Tom Matlack invites discussion around a simple question: Should the mega rich be admired or vilified?
Perhaps the most important business ethics question of our era—and economic issue for that matter—is whether or not Adam Smith’s free market capitalism should be allowed to guide the accumulation of wealth at the very tip top of the food chain. It impacts how we think about politics, tax policy, employment, entitlements, and pretty much everything to do with good and evil.
Are the mega rich to be admired or vilified?
We are talking about the 15,000 households that constitute the top 0.1% of wage earners averaging $23.8 million of income per year. And even beyond that the group that pulled down over a billion last year.
Just for a moment let’s set aside pro athletes, entertainers, Goldman Sachs investment bankers, even technology entrepreneurs and focus on the group that has consistently been at the top of the heap: hedge fund managers.
Every year AR Magazine (“Absolute Return & Alpha”) compiles its “rich list.” Here are the winners for 2011. The amounts represent the income of just these individuals for the past year:
1.Ray Dalio Bridgewater Associates $3.9 billion
2.Carl Icahn Icahn Capital Management $2.5 billion
3. James H. Simons Renaissance Technologies Corp. $2.1 billion
4. Kenneth C. Griffin Citadel $700 million
5. Steven A. Cohen SAC Capital Partners $585 million
Here are some important facts to note before I get to the moral implications of this data.
- In 2010 there were six hedge fund managers taking home more than a billion with the top earner at $5 billion.
- The average hedge fund lost 5 percent in 2011, according to Hedge Fund Research Composite Index, which tracks nearly 2,000 portfolios. That compares with a 2 percent gain for S.& P. 500.
- 11 of the top 25 individuals made it onto the list despite only producing single digit returns by charging massive fees.
- Paul Tudor Jones II charges a 4 percent management fee and takes 23 percent of any profit. So he made $175 million in 2011, although his main fund tracked the returns of the Standard & Poor’s 500-stock index. Steven A. Cohen, whose firm, SAC Capital Advisors, keeps 50 percent of the profit, earned $585 million.
- The average annual income for the top 25 hedge fund managers last year was $235 million with the group earning a total of 14.4 billion.
Steve Rattner had a fascinating oped in the New York Times this week as well in which he outlined French economists Thomas Piketty and Emmanuel Saez who examined American tax returns for 2010 to try to figure out who is benefitting from economic growth, the rich, the mega rich, or the average household.
“In 2010, as the nation continued to recover from the recession, a dizzying 93 percent of the additional income created in the country that year, compared to 2009 — $288 billion — went to the top 1 percent of taxpayers, those with at least $352,000 in income. That delivered an average single-year pay increase of 11.6 percent to each of these households.
Still more astonishing was the extent to which the super rich got rich faster than the merely rich. In 2010, 37 percent of these additional earnings went to just the top 0.01 percent, a teaspoon-size collection of about 15,000 households with average incomes of $23.8 million. These fortunate few saw their incomes rise by 21.5 percent.
The bottom 99 percent received a microscopic $80 increase in pay per person in 2010, after adjusting for inflation. The top 1 percent, whose average income is $1,019,089, had an 11.6 percent increase in income.”
This data is indeed interesting. Perhaps as interesting as the data is that Mr. Ratner, who was the lead advisor to President Obama during the bailout of the auto industry, until recently ran an investment firm called Quadrangle.
In April of 2010, Quadrangle paid a $12 million SEC fine while pointing the finger at Ratner for arranging a $1 million kickback scheme to win a $100 million investment from the New York State pension fund (WSJ, “Troubles Mount for Former Car Czar”). Ratner was left to defend himself against Federal and state criminal charges.
In December of 2010, Ratner paid the SEC $6.2 million and the state of New York $10 million to settle his personal cases, which also included promising to have a portfolio company produce a film for the brother of the pension plan’s decision maker (USA Today, “Former car czar Rattner to pay $10M in pension fund probe”).
So we have a leading voice point out the inequity of wage growth in our country who is in fact one of the money managers who is part of the 0.01% and apparently got there by blatantly cheating the system.
The data is important. Don’t get me wrong. But let’s just take a moment while I puke.
One place where this question of how to reward those whose only job is to create financial wealth for others has come under particular scrutiny is in the management of university endowments.
Harvard and Yale both have massive endowments. Both institutions are not for profit. They have noble laureates on their staff who, along with countless other academics, do research that has far reaching consequences for humanity. Yet the most notable researchers don’t get the big bucks, at least at Harvard. The money mangers do.
David Swensen of Yale has produced annual returns of 16.3 percent over 21 years. That is the best track record of any university endowment in the country. He has been widely accepted as the most significant beneficiary to Yale’s endowment. Last year he made slightly over $1 million. He does not do his job for personal wealth creation. He is amazingly good at making money for Yale. But he believes in that institution.
Harvard Management has historically employed the best money managers and compensated them at close to market rates. As a result their income dwarfs even the most important professor.
A Harvard Crimson opinion piece recently noted:
One hundred eighty to one represents the ratio of the highest-paid Harvard employee’s salary to the lowest. For a university with a $32 billion endowment, this wage disparity is ridiculous and embarrassing, and Harvard must amend it not only by ensuring good jobs for Harvard’s lowest-paid workers, but also by significantly reducing top executive compensations.
Harvard’s top compensated employee, Stephen Blyth, is the head of internal investments for Harvard Management Company (HMC). He took home $8.4 million in 2009 (the ratio 180 to 1 is based on his 2008 compensation of $6.4 million). Other top executives also made seven-figure salaries, and President Drew Faust made $875,000. Meanwhile, Harvard’s lowest-paid employees, our custodians, often must find multiple jobs simply to support their families.
Yale’s Swensen told the New York Times in 2007: “Paying some people $35 million where others earn $35,000 tears at the fabric of an institution.”
Mr. Dalio made 77,657 times the median. No judgment, just a fact.
My intent here is not to answer the moral question. It’s simply bring to the surface facts that I think are important for us all to think about. And to spark constructive dialogue. With that goal, I’d like to pose the following questions to you for you to contemplate and, if you are so moved, to respond to in the comment section or even in a responsive post (we are always open to new writers):
- Do you find the concentration of wealth, and the concentration of wealth creation that Mr. Ratner points out, problematic for a free society? If the answer is “yes,” how would you rectify the current situation?
- Is tax policy an answer (some recent research has pointed to the fact that higher tax rates may not be as big a hurdle to economic growth at previously feared, “The Case for Raising Top Tax Rates”)?
- Do you distinguish between those who earn huge wealth by virtue of company building—Steve Jobs for instance—from those who do so simply by virtue of investing capital in financial instruments?
- With particular regard to hedge fund managers, do you find the economic arrangements between investor and manager whereby huge wealth is created often in spite of poor performance wrong? If so, what should be done about it?