July 23, 2007
Academics have been shoving poor people under the microscope for some time now, searching for the maladies they feel make poor people poor. But that microscope’s focus seems to be shifting.
Researchers are now actually beginning to study the personality traits that drive the already rich to become unconscionably richer. Penn State’s business school, for instance, has just released a study that explores narcissism in Corporate America’s executive suites.
And who might be the most narcissistic of all our business leaders today? How about the kingpins atop America’s private equity funds?
These private equity movers and shakers certainly fit the Penn State executive narcissist profile. They pay themselves fortunes, think they can achieve anything, yet “do not generate” any better performance than their less exaltedly compensated executive brethren.
We have the evidence, and much more, in this week’s Too Much.
Robert Ulrich, the CEO of big-box retail giant Target, has all but clinched a $100 million take-home for 2007, the Minneapolis Star 
Tribune reports. Midway through June, Ulrich exercised 1 million Target stock options from his personal stash and cleared $43.4 million. Four weeks later, after a sudden 11 percent jump in the Target share price, Ulrich exercised another 1 million options, this time clearing $50.5 million. What did Ulrich do, over one month’s time, to boost the Target share price and gain that extra $7 million in personal option profits? Ulrich did nothing. Target's stock shot up the 11 percent after investors learned that a major New York hedge fund, Pershing Square Capital Management, had bought just under 10 percent of the company’s available shares . . .
Can consumption no one can see be conspicuous? About 100 awesomely affluent worldwide now own what may be the ultimate in inconspicuous consumption: a “yacht that dives underwater,” a personal luxury submarine. Two shipbuilders — U.S. Submarines Inc. in Oregon and Exomos, a Dubai-based firm — have cornered the global private sub market. The mid-size U.S. Subs model features five staterooms, two kitchens, a gym, and a wine cellar, all for $25 million. The upscale model, the Phoenix 1000, stands four-stories high and runs $80 million, still a bargain, says U.S. Subs founder Bruce Jones, compared to the $2.4 billion price-tag on a U.S. Navy attack sub. A Navy sub, adds Jones, carries missiles. His subs carry no projectile more dangerous than “a Champagne cork.”
Living large keeps getting more complicated. Take insurance. If you’re living an “upscale lifestyle,” Investment News noted last week, you may not be in good hands at Allstate. You need an insurance agent who specializes in clients of means. One such agent in New Jersey, Madison Insurance's Greg Niccolai, advises his clients that employing domestics can create “serious loss exposures” — servants can sue for everything from sexual harassment to wrongful termination — and recommends an employment policy “with a minimum $1 million limit.” Kidnapping coverage makes sense, too, as does coverage that pays for “psychological counseling” after “home invasions.” Also essential: $50 million in umbrella liability, coverage that picks up where other policies leave off. Warns liability guru Niccolai: “All of the client’s properties — including the Palm Beach home, the villa in Italy, and the ski home — must be listed on the umbrella or there will be no coverage for accidents that occur there.”
Whoever buys the Updown Court, the newly built 103-room mansion outside London now on sale for an astounding $140 million, will probably sleep without much fear of “home invasion.” The 57-acre property sports an ultra-fortified basement “panic room” — and two separate escape tunnels. The estate sits in Surrey Health, the UK’s second most economically segregated borough, according to a new report just released by the Joseph Rowntree Foundation. Britain’s already-wealthy areas, the study details, have “become disproportionately wealthier,” and average households, “neither poor nor wealthy,” are “diminishing in number and gradually disappearing” from London and the UK’s Southeast . . .
In South Africa last week, Archbishop Desmond Tutu called on church leaders to tackle the “moral rot” that has his nation’s inequality and crime rates soaring. Meanwhile, South African tax officials have set up a special unit to go after tax avoidance by South Africans who make over $1 million a year. Says tax official Anne Jenkins: “We’re scrutinizing their lifestyles.” South Africa’s rich, she adds, are “driving Ferraris, Porsches, and other very expensive vehicles” and “also own horses, yachts, aircraft, villas overseas, and other assets.” Tax officials are hoping to “rein in at least 500” super-rich South Africans by year’s end. But “we don’t want to give the impression,” notes taxman Matsobane Matlwa, “that because you have lots of money we think you’re a crook.” Of South Africa’s 47 million people, 15 percent currently live on under $1 a day. The country’s top 50 corporate execs, data released this March revealed, hold $14.4 billion worth of shares on South Africa’s stock exchange.
Quote of the Week
“I've been asked by some of the media, 'Senator, the two Americas you talk about, is it the rich and the poor?' No. It's not. The two Americas are the very rich and everybody else.”
Former U.S. Senator John Edwards, Prestonburg, Kentucky, July 18, 2007
New Wisdom
on Wealth
Ned Temko, London's earning, Guardian, July 15, 2007. A fascinating glimpse into the world — and mindset — of hedge fund and private equity managers, UK-style.
Matthew Lynn, There Has Never Been a Tougher Time to Be Wealthy, Bloomberg, July 18, 2007. Why the cost of living rich is rising, and always will rise, much faster than inflation overall.
You won’t find many humble people running private equity funds.
You could say, in fact, that the entire private equity industry rests on arrogance: the assumption that a privately held company — a company that doesn’t have to answer either to shareholders or federal securities industry regulators — can always “outperform” a publicly traded company that does.
