I heard a similar sentiment from the Taiwanese-born, thirtysomething CFO of a U.S. technology company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So, if you’re going to demand ten times the paycheck, you need to deliver ten times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”
And even those plutocrats who are sympathetic to the plight of the U.S. middle class feel compelled to contribute to it. One private equity investor invited me to lunch at Michael’s, the restaurant that is practically a canteen for the New York media set, to talk about income inequality. When we moved on to other subjects, he told me about a recent deal his firm had done to acquire an Indian outsourcing company. A fringe benefit was that he could now use it to outsource his own company’s research. The result was better work, more motivated employees, and lower costs. “We were paying University of Connecticut BAs $120,000 a year to do dead-end jobs,” he told me. “Now we pay Indian PhDs $60,000 and they are thrilled to work for us.”
You wouldn’t hear comments like these in many middle-class U.S. households. What’s striking, though, is how similar these views are to the perspectives of plutocrats in the emerging markets.
“You know, historically, economic activities tend to migrate because people who don’t have it have a lot more urge to have it, they’re willing to work harder for less money, and that’s part of life,” B. N. Kalyani, the chairman of Bharat Forge, India’s largest exporter of motor parts, told me. “You had your golden period; now, hopefully, we’ll have ours.”
Kris Gopalakrishnan, the cochair of Infosys, told me bluntly that the per capita consumption of the Western middle class would have to decline as the developed and developing worlds “meet somewhere in the middle.”
MY GOLF CADDY CAUSED THE FINANCIAL CRISIS
When I asked one of Wall Street’s most successful investment bank CEOs if he felt guilty for his firm’s role in creating the financial crisis, he told me with evident sincerity that he did not. The real culprit, he explained, was his feckless cousin, who owned three cars and a home he could not afford. One of America’s top hedge fund managers made a near identical case to me, though this time the offenders were his in-laws and their subprime mortgage. And a private equity baron who divides his time between New York and Palm Beach pinned blame for the collapse on a favorite golf caddy in Arizona, who had bought three condos as investment properties at the height of the bubble.
It is this not-our-fault mentality that accounts for the plutocrats’ profound sense of victimization in the Obama era. You might expect that American elites—and particularly those in the financial sector—would be feeling pretty good, and more than a little grateful, right now. Thanks to a $700 billion TARP bailout and trillions of dollars lent nearly free of charge by the Federal Reserve (a policy Soros himself told me was a “hidden gift” to the banks), Wall Street has surged back to precrisis levels of compensation even as Main Street continues to struggle.
But instead, many of the giants of American finance have come to, in the words of a mystified administration economist, “hate” the president and to believe he is fundamentally opposed to them and their well-being. In a much quoted newsletter to investors in the summer of 2010, hedge fund manager—and 2008 Obama fund-raiser—Dan Loeb fumed, “So long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire.” Two other former Obama backers on Wall Street—both claim to have been on Rahm Emanuel’s speed dial list—recently told me that the president is “antibusiness”; one went so far as to worry that Obama is “a socialist.”
In some cases, this sense of siege is almost literal. In the summer of 2010, for example, Blackstone’s Schwarzman caused an uproar when he said an Obama proposal to raise taxes on private equity firm compensation—by treating carried interest as ordinary income—was “like when Hitler invaded Poland in 1939.”
However histrionic his metaphors, Schwarzman (who later apologized for the remark) is a Republican, so his antipathy for the current administration is no surprise. What is perhaps more surprising is the degree to which even former Obama supporters in the financial industry have turned against the president and his party. A private equity manager who is a passionate Democrat and served in the Clinton administration proudly recounted to me his bitter exchange with a Democratic leader in Congress, who was involved in the tax reform effort. “Screw you,” he told the lawmaker. “Even if you change the legislation the government won’t get a single penny more from me in taxes. I’ll put my money into my foundation and spend it on good causes. My money isn’t going to be wasted in your deficit sinkhole.”
