TOO MUCH: Monitoring excess and inequality / March 30 2009

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Billionaire conglomerateur Ron Perelman is emblematic of the American plutocratic class represented by Kirk Douglas (Gordon Gekko) in the film Wall Street.

 

THIS WEEK

Charities and rich people have emerged, over recent weeks, as somewhat of a hot-button issue. The Obama administration has proposed limiting the tax deductions the wealthy can take on their charitable donations. Rich people shouldn’t get a bigger deduction on a $100 contribution, as the President argued last Tuesday, than average people.

People of ample means don’t particularly care for Obama’s suggested tax deduction change, and neither do most of the nation’s biggest charities, on whose boards many people of ample means just happen to sit. They’re allactively opposing the limit on deductions the White House is proposing.

The debate, so far, has revolved around questions of incentive. Would the rich give less, policy wonks are asking, if they couldn’t deduct off their taxes as much for charitable contributions as they do now? Here at Too Much, we have an even more basic question: Just how much to charity are the rich now giving?

In this week’s issue, we pursue the answer. Also this week: We explore why hedge funds so desperately need clipping.


GREED AT A GLANCE

America’s health care system is working better than ever — for people like Daniel Starks. St. Jude Medical Inc. last week announced that Starks, the company’s chief executive, took home $32.2 million in 2008. Starks cashed out a stash of previously awarded stock options to grab the bulk of that jackpot. But the CEO doesn’t have to worry about running out of options to cash out anytime soon. St. Jude, a Minnesota-based medical device maker, dropped a pile of 600,000 new options on Starks in 2008. Their starting value: $6.4 million. Something else at St. Jude dropped in 2008. Total returns to shareholders ended the year down a not-so-healthy 18.9 percent . . .   

Timeshare mogul David Siegel and his wife Jacqueline don’t particularly care if people call them pretentious. If they did, they wouldn’t be building a 90,000-square-foot home off Florida’s Lake Butler and naming it “Versailles” after a certain French palace they happen to fancy. But don’t call them insensitive. The couple, Jackie told an upscale Florida magazine earlier this month, understand full well “that the whole country is going through a hard time right now.” To show their sensitivity, the couple have cut back on core household staff at the temporary abode they’re calling home until they move into their Versailles. They now only employ five nannies — for their eight children — and a housekeeper. With the “bad economy,” says Jackie, the Siegels feel “we should suffer too.” Adds the ex-model: “We even have our kids doing chores now. They take out the garbage and stuff like that.” The 30-bathroom, 15-bedroom Versailles, once complete, will rank as America’s largest occupied residence . . .

America’s most expensive occupied residence, at least for now, sits a continent away from the Versailles construction site in Florida. This 123-room, 57,000-subplugsquare foot Los Angeles manse belongs to Candy Spelling, the widow of TV producer Aaron Spelling. Candy, reports the Wall Street Journal, last year announced plans to “downsize” to a $47 million condo. She wants $150 million for her 18-year-old L.A. spread. Her lawyer doesn’t think she’ll have any problem getting it, even with the troubled economy. Notes the attorney: “The ones who could afford it three years ago can still afford it today.”

Prince & Associates, a market research firm that specializes in global private wealth, is predicting a shift to “real elitism” among the world’s super rich. In a recent Prince survey, nearly three-quarters of private jet owners — average net worth, $116 million — said they plan to make “more upscale” purchases in the year ahead. That’s news worth cheering for Jack Smith, a writer for the Robb Report luxury magazine. Last week, in a Philadelphia Inquirer op-ed, Smith defended his magazine and the wealthy who continue to shell out, despite the recession, big bucks for supercars and “wristwatches that cost as much as a thoroughbred.” Even if the Robb Report “did nothing but spur the sales of personal helicopters, palatial mansions, polo ponies, and other big-ticket items,” Smith proudly proclaimed, “it would be performing a valuable public service.”

In New York last week, 80 wealthy citizens performed a different sort of public service. They released an open letter urging state lawmakers and Governor David Patterson to raise taxes on the rich. To avoid deep cutbacks in vital state services, the letter pointed out, New York needs to see “an increase in income taxes on those who can afford it — which means us.” By week’s end, New York’s top politicos finally agreed. The governor and New York’s legislative leaders, saynews reports, now support a plan that will will hike the state tax rate on income over $500,000 from 6.85 to 8.97 percent for three years. One activist in the long campaign to raise taxes on New York’s rich, Working Families Party executive director Dan Cantor, is calling the new tax hike “a profound breakthrough for tax fairness.” Adds Cantor: “The era of phony prosperity has ended, and a new era of real shared sacrifice must begin.”


