Posted on 07/26/2007 9:38:25 AM PDT by hripka
"The rich are different from you and me," wrote Fitzgerald and I suppose they are, but the differences – they wax and wane with the economic tides. Gilded ages come, go, and are reborn on the monsoon cloudbursts of seemingly intangible forces such as globalization, innovation, and favorable tax policy. For the rich to be truly rich and multiply their numbers, they need help. Adept surfers they may be, but like all riders, the wealthy need a seventh wave that allows them to preen their skills and declare themselves masters of their own universe, if only for a moment in time. That the golden glazed surfboards of the 21st century seem unique with their decals of "private equity" and "hedge finance" is mostly a mirage. Wealth has always gravitated towards those that take risk with other people’s money but especially so when taxes are low. The rich are different – but they are not necessarily society’s paragons. It is in fact society’s wind and its current willingness to nurture the rich that fills their sails.
What farce, then, to give credence to current debate as to whether private equity and hedge fund managers will be properly incented if Congress moves to raise their taxes up to levels paid by the majority of America’s middle class. What pretense to assert, as did Kenneth Griffin, recipient last year of more than $1 billion in compensation as manager of the Citadel Investment Group, that "the (current) income distribution has to stand. If the tax became too high, as a matter of principle I would not be working this hard." Right. In the same breath he tells, Louis Uchitelle of The New York Times that the get-rich crowd "soon discover that wealth is not a particularly satisfying outcome." The team at Citadel, he claims, "loves the problems they work on and the challenges inherent to their business." Oh what a delicate/tangled web we weave sir. Far better to admit, as has Warren Buffett, that the tax rates of the wealthiest Americans average nearly 15% while those of their salaried and therefore less incented assistants just outside their offices are nearly twice that. Far better to recognize, as does Chart 1, that only twice before during the last century has such a high percentage of national income (5%) gone to the top .01% of American families. Far better to understand, to quote Buffett, that "society should place an initial emphasis on abundance but then should continuously strive to redistribute the abundance more equitably."
Buffett’s comments basically frame the debate: when is enough, enough? Granted, American style capitalism has fostered and encouraged innovation and globalization which are the fundamental building blocks of wealth. That is the abundance that Buffett speaks to – the creation of enough. But when the fruits of society’s labor become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water as is clearly the case today, then the system ultimately breaks down; boats do not rise equally with the tide; the center cannot hold.
Of course the wealthy fire back in cloying self-justification, stressing their charitable and philanthropic pursuits, suggesting that they can more efficiently redistribute wealth than can the society that provided the basis for their riches in the first place. Perhaps. But with exceptions (and plaudits) for the Gates and Buffetts of the mega-rich, the inefficiencies of wealth redistribution by the Forbes 400 mega-rich and their wannabes are perhaps as egregious and wasteful as any government agency, if not more. Trust funds for the kids, inheritances for the grandkids, multiple vacation homes, private planes, multi-million dollar birthday bashes and ego-rich donations to local art museums and concert halls are but a few of the ways that rich people waste money – and I must admit, I am guilty of at least one of these on this admittedly short list of sins. I have, however, avoided the last one. When millions of people are dying from AIDS and malaria in Africa, it is hard to justify the umpteenth society gala held for the benefit of a performing arts center or an art museum. A thirty million dollar gift for a concert hall is not philanthropy, it is a Napoleonic coronation.
So when is enough, enough? Now is the time, long overdue in fact, to admit that for the rich, for the mega-rich of this country, that enough is never enough, and it is therefore incumbent upon government to rectify today’s imbalances. "The way our society equalizes incomes" argues ex-American Airlines CEO Bob Crandall, "is through much higher taxes than we have today. There is no other way." Well said, Bob. Enough said, Bob. Because enough, when it comes to the gilded 21st century rich, has clearly become too much.