Indeed, within the private equity fraternity, which would be hardest hit by a change in the tax treatment of carried interest, this is very much the majority view. When I met him in his boathouse on Martha’s Vineyard, the cofounder of a private equity firm warned that raising the taxes on his industry would “kill” investment in this country and drive the money overseas. He also said it was morally unjust because private equity professionals like himself put their own money at risk and so did not deserve to have their profits taxed like regular income. Finally, he argued that raising the tax would actually be fine for him—he was near retirement and had already made his billion—but would be “unfair” to his junior partners. They earned $500,000 or so a year and accepted such moderate compensation only in the hope of huge, and lightly taxed, payouts after a decade or two of work. This white-haired grandfather had voted for Obama in 2008, though he was backing Jon Huntsman in 2011. Like so many of his peers, he came from a humble background—his father was a Pennsylvania steelworker.
The fight over carried interest is fascinating because it offers such clear insight into the power of self-interest to shape ideology. On a human level it is hard not to have at least a little sympathy for the fierce defenders of the current system—after all, a 20 percentage point tax hike is hard to stomach no matter how rich you are—but intellectually their position is close to indefensible. One piece of evidence came in a November 2011 speech Mike Bloomberg delivered in Washington. Bloomberg is, of course, himself both a plutocrat and one of the country’s most prominent financial entrepreneurs. As New York’s mayor, he has defended Wall Street with the hometown zeal of a Detroit politician supporting the carmakers or a prairie leader backing farmers.
Nonetheless, here was Bloomberg on carried interest: “Since fair is fair, tax loopholes in the financial industry that are outdated should be closed, too, such as taxing carried interest at ordinary income rates. And I say this even though many of the people who would be affected are my constituents—so I assume I will get some phone calls later this afternoon.”
GALT’S GULCH
Carried interest is a very specific issue that touches a very specific group of people. The rise of Occupy Wall Street has brought a broader critique of the 1 percent to the fore, and in doing so has spurred some of the plutocrats to mount a more general self-defense.
On October 11, 2011, Occupy Wall Street protesters marched past the Upper East Side homes of some of New York’s wealthiest residents, including John Paulson, the hedge fund manager who earned billions betting against subprime mortgages. Paulson & Co. issued a statement pointing out: “The top 1 percent of New Yorkers pay over 40 percent of all income taxes, providing huge benefits to everyone in our city and state. . . . Paulson & Company and its employees have paid hundreds of millions of dollars in New York City and New York State taxes in recent years and have created over 100 high-paying jobs in New York City since its formation.” In response, Occupy Wall Street protesters left a mock tax refund check outside Paulson’s house.
Jamie Dimon, the highest-paid Wall Street CEO, earning $23 million in 2010, is another unapologetic defender of the
1 percent. “Acting like everyone who’s been successful is bad and because you’re rich you’re bad—I don’t understand it,” Dimon said when asked about public hostility toward bankers at an investors’ conference in New York in December 2011. “Sometimes there’s a bad apple, yet we denigrate the whole.”
Peter Schiff, CEO of a Connecticut-based broker-dealer and unsuccessful candidate in the 2010 Republican primary for a Senate seat in that state, took the message straight to Zuccotti Park, walking through the square with a video camera and a handwritten sign that announced: “I am the 1%.”
I heard similar sentiments at a public interview I conducted with GE’s Jeff Immelt that month. During the question-and-answer session a white-haired gentleman sitting almost exactly in the middle of the room rose to speak. He admitted that his comments would be “not a question, it’s almost a statement.” It was one he assumed Immelt had sympathy with, but that “you can’t make given the position you sit in.” He went on to warn: “Our problem frankly is, as long as the president remains antiwealth, antibusiness, antienergy, anti–private aviation, he will never get the business community behind him. . . . The rhetoric is so poisonous . . . and the problem and the complication is 40 or 50 percent of the country are on the dole that support him.”