Quote of the Week

“If you made 500 million dollars and you gave away 250, I think you would still be left with enough to enjoy. The point is, there has to be some demonstrable response to this sense of crisis today from the rich people, rather than have them hide, or hire security guards, or insist that they stay anonymous.” —Dr. Zbiginiew Brzezinski, former U.S. national security advisor, MSNBC Morning Joe, March 26, 2009

New Wisdom
on Wealth

Meizhu Lui, The Wealth Gap Gets Wider, Washington Post, March 23, 2009. Why the nation’s “long-term economic future depends on the inclusion of all Americans in opportunities to build wealth.”

David Moberg, Give CEO Pay the Pink Slip, In These Times, March 23, 2009. A fine exposition on why “capping outsized salaries” would help build corporate responsibility.

Chiou Tian-juh, Economic policy needs to address wealth gap, Taipei Times, March 25, 2009.

Sanford Jacoby and Sally Kohn, Japan’s management approaches offer lessons for U.S. corporations, Seattle Times, March 28, 2009. The price we pay for tolerating what Japan does not: a huge gap between top and bottom on the corporate pay ladder.


IN FOCUS
Down But Not Out at $464 Million a Year

NOT EVERYONE  in the global hedge fund industry is making millions. Not everyone in the hedge fund industry right now even has a job. Amid the worst global economic meltdown since the Great Depression, hedge funds are hemorrhaging positions. An estimated 20,000 will be gone by year’s end.

But the hedge fund industry still does have something no other industry in the known universe can match: the best-paid top executives who ever lived.

“These are the highest earners,” as Manhattan College financial historian Charles Geisst put it last week, “of all time.”

That observation came right after Alpha, the hedge fund industry trade journal, reported that the hedge fund industry’s top 25 managers added $11.6 billion to their personal fortunes in 2008, an average of $464 million each.

How did the movers and shakers of hedge fund land work such magic? For the most part, we simply don’t know. Hedge funds, as largely unregulated entities, don’t have to reveal almost anything about how they go about their business.

The most secretive hedge fund manager of them all, James Simons of Renaissance Technologies, netted $2.5 billion last year. One of the funds Simons manages generated a 160 percent return in 2008, through some financial alchemy that observers, in the absence of any real information, have taken to describing as “computer-driven trading strategies.”  

The number two on this year’s hedge fund top 25 we know more about. John Paulson of Paulson & Co. has made his big money — $2 billion in just 2008 alone — by betting that the incredibly overinflated market for subprime mortgage-backed securities would tank.

Paulson no doubt understands the lucrative irony behind his enormous personal windfall. His colleagues in the hedge fund industry helped inflate the market for subprime securities in the first place.

Fifty years ago, in a more equal America, hedge funds as we now know them didn’t exist. They didn’t explode onto the financial scene until the 1980s, when the Reagan revolution was rapidly concentrating income and wealth at the top of the U.S. economic ladder.

America’s newly flush rich, their pockets bulging, had plenty of cash to invest, and the emerging new hedge funds — pools of investment capital open only to deep-pocket investors — promised better returns than those deep pockets could get anywhere else.

Hedge fund managers, needing to deliver on those promises, hungered mightily for high-return investment opportunities that could keep their wealthy clients happy. Traditional Wall Street investments — corporate stocks and bonds — couldn’t deliver the high returns the hedge funds needed. But the financial world’s new-fangled “derivatives” could.  

These increasingly exotic financial instruments, all based on the endless repackaging of ever-shakier mortgage loans and consumer debt, would find an eager hedge fund market. Hedge fund dollars, in effect, kept the U.S. economy blowing bubbles.

The bubbles all burst in 2008, and the hedge fund industry has certainly felt the aftershock. Over 900 hedge funds, about 14 percent of the fund total worldwide, shut their doors last year. The industry ended 2008 with assets down 37 percent, over $700 billion, from the industry peak last June.

But that downturn has left $1.2 trillion still sloshing in hedge fund coffers, more than enough to power top hedge fund execs to another round of windfalls

These top execs typically charge investors a fixed percentage of the billions in assets they manage, usually 2 percent. The celebrity hedge fund managers charge even more. James Simons, for instance, levies a 5 percent management fee on the billions investors turn over to him — and then takes a 44 percent cut on any profits he makes selling the assets he buys with those investor billions.

In 2008, you didn’t have to be a hedge fund celebrity like Simons to score big. Even junior hedge fund analysts did quite wonderfully, given the economic tenor of our times. They averaged $195,520 last year, says the trade journal Alpha.

Industrywide, hedge fund jobs paid an average $794,000 in 2008, down from $940,000 the year before. But cheerier days may be coming. U.S. Treasury Secretary Tim Geithner last week unveiled a plan that will hand hedge funds and other big investors a subsidy worth as much as $1 trillion to start buying up the toxic derivative securities that now have no little or market value.

If Geithner’s plan works, hedge funds will take those tax dollars and jumpstart the market for toxic securities, the securities will rise handsomely in value, and hedge fund managers will reap still more jackpots.