If gluttony describes the acquisitive reach of the mega-rich, then the same gastronomical metaphor applies to today’s state of the credit markets. Stuffed! Both borrowers and lenders may have bitten off more than they can chew, and even those that swallow their hot dogs whole – Nathan’s Famous Coney Island style – are having a serious bout of indigestion. Several hundred billion dollars of bank loans and high yield debt wait in the wings to take out the private equity and leveraged buyout deals that have helped propel stocks to Dow 14,000. And lenders…mmmmm, how do we say this…don’t seem to have much of an appetite anymore. Six weeks ago the high yield debt market was humming the Campbell’s soup theme and now, it’s begging for a truckload of Rolaids. Yields have risen by 100 to 150 basis points in response as shown in Chart 2.
Some wonder what squelched the hunger of potential lenders so abruptly, while in the same breath suggesting that the subprime crisis is "isolated" and not contagious to other markets or even the overall economy. Not so, and the sudden liquidity crisis in the high yield debt market is just the latest sign that there is a connection, a chain that links all markets and ultimately their prices and yields to the fate of the U.S. economy. The fact is that several weeks ago, Moody’s and Standard & Poor’s finally got it into gear, downgrading hundreds of subprime issues and threatening more to come. "Isolationists" would wonder what that has to do with the corporate debt market. Housing is faring badly but corporate profits are in their prime and at record levels as a percentage of GDP. Lenders to corporations should not be affected by defaults in subprime housing space, they claim. Unfortunately that does not appear to be the case.
As Tim Bond of Barclays Capital put it so well a few weeks ago, "it is the excess leverage of the lenders not the borrowers which is the source of systemic problems." Low policy rates in many countries and narrow credit spreads have encouraged levered structures bought in the hundreds of millions by lenders, in an effort to maximize returns with what they thought were relatively riskless loans. Those were the ABS CDOs, CLOs, and levered CDO structures that the rating services assigned investment grade ratings to, which then were sold with enticing LIBOR + 100, 200, 300 or more types of yields. The bloom came off the rose and the worm started to turn, however, when institutional investors – many of them foreign – began to see the ratings downgrades in ABS subprime space. Could the same thing happen to levered structures with pure corporate credit backing? To be blunt, they seem to be thinking that if Moody’s and Standard & Poor’s have done such a lousy job of rating subprime structures, how can the market have confidence that they’re not repeating the same structural, formulaic, mistake with CLOs and CDOs? That growing lack of confidence – more so than the defaults of two Bear Stearns hedge funds and the threat of more to come – has frozen future lending and backed up the market for high yield new issues such that it resembles a constipated owl: absolutely nothing is moving.
Bond managers should applaud. It is they, after all, who have resembled passive owls for years if not decades. If, as I pointed out in my opening paragraph, wealth has always wound up in the hands of those that take risk with other people’s money, then private equity and hedge fund managers have led the charge in recent years. Of course they have been aided and abetted by those monsoon forces of globalization and innovation, producing worldwide growth that led to escalating profits and equity prices, often at the expense of labor. But the Blackstones, the KKRs, and the hedge funds of recent years also climbed to the top of the pile on the willing backs of fixed income lenders too meek and too passive to ask for a part of the action. Covenant-lite deals and low yields were accepted by money managers as if they were prisoners in an isolation ward looking forward to their daily gruel passed unemotionally three times a day through the cellblock window. "Here, take this" their investment banker jailers seemed to say, "and be glad that you’ve got at least something to eat!"
Well the caloric content of the gruel in recent years has been barely life supporting and unhealthy to boot – sprinkled with calls and PIKS and options that allowed borrowers to lever and transfer assets at will. As for the calories, high yield spreads dropped to the point of Treasuries + 250 basis points or LIBOR + 200. Readers can sense the severity of the diet relative to risk by simply researching historical annual high yield default rates (5%), multiplying that by loss of principal in bankruptcy (60%), and coming up with an expected loss of 3% over the life of future loans. At LIBOR + 250 in other words, high yield lenders were giving away money!