The speaker was Leon Cooperman, a sixty-nine-year-old self-made billionaire. Son of a South Bronx plumber, Cooperman made it to Columbia Business School, then Goldman Sachs, then founded his own hedge fund. A few weeks after he made his statement to Immelt, Cooperman expanded on his views in an open letter to President Barack Obama, which instantly became the talk of Wall Street. In it, Cooperman complained the 1 percent were being unfairly caricatured: “Capitalists are not the scourge that they are too often made out to be”; the wealthy are not “a monolithic, selfish and unfeeling lot who must be subjugated by the force of the state.” Instead, Cooperman urged the president and his supporters to remember that they needed the rich: “As a group, we employ many millions of taxpaying people, pay their salaries, provide them with health care coverage, start new companies, found new industries, create new products, fill store shelves at Christmas, and keep the wheels of commerce and progress (and indeed of government, by generating the income whose taxation funds it) moving.”
Foster Friess, the Wyoming mutual fund investor who shot to national prominence as the backer of the main super PAC supporting Republican primary candidate Rick Santorum, made the same point when I spoke to him in February 2012.
“People don’t realize how wealthy people self-tax,” Friess told me when I asked him whether, given the country’s economic troubles, it was fair to ask the rich to pay a bigger share. “You know, there’s a fellow who was the CEO of Target. In Phoenix, he’s created a museum of music. He put in around $200 million of his own money. I have another friend who gave $400 million to a health facility in Nebraska or South Dakota, or someplace like that. You look at Bill Gates, just gave $750 million, I think, to fight AIDS.”
Friess’s point is that the common good is better served when the wealthy “self-tax” by supporting charities of their own selection, rather than paying taxes to fund government spending.
“I think we should get rid of taxes as much as we can,” Friess told me. “Because you get to decide how you spend your money, rather than the government. I mean, if you have a certain cause, an art museum, or a symphony, and you want to support it, it would be nice if you had the choice to support it. Where we’re headed, you’ll be taxed, your money taken away, and the government will support it.
“It’s a question—do you believe that the government should be taking your money and spending it for you, or do you want to spend it for you?” Friess explained.
As for the idea that an economic age, like our own, that is conducive to creating vast fortunes should also be one in which taxes are high—Friess considers that absurd. “If you look at what Steve Jobs has done for us, what Bill Gates has done for society, the government ought to pay them. Why do they collect money from Gates and Jobs for what they’ve contributed? It’s ridiculous.”
Indeed, Friess is unpersuaded by the entire 99 percent paradigm. In his view, it is the Americans at the bottom of the income distribution who are getting the free ride. “I’m just so amazed at this concept that President Obama says, ‘I’m not gonna let half the American people that pay no taxes bear the unfair burden of the other half, who are not paying their fair share.’ It’s pretty comical, when you think about it,” he told me. “About 46 percent of the American public pay no income taxes.”
Friess believes we all rely on the 1 percent, and should respect them accordingly. “It’s that top 1 percent that probably contributes more to making the world a better place than the 99 percent. I’ve never seen any poor people do what Bill Gates has done. I’ve never seen poor people hire many people,” he told me. “So I think we ought to honor and uplift the 1 percent, the ones who have created value.”
Friess is very conservative, but among the plutocrats, his views about the oppression of the rich are not unusual. In a rare interview with the Chicago Tribune in the spring of 2012, Ken Griffin, a Chicago-based billionaire hedge fund manager, complained that plutocrats don’t have enough of a voice in American politics and that political engagement is an onerous burden it is their duty to bear.
“I think [the ultrawealthy] actually have an insufficient influence,” Griffin, who donated more than $1 million to Republican political causes in the 2012 election cycle, told the Chicago Tribune. Over time, the Griffins have given roughly $1.5 million to the conservative causes supported by David and Charles Koch. “Those who have enjoyed the benefits of our system more than ever now owe a duty to protect the system that has created the greatest nation on this planet.”
