Book Review: The High-Beta Rich

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Book Review: The High-Beta Rich

Bigger and Beta

According to a new book the super-rich are getting not only richer but also more dangerous — both to themselves and to society as a whole. Sophie McBain pays a visit to the volatile breakaway republic of Richistan

THE BLIXSETHS WERE once the billionaire owners of seven homes — including a Caribbean island and a French château — three private jets, two yachts, his-and-hers Rolls-Royce Phantoms and two dogs, Learjet and G2 (for Gulfstream, of course). Now they have filed for bankruptcy, and with their 110 house staff long gone, Edra Blixseth shuffles around her gutted California home with a bottle of Windex, locked in an endless battle with the dust. Even the coral from their fish tank has been repossessed.

‘The only thing harder than getting a rich person to talk to you is getting a formerly rich person to talk to you,’ Robert Frank tells me, but he clearly enjoys a challenge. Three years after smuggling himself into Richistan, the increasingly remote parallel universe occupied by the super-rich, Frank’s second book sheds light on Richistan’s exiles: the men and women who made millions and then lost them. If Frank’s desire to avoid political posturing and finger-pointing is sometimes frustrating, his ability to paint a vivid yet balanced portrait of the lives of the once rich is also one of the book’s greatest strengths — it has opened doors that butlers would otherwise have slammed in his face.

There’s Jack Warner, who once owned property valued at $14 million and now lives in his pick-up truck, and the Siegels, who built ‘Versailles’, the largest private house in America — they pronounce it ‘Versize’, Frank can’t resist adding — but are selling it unfinished, having fired their army of housekeepers and yanked the kids out of private school. During 2008, casino king Sheldon Adelson lost the equivalent of $2.7 million an hour.

In many ways Frank’s subjects embody the traditional American capitalist ideal — they are the welfare kids and high-school drop-outs who rose from small-town obscurity to build business empires that surpassed their wildest American dreams — but they also suffer from capitalism’s modern counterpoint of hyper-growth on shaky foundations and unstable wealth, notably because of conspicuous consumption and overreliance on credit and financial markets. Like high-beta stocks, which fluctuate more than the broader market, the high-beta rich experience greater peaks and troughs in their income than ordinary Americans. Between 2008 and mid-2009, the income of the top one per cent fell by three times as much (percentage-wise) as it did for American earners as a whole.

Their stories may make for ‘great schadenfreude’, much like ‘the Bugatti crashes that have become popular on YouTube’, Frank writes, revealing a whole new world of online procrastination — but their misfortunes also have broader economic significance.

He gives three reasons for caring about the high-beta rich, two slightly banal and one extremely interesting. First, we can learn from their mistakes, although not all the lessons are relevant to the 99 per cent — David Siegel confesses that maybe ‘he shouldn’t have tried to build the largest house in America while he had $1 billion in debt’. Secondly, they reveal an untold side of the US elite. Finally — and this is the interesting point — because the 1 per cent control an increasing proportion of America’s wealth, dramatic changes in their income disrupt the consumer economy and government finances.

Illustration by Phil Wong

MOST HIGH-BETA wealthy can easily absorb the loss of a few million dollars, but their employees cannot. And when the wealthy tighten their belts, consumer markets are strangled, because the wealthiest 5 per cent of Americans accounted for 37 per cent of consumer outlay in 2010. Increasingly state and federal governments are struggling to cope with the sudden declines in tax revenues from the rich, too. In California, for instance, the top 1 per cent paid 48 per cent of state income taxes in 2007, so by 2011 the state was left with a $26 billion budget deficit as tax revenues from the rich plummeted. The federal government is similarly vulnerable, as the top 1 per cent pay over 38 per cent of income taxes. The problem isn’t simply that modern wealth is increasingly volatile, but that the rest of society is ever more dependent on the fortunes of the rich.

Despite his bold analysis, Frank’s proposed solutions for high-beta wealth are disappointingly tentative — he gives a list of recommendations that includes ‘stop acting rich’ and ‘wealth isn’t all it’s cracked up to be’. That said, when I push him to single out one important way to mitigate the effects of high-beta fluctuations on the state, he doesn’t hesitate: better rainy-day provision by governments.

One perhaps unusual solution, which he ambivalently floats (‘I’m not going to tell readers what they should think’), is taxing the wealthy less so fluctuations in their income have a smaller effect on the budget. While this could reduce the political effect (while nevertheless resulting in smaller government coffers), it does nothing to tackle the commercial or social effects of high-beta wealth.

The book gives a few pointers for the wealthy, too, and if this advice is staggeringly obvious, it only makes it more surprising that his high-beta protagonists didn’t follow it: ‘Stick to your business speciality, borrow for your business and not your lifestyle, always value your assets based on long-term price trends rather than short-term bubble variations. Most of all, never, ever sell assets at the bottom of a cycle if you can avoid it.’

He holds tech entrepreneur Frank Kavanaugh as a ‘model for low-beta rich’, but his example hardly makes low-beta wealth sound like a happier alternative to betting personal fortunes on real-estate bubbles. Kavanaugh lives frugally because he is a loner and he is risk-averse partly because of his paralysing insecurity, we learn. ‘Life as a low-beta millionaire is one of perpetual frustration and disbelief,’ Frank writes.

If life as a billionaire with a balanced budget is as thankless as Frank describes, the implication is that the reckless rich deserve our understanding and not resentment or incredulity. The high-beta wealthy are not the only public foe to benefit from Frank’s reluctance to apportion blame: the banks get off unusually lightly, too.

KEN CAGE, THE overworked repo man and squat action hero specialising in James Bond-esque stunts to repossess private jets and super-yachts, recalls his surprise that many victims could buy jets without having to put any money down, could take out loans far greater than the value of their new toy, and in some cases were granted loans without having to fill in their occupation, address or income. In Cage’s words: ‘The lending practices in this country are totally screwed up.’ The Blixseths would agree. Their rapid exile from Richistan was hastened by a $375 million loan, which they took out, they say, under intense pressure from Credit Suisse.

‘Anyone who says that middle America was to blame for borrowing money they can’t afford needs to look at the wealthy, and they did exactly the same thing, on a bigger scale. Your sub-prime mortgagor might lend $50,000 to someone who doesn’t really have a justifiable income. But in this case we’re talking about lending $375 million to the Blixseths, or the $1 billion borrowed by the Siegels,’ Frank says.

He concedes that he could have devoted chapters to the banks’ role in facilitating the boom and bust but the topic has been covered elsewhere. It is a modest response, because while the sub-prime mortgage market has been analysed in mind-numbing detail, ill-considered lending to the wealthy has received less coverage. Moreover, Frank foresees a new explosion in easy loans for the wealthy, because in a stagnant economy the rich are banks’ easiest source of custom.

Frank’s early career as a foreign correspondent may have helped him take the role of neutral observer, more interested in developing an accurate picture of the world of high-beta wealth than pushing a particular agenda. It also means he is probably familiar with the jetsetters’ joke that the more stringent the visa requirements, the less pleasant the holiday destination. It ought to come as little surprise, then, that the residents of Richistan defy their stereotypes, and that ‘wealth isn’t all it’s cracked up to be’.

For the most part, reporting on the lives of the rich and the formerly so has reminded him that the most valued things in life aren’t for sale — with one very big exception: ‘The only thing I’d acknowledge is a terrific benefit of wealth is a private jet.’

Buy The High-Beta Rich on Amazon

Sophie McBain is a staff writer at Spear's