Inequality: The best of the Bigs made $3.4 bn last year; Littles are cashing in their 401(k)s

Thanks to the ever-valuable Naked Capitalism (a good site to put into daily rotation), we find several pieces that, added together, paint quite the picture of wealth inequality.

Note I said “wealth inequality,” not “income inequality.” The numbers below are about income, yes, but income is just change to wealth, to the balance sheet of individuals and households. So this is a wealth story.

First this, about the best of the Bigs — the hedge fund managers.

The Rich List: Highest-earning hedge fund managers of 2013

This article by Wolf Richter in Naked Capitalism tells us about billionaire hedge fund manager Stephen Cohen borrowing what could be a billion dollars against his art collection — “impressionist, modern, and contemporary art estimated to be worth $1 billion” — and wonders why borrow, if Cohen is already so wealthy. The answer? Because he can pay interest of 2.5% on the loan, from Goldman Sachs no less, and earn 8% on the money. Richter:

In the rarefied air where these art loans take place, they have unique advantages: clients get to keep their art on the wall, and interest rates are about 2.5% – thanks to the Fed’s indefatigable efforts to come up with policies that enrich this very class of success stories. This is where the Fed’s otherwise illusory “wealth effect” is actually effective.

So why borrow money?

“A number of hedge fund guys who manage their money wisely, they look to put their art collections to work,” explained Michael Plummer, co-founder of New York-based consultant Artvest Partners and former COO at Christie’s Financial Services. “If you can get liquidity out of your collection and pay only 250 basis points,” he said, “it just makes sense.”

So Cohen will invest it. Cheap leverage, the holy grail these days. It’s the driver behind the asset bubbles all around. … Cohen, using these multiple layers of leverage, might earn a return of 8% a year on his art loan that costs him 2.5% a year. Multiply that out to a billion, and it’s a money machine. That would be on top of the art itself that has seen phenomenal increases in value under the Fed’s money-printing binge.

The main point of Richter’s article is that the world of the Bigs is over-leveraging itself (again). My point is about the benjamins, the bucks. A return of 5.5% on $1 billion is actual money — $55 million — in this man’s world anyway. I’d settle for half that. Yet for Cohen that’s pocket change.

Here’s what the best of the Bigs, the top hedge fund managers like Cohen, made as personal income in 2013:

Rank Name Firm Earnings
1 David Tepper Appaloosa Management $3.5 billion
2 Steven Cohen SAC Capital Advisors $2.4 billion
3 John Paulson Paulson & Co. $2.3 billion
4 James Simons Renaissance Technologies $2.2 billion
5 Kenneth Griffin Citadel $950 million
6 Israel (Izzy) Englander Millennium Management $850 million
7 Leon Cooperman Omega Advisors $825 million
8 Lawrence Robbins Glenview Capital Management $750 million
9 Daniel Loeb Third Point $700 million
10 Raymond Dalio Bridgewater Associates $600 million
10 Paul Tudor Jones II Tudor Investment Corp. $600 million
Click to view the full ranking of the top 25 money earners

Again, this isn’t what the funds made. This is what the managers made, personally. And thanks to the special tax break that hedge fund managers have purchased for themselves, this is taxed at no more than 15%, unlike your own money.

Notice that Mr. Cohen is only number 2 on the list. Better luck next time, sir.

Raiding 401(k)s replaces home equity withdrawals as way to make ends meet

At the other end of the spectrum, where the whole rest of the country lives, the following is going on. First, Yves Smith (my emphasis):

It’s been creepy to see economists and the financial media cheering the re-levering by American households as a sign that they economy is on the mend and consumers are regaining their will to shop. But ordinary Americans took huge balance sheet hits in the crisis: the loss of home equity, which only in some markets has come all the way back; job losses and pay and hours reductions, which led many to run down savings as they readjusted; declines in stock market portfolios; lower income thanks to ZIRP for retirees and other income-oriented investors.

While the top wealthy are borrowing [see the Cohen “art collection” story immediately above], in contrast to the behavior of the rich predecessors, on the other end of the spectrum, many are still struggling for survival. The latest job report showed that the number of long-term unemployed, reflected in the level of people who’ve given up looking for work and are counted as no longer in the workforce, only continues to rise. Food stamps and extended unemployment benefits have been cut. And with soup kitchens under stress too, one wonders how people who are in such dire financial straits manage to get by.

With the home equity “piggy bank” depleted, cash-strapped citizens are turning to their 401(k)s to help them in emergencies. Smith again:

A Bloomberg story gives the sobering details of how prevalent 401 (k) withdrawals have become. For the latest year in which data is available, 2011, 4% of all households paid early withdrawal penalties. A Federal Reserve study found that 9.3% of taxpayers with retirement accounts paid early withdrawal penalties, an increase from 7.9% in 2004. …

The article points out that one-third cashed out their 401 (k)s when they changed jobs. … It’s also worth comparing the magnitude of these withdrawals to median 401 (k) balances: $24,000 overall, and $65,300 for those over 55 (click to enlarge):

Workers who cashed out their 401(k)s when changing jobs (click to enlarge)

Workers who cashed out their 401(k)s when changing jobs (click to enlarge)

Stop and reflect — median 401(k) balances are $24,000 overall, and $65,300 for those over 55. Neither of those is a large number. If you’re retiring with, say, $70,000, which has to stretch to the end of your life, what are your odds of staying out of poverty before the first five years is up? Or even the first two years?

This is a wealth inequality story

This is why I say this is about wealth inequality, not income inequality. Because the growth in wealth (income is just “change of wealth”) is so great at the top, the money is just piling up like lint in the pockets of the Bigs. At the same time, us Littles are raiding our meager retirement stashes, hastening the day when poverty knocks at the door.

Does that put another spin on that push by Mr. Chained CPI (sorry, President “Hope and Change” Obama) to cut benefits to retirees after kowtowing to one of the princes of the “1% Project” — CitiBank’s own Robert Rubin? Careful with that legacy hunt sir; you may not catch the bird you want to catch.

The Rich and the Rest, a tale for our times

And to tie all this together in a nice short video, here’s a look at how we got here. Again, from a Naked Capitalism article. See what I mean about putting this site into rotation?) Watch:

The absolute must-watch of the whole piece is the segment starting at 3:15 (I won’t tell you what it is). But the piece is short; feel free to take a few minutes to get there.

In the graph at 1:20, when you see “Corporate Profits,” think “CEO Compensation.” It’s why those profits are generated and where they end up.

The trade deficit graph at 1:52 tells you all you need to know about where the money went … back to executive compensation, of course. That’s the whole point.

Consider: When a CEO sends our manufacturing jobs overseas, she adds the difference in cost to the corporate coffer, which she then loots. Since differences in manufacturing cost between Asia and the U.S. are pennies on the dollar, what’s retained by the corp is savings is far greater than what’s paid out to Asia in expenses.

Thus an increase in the trade deficit of, say, $100 million (the expense side of manufacturing in Asia), could easily be the low-low price of not spending four times that, or $400 million, in the U.S. That’s $400 million that the American economy was denied, much of it denied to workers; $400 million that went instead to the pockets of the corp — ready for easy looting by the CEO class and their crony boards of directors (do click; it really does work that way).

Finally, at 2:53, from the mouth of John Maynard Keynes, a sentence that says it all:

Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.

Can you say “job creators”? I can’t either.

Here’s to the “most wickedest of men” — and the men and women who serve them. Their sun, I suspect, will not shine forever. Certainly not after the climate bill comes due.


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Gaius Publius is a professional writer living on the West Coast of the United States.

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