UBS), possibly as early as this week. Sources said the lawsuit may include allegations of malfeasance by senior UBS executives.

WEB SITES:

• Bloomberg reported that money manager John Paulson, the owner of Paulson & Co., is launching a hedge fund that will provide capital to financial firms which have been damaged by the housing crisis. Paulson, who wants to open the fund by December, used bets against the U.S. housing market to help him earn $3.7B in 2007.
• After U.S. lawmakers reached a deal on legislation to alleviate the housing recession, the House of Representatives will today vote on a rescue plan for Fannie Mae -- Federal National Mortgage Association (NYSE: FNM) -- and Freddie Mac -- Federal Home Loan Mortgage Corporation (NYSE: FRE). Representative Barney Frank said that the package, which increases the likelihood Treasury Secretary Henry Paulson will get the authority to inject capital into the two, is "fully acceptable," Bloomberg reported.
• Oil trading losses forced SemGroup LP, which used to be America's 12th largest private company, to declare bankruptcy yesterday. Reuters noted that SemGroup LP's parent company is SemGroup Energy Partners LP (NASDAQ: SGLP).

America touts itself as an egalitarian society. But the way we reward people suggests that while everyone has an equal chance to get rich, only about five people can make more than a billion in a year. The way these five people get there reveals what our society most values -- the ability to help people with huge amounts of money get much richer as quickly and consistently as possible.

Wednesday's New York Times listed those five most valuable players. Here are our society's biggest winners, where they work, how much they made in 2007, and how they won:

• John Paulson (Paulson & Co.) -- 2007 earnings: $3.7 billion. Beginning in 2005, Paulson made huge bets on the decline in value of securities backed by subprime mortgages
• George Soros (Soros Fund Management) -- 2007 earnings: $2.9 billion. Soros' $17 billion flagship Quantum Endowment fund racked up a 31.7% return in 2007, its best annual showing since the high-tech implosion at the start of this decade. Soros' $2.9 billion payday comes almost entirely from his personal stake in the fund (which he no longer manages). I don't know how he made that 31.7% return.
• James Simons (Renaissance Technology) -- 2007 earnings: $2.8 billion. Simons, a mathematician and former Defense Department code breaker, uses complex computer models to trade.

The New York Times reports that the highest paid hedge fund manager, John Paulson, made $3.7 billion last year. If you are in the median family, that is 61,157 times more than your $60,500 income. Put another way, on a pretax basis Paulson made 30.6 times more in one hour -- $1.9 million -- than the median family took in all year. To make the list of the top 25 hedge fund managers you needed to earn $360 million last year. Thanks to them and a few others, income inequality in 2007 was at its most extreme since 1928, the year before the Great Depression began.

The top hedge fund managers made money in a variety of ways. They bet that prices of commodities like oil, wheat and copper would rise. But Paulson made his money by wagering enormous sums on a decline in the value of subprime mortgage-backed securities known as Collateralized Debt Obligations (CDO). One of his funds making that bet returned 590% in 2007, and the other handed back 353%. By the end of 2007, Paulson managed $28 billion in assets, up more than four-fold from $6 billion in 2006.

Many of the trends from which these hedge funds profit are coming out of your pocket. The higher commodity prices are squeezing the budgets of people who are paying more for food and energy -- for example, producer price inflation rose 1.1% in March. And hedge funds are among those driving up the prices that you pay for commodities through their leveraged bets. But, as I posted earlier, Paulson profited from the pain of homeowners who defaulted on their mortgages and foreclosed on their homes.

The New York Times reports that in 2007, the median family made less -- $60,500 -- than it did in 2000 -- $61,000. Meanwhile, that family's costs have spiked -- oil is up 342%; wheat, milk, and egg prices have doubled or tripled. And the dollar has lost 65% of its purchasing power. But no worries -- hedge funds are making out well. DealBook reports that John Paulson, who famously profited from selling subprime short last year, made $3 billion in 2007. I don't know how much he made in 2000, but I'd bet that he's better off now than he was then.

Newsweek reports that people like Paulson are part of a new Superclass that's prospered in the last seven years. The Superclass is a group of a few thousand government and business people who control most of the world. How many and how much? Newsweek notes: "The top 50 control almost $50 trillion in assets. The heads of the world's biggest corporations are also members; the top 2,000 support perhaps 500 million people, generate almost $30 trillion in sales and have well over $100 trillion in assets."

Thanks to tax cuts passed in 2001, Paulson probably paid a lower tax rate on his $3 billion than the median American paid on his or her $60,500. Specifically, Paulson could have paid 15%, the long-term capital gains rate, on his income from shorting subprime. The median family paid a 25% rate on its income. That capital gains rate was 20% in 1997 so Paulson may have paid $150 million less in taxes thanks to that 15% rate. But the most interesting part is how Paulson profited.