/ 20 April 2008

Super-rich face backlash as credit crunch hits home in US

The ”American dream” of unashamed wealth and the opportunity for all to acquire it has reached a crisis point before: in the Depression, the oil shock, in the ”greed is good” Eighties and the madness of the dotcom bubble.

But America’s relationship with wealth — uncomfortable as it has sometimes been — has always been built on the same foundation. Even as charted in the salutary tales of Fitzgerald, Steinbeck or Wolfe over the decades, or in the endless fascination with Howard Hughes and the fictional Ewings of Dallas, the aspiring masses never quite lost their admiration for blatant enrichment, nor the elite their pride in it. Now, however, all that appears to be changing.

Confronted by the revelation that Wall Street’s biggest earners are pulling down figures that the chancelleries of many small countries would be happy to have banked, and in the midst of an election cycle that has focused on the impoverishment of ordinary Americans, a cultural backlash is under way.

It is not only from those impoverished United States householders, or from the usual suspects on the left, either. Even those who might normally be considered filthy rich are declaring themselves offended by the obscene levels of remuneration of the country’s uber-wealthy.

The latest backlash — which has seen even Republican nominee for president John McCain (married to an heiress) weigh in — has been prompted by the news last week that Wall Street’s biggest-ever pay packet topped $3,7-billion in 2007 for one hedge fund manager for a fortune he made from gambling on the collapse in the mortgage market that has caused millions to lose their homes.

And as the financial crisis spawned in the US spreads globally, there is even unprecedented talk of ”shame” in the ranks of the super-rich. ”There is something really obscene going on. This is an era of ridiculous excess. We have not seen the worst of it and there is going to be real anger,” said David Rothkopf, author of a new book, Superclass

The man with history’s biggest annual pay packet is hedge fund manager John Paulson of Paulson & Company. But he is not alone, as the ”Alpha 25 list” of the super-rich published by Alpha financial magazine last week made clear.

Up with Paulson were global markets gambler George Soros and rival dealer James Simons, who made $3-billion apiece. Meanwhile ordinary Americans are being squeezed harder by inflation and the credit crunch, a stagnant economy, falling house values and rising unemployment — and, in a tax system rigged against them by successive conservative administrations, often pay proportionately twice as much tax as Paulson, Soros and their cohorts.

The widening gap that these trends are producing in US society is shaking traditional values to their roots. There are growing signs that the majority are losing faith in the remains of the American dream, while the chief beneficiaries of it feel guilty as never before.

”It’s unprecedented that the super-wealthy would express so much shame in public”, said Robert Frank, author of the book Richistan, which chronicles the rise of America’s new super-wealthy to a point where they live in a separate world of rarefied exclusivity. ”It is not just people like Bill Gates and Warren Buffett standing up and saying ”it’s not fair”. I spoke to 100 people earning over $10-million who would not even admit to being rich: they feel ashamed about the inequality.”

When even the aptly named multibillionaire money manager Bill Gross, known as ”the Bond King”, pens a blog headlined ”Enough is enough”, you know something has shifted. He was widely quoted as saying after Alpha published a list of last year’s top earner that ”It’s not illegal, but it is ugly”. Even to rank in the top 50 of the Alpha list you had to have made more than $210-million last year.

Five years ago, a paltry $30-million would have got you into the top 25. Eight United Kingdom fund managers made the list, the highest earner being David Slager, who made $450-million at Atticus Capital.

Meanwhile a recent survey by Pew Research found that between 1983 and 2004, the median net worth for upper-income US families — defined as those who earn 150% of the national average — grew by 123%, while the typical net worth for middle-income families grew by just 29%.

In addition, poverty increased and the collapse in the mortgage market caused two million homes to be repossessed in the US last year. ”The middle class and the upper middle class are struggling and feel more depressed by their prospects now and resentful of what appears to be prosperity at the top but not in their own life,” said economist Gary Burtless of think tank the Brookings Institution in Washington DC.

”From the Second World War to the Seventies prosperity was more broadly spread in the US and fewer people were left behind. But feeling you can make tons of money or achieve distinction and not be held back by your circumstances is now perhaps more under threat here than in countries that Americans have always thought of as snobby, like the UK or Scandinavia,” he added.

The financial crisis has certainly had its high-profile victims, such as Bear Stearns bank. But David Rothkopf pointed out that when multibillionaires lose, they are rarely broke, or even poor. ”I know a guy who lost a billion and was left with only $400-million. That’s the pattern,” he said. If the names at the top shuffle, the system itself does not topple. And that is the key to the current problem that means it is unsustainable both economically and psychologically, according to experts.

Talk of the wealth gap is no longer confined to developing world dictatorships. ”It is market fundamentalism and it’s nuts. Inequality has grown everywhere in the world as a result of this,” said Rothkopf. But the world of hedge and bond funds and the securities derivatives markets is not only complex and obscure, it is also very lightly regulated and taxed.

Top earners such as Paulson and Soros often pay only 15% in capital gains tax on their fortunes, while white-collar workers in the US pay 35%. That prompted Warren Buffett to say it was unfair that he paid less tax than his secretary. ”Even Bill Gates is saying the inequality gap is the biggest problem in the world,” said Robert Frank.

The last time America saw wealth inequality like this was 1928, the eve of the Depression, according to Jared Bernstein, a senior fellow at the Economic Policy institute in Washington. ”Equality of opportunity is at the heart of our economic and social tradition and it is starting to become clear to people that the principle is being violated because those at the top are erecting barriers to those below,” he said.

The now Democrat-led Congress in the US made noises about higher taxes on the most wealthy in recent months, reversing cuts made under President George Bush, but then backed down. The issue will come up again in the autumn legislative round, but no one is expecting Congress, or even a Hillary Clinton or Barack Obama White House to decimate the fortunes of the uber-rich and spend it all on mortgage safety nets or public schooling for the masses.

But how does that square with the new age of conspicuous philanthropy, where tycoons such as Gates and Buffett make much of giving billions to good causes, in a tradition spawned by Scottish immigrant and steel magnate Andrew Carnegie?

”Gates and Buffett are the exception. What they have done is truly wonderful but they are the truly aberrant,” said Rothkopf. ”Most of the super-rich don’t give much away at all and even then it is what we call ‘conspicuous conscience’ — it’s money they would have given anyway but they give it on stage and often with strings attached. It’s mostly hypocritical.”

It does not seem to have changed the inequality gap in America, nor taken away fears that the equality of opportunity that is the essence of the American dream is being fatally undermined. And a lot of the concern, freshly expressed by the rich for the poor, the environment — even the less rich — stems from self-interest anyway, says Robert Frank.

In the big picture of Rothkopf’s global ”superclass” and the Richistan that sustains the mega-billionaires in their excess, recession or no, Frank concludes: ”It’s business as usual.” — Â