Over the past few weeks much of that has changed. The mistrust of rating service ratings, the constipation of the new issue market and the liquidity to hedge the obvious in CDX markets has led to current high yield CDX spreads of 400 basis points or more and bank loan spreads of nearly 300. The market in the U.S. seems to be looking towards this week’s large and significant placing/pricing of the Chrysler Finance and Chrysler auto deals to determine what the new level for debt should be. In the U.K., a similarly large deal for BOOTS promises to be the bell cow for European buyers. But the tide appears to be going out for levered equity financiers and in for the passive owl money managers of the debt market. And because it has been a Nova Scotia tide, rising in increments of ten in a matter of hours, it promises to have severe ramifications for those caught in its wake. No longer will double-digit LBO returns be supported by cheap financing and shameless covenants. No longer therefore will stocks be supported so effortlessly by the double-barreled impact of LBOs and company buybacks. The U.S. economy in turn will not benefit from this tidal shift and increasing cost of financing. The Fed tightens credit by raising short-term rates but rarely, if ever, have they raised yields by 150 basis points in a month and a half’s time as has occurred in the high yield market. Those that assert that this is merely an isolated subprime crisis should observe very closely the price and terms that lenders are willing to accept with Chrysler finance this week. That more than anything else may wake them, shake them, and tell them that their world has suddenly changed. High yield lenders, perhaps if only in their frozen, frightened passivity, are signifying that the wealth must be redistributed, that the onerous oppressive tax in the form of low yields must change, and that finally enough is enough!
William H. Gross Managing Director
I basically agree. Their income is really a fee for professional services, and it makes no sense to call it a capital gain.
Only taxpayers who put their own capital at risk should be entitled to capital gains rates.
Interesting that Gross refers to the Forbes 400 and rich people as “they.”
322 William H Gross 1.2 62 Laguna Beach, CA bonds
That’s the listing of Number 322, Bill Gross on the Forbes 400. His net worth is $1.2 billion.
I wonder why he didn’t say “we” need to pay more taxes.
....
So when is enough, enough? Now is the time, long overdue in fact, to admit that for the rich, for the mega-rich of this country, that enough is never enough, and it is therefore incumbent upon government to rectify today’s imbalances. “The way our society equalizes incomes” argues ex-American Airlines CEO Bob Crandall, “is through much higher taxes than we have today. There is no other way.” Well said, Bob. Enough said, Bob. Because enough, when it comes to the gilded 21st century rich, has clearly become too much.”
I don’t see the system breaking down. I see more middle class people moving up in wealth. I see more illegal immigrants that are criminals or HS drops filling up our country. I see a large minority of native Americans drop out of HS (at least 1 out of 4) with few employable skill except selling drugs.
Sure there are poor people working hard trying to get ahead that have not self-destructed by dropping out of HS, having babies at 13, or becoming a substance abuser, but in time they can save and buy a home, and live well.
Face it, our “poor” are subsidized by our state and federal governments to the tune of about $20K per year each, and with opportunities open to all, even people with 85 IQs should be able to succeed in America.
Class envy is not becoming. Frivolous rich eventually spend into oblivion and become middle class.
This country is about class mobility, UP and DOWN.
Gross is very rich elite left winger. Now, he is beating the drums for Obama/Hilliarly to tax the hell out of us. I labeled him as the head Pimp for Pimpco.
Gross and the other super rich elite limo liberals will have escape clauses if the tax laws will change. The rest of us will get hammered.
Also, Gross, is poed that his former might re his Pimpco Bonds have been an absolute terrible investment since GW’s tax changes became the law in mid 1992.
We dumped our holdings of Pimpco Bonds shortly after the tax changes. Bill, the Pimpco head Pimp was on Maria’s whine show moaning about the changes in taxes that were coming. So I figured it was time to get out of Pimpco and get into the various indexs.
Gross, Brinker and Buffet are super rich liberals trying to justify what liberal monagers due with our money.
He gives himself up completely in the very first paragraph: it is not the productivity gains (which come in waves), it is not the individual talent and ability to stomach risk --- it's the environment that makes people rich.
The Roman Empire was rich because of the favorable tax treatment. America was rich when Europe was not because of a very favorable tax treatment. Soviet Russia fell apart because of the heavy tax burden, you see.
similarly, Andrew Carnegie, J.P. Morgan, Bill gates and Warren Buffet apparently enjoyed some special, favorable treatment from the then nonexistent IRS.