Earlier this month, that assumption came under attack — from one of the most reputable institutions on the global business landscape, Moody's Investors Service, an agency that rates the credit worthiness of some 12,000 corporate entities.
Private equity firms like to claim they “free” the “underperforming” companies they buy — and take private — to invest and innovate. Liberated from shareholder expectations, these companies no longer have to obsess over meeting short-term earnings targets.
The companies private equity funds take over, the argument continues, can also pay whatever they need to pay to attract the very best management talent, without having to disclose to federal regulators — or the media — how much that talent costs.
The new Moody’s analysis challenges these claims on every front. Moody’s finds no evidence to “suggest that private-equity firms are investing over a longer-term horizon than do public companies,” nor any “evidence to prove that the higher returns provided to private equity are driven by stronger management teams.”
What did Moody’s find? Private equity firms, as analyst Tom Taulli puts it, are benefiting from “cheap rates on debt.” They borrow 80 to 90 percent of the dollars needed to buy out the companies they target, then load up the companies they capture with even more debt — and use that added debt to pay themselves huge dividends.
And how do the captured companies generate enough revenue to pay down all that debt? The new Moody’s analysis doesn’t address that point. Last week, in New York’s Times Square, a trio of worker advocacy groups — the Service Employees Union, ACORN, and the New York Working Families Party — did.
The three groups took a busload of media on a guided Times Square tour to show how dominant an economic reality private equity has become. In the 50 square blocks that make up the Times Square area, the tour pointed out, 53 stores and offices now operate, or are about to operate, under private equity control.
Among the familiar enterprises now run by private equity managers: Hilton, Hertz, Dunkin’ Donuts, Burger King, Alamo/National Rental Car, and even the Madame Tussauds wax museum.
“Times Square isn't all glitz and glamour,” explains Stephen Lerner, the director of the new Service Employee union Private Equity Project. “It's filled with people making $8 an hour, without health care, working for the some of the wealthiest companies in the world.”
One reason these workers are making so little: Their private equity employers are squeezing wages and jobs to generate the cash flow they need to pay off their corporate debts — and make the companies attractive enough to sell.
One example: Toys "R" Us, the national chain that has its flagship store on Broadway and West 44th. The 2005 private equity takeover of Toys "R" Us led to 3,000 layoffs nationwide. In Times Square, Toys "R" Us workers are now taking home $7.15 and $8 an hour.
The private equity industry, sums up SEIU’s Lerner, has become “an engine of economic inequality.”
Last week, in Washington, other groups were organizing to slow that engine down. The new Coalition to End the Carried Interest Tax Loophole, the effort taking on the tax provision that lets private equity mega millionaires pay taxes at lower rates than firefighters, has just begun placing campaign info online.
How tall are you? Your individual answer makes no difference — to society overall. You can be short and make an important contribution to the society where you live, or you can be tall and make that same contribution. Either way, your height doesn’t matter.
But, collectively, height does matter. Height reflects health. The higher a society’s average height, scientists tell us, the healthier the society. The same factors that help kids grow tall — nutritious food and access to quality medical care — help keep everybody healthy.
Affluent societies can provide, of course, more of this nutritious food and quality care than poor societies, and, not surprisingly, affluent societies sport taller peoples than poorer societies.
All this begs an obvious question, at least for researchers like John Komlos, an economic historian at Germany’s University of Munich: Are the world's most affluent societies also the tallest?
The answer, surprisingly, turns out to be no. People in the United States, the richest nation in the world, now sit “at the bottom end of the height distribution in advanced industrial countries,” Komlos noted last month in a paper for the Social Science Quarterly.
“U.S. physical stature,” Komlos and co-author Benjamin Lauderdale from Princeton observe, “does not fully reflect U.S. affluence.”
Komlos, who grew up in Chicago, has been studying height and health for a quarter-century. His latest research contrasts how heights have evolved in the United States and Europe.
The basic finding: Americans, once the world’s tallest, have lost that lofty status. The typical male in the Netherlands, the world’s current tallest nation, “measures 6 feet, a good two inches more than his average American counterpart.” Americans, on average, used to stretch over two inches taller than the Dutch.
Could this height differential merely reflect recent immigration into the United States from poorer countries? The Komlos research, to get at this question, specifically excluded the U.S. Hispanic population.
“Even native-born U.S. white men are shorter than their counterparts in Norway, Sweden, Denmark, the Czech Republic, Belgium, and Germany,” note Komlos and co-author Lauderdale, “and black men are even shorter than that.”
Greater poverty in the United States doesn’t fully explain the height gap either. Rich Americans, the research shows, “are shorter than rich western Europeans.”
So what accounts for the height differences? Komlos and Lauderdale make no sweeping pronouncements. But they do note other research that links longer life-expectancy to greater levels of economic equality. The more equally a society distributes income, the longer people seem to live — and the taller they seem to grow.
In the end, Komlos and Lauderdale suggest, we won’t be able to unravel the mystery of height — “the wealthiest are by no means the tallest or the healthiest” — until we take into account factors that include the “distribution of income within a society” and “government policy toward equality.”
Stat of the Week
“The richest 1 per cent of Americans earn about $1.3 trillion a year,” notes Daniel Swift in a just-published review of Richistan: a Journey Through the 21st-Century Wealth Boom and the Lives of the New Rich by Robert Frank, “more than the total national income of France, Italy, or Canada.”
Too Much is published by the Council on International and Public Affairs, a nonprofit research and education group founded in 1954.
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