But some financial insiders like venture capitalist Peter Cohan don’t believe Geithner’s plan will work. A good many hedge fund managers won’t play ball with Geithner’s new plan, Cohan predicts, “because they fear that there’ll be a public outcry over their compensation if the plan makes them even richer.”

And if that outcry gets loud enough, the hedgies no doubt worry, lawmakers may feel compelled to shut the loophole that lets hedge fund managers claim much of their income as capital gains. That neat trick lowers the tax rate on a hefty chunk of hedge fund manager earnings from 35 to 15 percent.

The cost to taxpayers? The hedge fund loophole, the Institute for Policy Studies in Washington, D.C. estimates, is running taxpayers about $2.7 billion a year.


Hedge fund incomes

IN REVIEW
Getting Past the Philanthropic Foolery

The 2008 Study of High Net Worth Philanthropy: Issues Driving Charitable Activities among Affluent Households. March 2009. Sponsored by Bank of America, researched and written by the Center on Philanthropy, Indiana University.

he good folks at the Indiana University Center on Philanthropy would like us to know that we can gain “new insights” aplenty from the just-published second edition of their ongoing landmark research on the charitable giving of America’s rich.

The first edition of this research — the largest survey of wealthy Americans about charity “ever conducted” — covered 2005. The Center’s new Study of High Net Worth Philanthropy, based on a random sampling of “over 20,000 households in high net-worth neighborhoods,” covers 2007.

And what can we learn from this massive research? In the news releaseannouncing the new report’s unveiling, we get an answer from the Bank of America, the financial institution that’s sponsoring the Center’s research on the eminently comfortable and their charitable contributions.

“Our clients,” says Cary Grace, the Bank of America’s charity chief, “are taking a more proactive approach to integrating philanthropy into their wealth management strategies.”

The rest of the news release goes on to list a variety of equally scintillating “insights.” The wealthy, the release informs us, “demonstrate a strong desire” to give back to their communities. The rich expect the charities that get their contributions to engage in “sound business practices.” Their giving, the awesomely affluent believe, sets a good “example” for their children.

But don’t let this news release pablum fool you. The new Indiana University Center on Philanthropy research on the rich really does offer some eye-opening findings. You just won’t the Center’s flacks talking about them.

The reason: This new study, once you actually dive into the survey data, makes America’s very rich — the clients the Bank of America most covets — look something less than generous. Much less.

Between 2005 and 2007, Wall Street’s biggest go-go years, charitable contributions from Americans who make over $5 million a year dropped 14.1 percent, after taking inflation into account.

We can’t say exactly what happened to the incomes of these wealthy Americans over that two-year span, because the IRS hasn’t yet released any official stats for 2007. We do know that taxpayers making over $5 million — just three-hundredths of 1 percent of the taxpaying public — upped their share of America’s total income, between 2005 and 2006, from 9.1 to 10 percent.

That’s the equivalent of a $45.9 billion swing to the 40,848 households at the tippy top of America’s economic ladder. A significant sum, to be sure, but not enough apparently to prevent the super wealthy from cutting back, one year later, on their charitable giving. Households making over $5 million a year dropped their average giving from $995,192 in 2005 to $855,200 in 2007.

But doesn’t this $855,200 still represent a hefty act of generosity? Not really, not once you consider the net worth of America’s richest families. In 2007, families worth $50 million or more gave an average $885,387 to charity. That sum computes to just 1.48 percent of their average 2007 net worth.

Between 2005 and 2007, we need to remember, the hedge funds that the super rich were busily stashing their fortunes into were routinely returning 15 to 20 percent per year and more. Even the most conservative of wealthy investors were getting double-digit returns from their private wealth managers.

The super rich, given these investment returns, could have upped what they actually gave to charity in 2007 by five or ten times and still ended the year with a higher household net worth than when the year started.

Back in the 1990s, a multimillionaire San Francisco money manager named Claude Rosenberg started a research group dedicated to demonstrating to rich people this very message, that they could easily afford to give far more of their fortunes to charity than they actually do.

In the year 2000, Rosenberg’s researchers would go on to document, households with $1 million or more in income could have given $128 billion more to charity than they did in fact give, without losing any net worth over the course of the year.

Claude Rosenberg, a true generous soul, died last May at the age of 80. His message to the rich, the new data from the Indiana University Center for Philanthropy make abundantly clear, remains sadly unheeded.

Stat of the Week

In 2002, the year the first hedge fund industry pay scorecard appeared, a hedge fund manager needed to make $30 million to rank in the industry’s top 25. Last year, says the hedge fund industry trade journal Alpha, a ticket into the top 25 required at least $75 million.

Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954. Office: Suite 3C, 777 United Nations Plaza, New York, NY 10017. E-mail: editor@toomuchonline.org

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