The guy should stick with deals: he betrays no capacity to think intelligently about anything else.
Interesting point!
If these uber-wealthy liberals want to see equality of incomes and redistribution of wealth, there is nothing stopping them from doing so. Starting with their own money first. Any time they want.
Folks, this guy is sending out a warning. Watch out!
George: We’ll be like the Gatsbys.
Jerry: I don’t know what that means.
Putting accumulated wealth under the control of trusts and corporations takes it out of the line of fire for estate taxes. Accumulating gross revenues into a corporation and paying expenses before declaring a net taxable profit beats the hell out of ordinary income tax, FICA and medicare and possibly AMT. If your car is leased by your corporation, the lease gets covered as a pre-tax expense of the corporation. That beats a car payment from the net income after paying ordinary income tax, FICA/medicare taxes.
Changing the rules on capital gains will have one predictable effect. Capital will flee to a more favorable location. That's the driving force behind outsourcing of labor and building factories anywhere but on the soil of the USA. Unfavorable treatment of any variety of investment will result in having that class of investment shunned.
If people spent half the time considering the welfare of their souls that they spend considering the welfare of their bank accounts, everyone on the planet would get into heaven. And it would be a far better planet, too.
Sorry; just venting.
If people spent half the time attending to their own betterment that they spend resenting the hyper-wealthy, everyone on the planet would be better off. Warren Buffet et al. are hundreds of times more wealthy than I am but they have never yet picked my pocket to get there.
If you consider living paycheck to paycheck living well, you might have something. I don't agree.
There are some of us that do not live "above" our means, but are struggling because our paychecks are not rising at the same rate as our bills are rising. What are we supposed to do?
We all need to vent sometimes, eh?
I am nearly 60 with a good income, but was not able to save a significant amount until after my Wife and I put our three kids through college. I put myself through 7 years of college, and went though many years of paycheck to paycheck.
I was self-employed for 4 years and my income was boom or bust. My second child was born, and I had more money going out than coming in for most of the year. I had dropped out of the active Army Reserve before, so I decided to go back. That extra income was enough to balance the budget. I even considered a second job for a while.
There are times when most people, even those with good incomes go through tough times, but it is amazing how much you can cut from the spending side.
Funny how at least two-thirds of the article talked about the subprime lending debacle and other banking/borrowing problems that are going on, and no one commented on it.
Improve your skills so someone will be willing to pay you more money. I'm constantly purchasing new books to stay on the leading edge of software technology. Two weeks ago I purchased a new book on WPF (Windows Presentation Foundation). I was excited about spinning up on the new technology, but I suddenly realized that my Windows 2000 based computers could not support the new tools and APIs. Yack. I had two old "shoebox" computers purchased 18 months ago with Windows XP COA (certificate of authorization) that were sitting fallow. I called the local surplus shop and they coughed up a copy of the media (Window XP OEM SP2). A trip to Sam's club netted a 320 GB SATA drive for $109. I installed Windows XP on that drive and I've been re-installing my applications and tools for the last week and a half. I finally have an OS that will support the new technology. That is critical if I have any hope of improving my skill set and being eligible to bid on contracts that require those new skills. Note the cost was essentially just another $109+tax and lots of my labor.
Early last year I spent weeks devouring books on digital signal processing and exercising those new concepts using an open source version of MATLAB called Octave. Again, this self education process was mostly personal effort to track down the resources. The payback is extended assignments on tasks requiring those DSP skills. My first DSP book was captured from an online source with all the chapters in PDF form. The author even returned my questions by e-mail. I learned what I needed to do the tasks required by my employer. In turn, I purchased a copy of the book that had been provided gratis on the web.
Learning and adding new skills should be a continuous process. Especially if you are in the computer science field. If you become complacent, you will be left behind when others with current skill sets take jobs that you aren't qualified to perform.
If you have a web browser (and posting here on FR says you do), then you have access to an amazing wealth of skills and opportunities. Exploit it.
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