Griffin also complained about the necessity of lobbying: “I spend way too much of my time thinking about politics these days because government is way too involved in financial markets these days.” That dependence on government regulation, Griffin worries, is limiting the free speech of the rich. “This is the first time class warfare has really been embraced as a political tool. Because we are looking at an administration that has embraced class warfare as being politically expedient, I do worry about the publicity that comes with being willing to both with my dollars and, more importantly, with my voice, to stand for what I believe in. As government gets bigger every single day, how does my willingness to stand up for what I believe is right become eclipsed by my dependency on institutions that are ultimately controlled by the government? Remember, I live in financial services, and every bank in the United States is really under the thumb of the government in a way it’s never been before.”
Like so many of today’s working rich, Griffin, who was a billionaire before his fortieth birthday, thinks of himself as a self-made man: “I started my career with myself, two employees, and a one-room office. Nothing was given to me per se, except for a great education—my college degree [at Harvard]—and a country that allows somebody to just go for it.” Griffin is proud his firm, like all hedge funds, didn’t need government money to survive the crisis, and he doesn’t see himself as a beneficiary of the bailout that rescued the financial sector more broadly.
One day in November 2011, Dennis Gartman, a former commodities analyst and foreign exchange and bond trader, devoted his daily investment note to a rousing defense of the 1 percent:
We celebrate income disparity and we applaud the growing margins between the bottom 20 percent of American society and the upper 20 percent for it is evidence of what has made America a great country. It is the chance to have a huge income . . . to make something of one’s self; to begin a business and become a millionaire legally and on one’s own that separates the U.S. from most other nations of the world. Do we feel bad for the growing gap between the rich and the poor in the U.S.? Of course not; we celebrate it, for we were poor once and we are reasonably wealthy now. We did it on our own, by the sheer dint of will, tenacity, street smarts and the like. T
hat is why immigrants come to the U.S.: to join the disparate income earners at the upper levels of society and to leave poverty behind. Income inequality? Give us a break. God bless income disparity and those who have succeeded, and shame upon the OWS crowd who take us to task for our success and wallow in their own failure. Income disparity? Feh! What we despise is government that imposes rules that prohibit or make it difficult to make even more money; to employ even more people; to give even more sums to the charities of our choice.
Much of this pique stems from simple self-interest. In addition to the proposed tax hikes, the financial reforms that Obama signed into law in the summer of 2010 have made regulations on American finance more stringent. But, the rage in the C-suites is driven not merely by greed but by an affront to the plutocrats’ amour propre, a wounded incredulity that anyone could think of them as villains rather than heroes. Aren’t they, after all, the ones whose financial and technological innovations represent the future of the American economy? Aren’t they doing, as Lloyd Blankfein quipped, “God’s work”?
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You might say that the American plutocracy is experiencing its John Galt moment. Libertarians (and run-of-the-mill high school nerds) will recall that Galt is the plutocratic hero of Ayn Rand’s 1957 novel, Atlas Shrugged. Tired of being dragged down by the parasitic, envious, and less talented lower classes, Galt and his fellow capitalists revolt, retreating to “Galt’s Gulch,” a refuge in the Rocky Mountains. There, they pass their days in secluded splendor, while the rest of the world, bereft of their genius and hard work, collapses.
That was, of course, a fiction, and one with as much bodice ripping as economics. But versions of Galt’s Gulch are starting to show up in more sober venues. James Duggan, a founding principal of a Chicago firm of tax and estate planning lawyers, believes “wealth is fleeing the country.” Some of the self-exiled rich are, Mr. Duggan argues, “conscientious objectors”: “There are those who are simply going offshore to make a statement. Their level of discontent with the current circumstances in our country, coupled with attacks on the wealthy, has created a distinct sense of rebellion among many wealthy citizens. While they may love the country, they are objecting to the current trends and responding by moving themselves or their assets, or both, away from the cause of the problem.”
Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else Page 29
