The Rich get Richer, Redux

We’ve been reading a Merrill Lynch Global Wealth Management report on High Net Worth Individuals (HNWI). There are a number of metrics to define this group, but most include those who have at least a million bucks to play with. That’s a million+ not counting homes, yachts, private jets, etc. Then there is a subset, Ultra High Net Worth Individuals (UHNWIs), those with 30-50 million in play money. There are about 10 million worldwide in the HNWI playpen; North America has by far the most, over 3 million.

The HNWIs took a hit when the economy collapsed. Not that they had to make any lifestyle changes, but it got their attention. Not to worry, you’ll be happy to hear that this report shows they pretty much recovered from the beating they took — within one year. The Merrill Lynch study was just released but it covers the HNWI world as it was in 2009, just one year after the collapse. At that point the HNWIs were up 18.9% with a total of $39 Trillion in their piggybanks. The subset UHNWIs were up 21.5%. Apparently the Joneses couldn’t quite keep up.

What are they doing with their money? Here’s what Merrill Lynch sees in the research, “By 2011, HNWIs are expected to further reduce investments in their home regions and look to those regions in which growth is expected to be more robust. While HNWIs from the mature economic regions of North America and Europe are expected to continue increasing their allocations to Asia-Pacific in search of higher returns, HNWIs in Europe are also likely to increase their North American holdings to inject stability into their portfolios.”

So Merrill Lynch says the 1% of Americans who have almost all the bucks are going to invest in Asia. Their tax advisors will -of course- have them leave their profits offshore so they aren’t bothered by those pesky IRS types. On the other hand, the HNWIs from Europe will be investing over here; in our Treasury Bonds if they are looking for stability. One way or the other, none of the HNWIs are doing anything for our economy, except maybe for Tiffany & Co. along with all the others in the booming luxury markets.

None of this creates the jobs we need. Small businesses create jobs and there are precious few small business owners in the HNWI class. Most are lucky to take home healthy five figure paychecks and everything they have is in their business. To grow they need help from the banks whose coffers are bulging with bucks (thanks to the tax payers), but they aren’t lending. So the folks who create jobs are stuck, in many cases barely hanging on in a slow economy the banks created.

If the HNWIs think they are immune from the growing discontent rising in America they are mistaken. If they believe they have no responsibility to restore and maintain the safety nets put in place following the Great Depression, they are mistaken. “With great power there must also come great responsibility,” so saith Peter Parker (AKA Spiderman). That is the essence of ethics.  

W.T.”Bill” McKibben is a Buffalo based author. © 2011 GLG

Doing Time

There has been endless speculation as to what and or who created the giant economic bubble that burst in 2007.  To prevent a global financial meltdown the Bush administration created a huge bailout program for banks and for the colossal insurer AIG. The bailout not only prevented a bad situation from becoming unimaginably worse, it has paid off for the taxpayers as the banks pay back the loans with interest. It appears that the bailout of General Motors and Chrysler may pay off as well.

None of this is very comforting to those who lost their jobs and homes. Those folks and many of the rest of us have been wondering when the high flyers whose reckless behavior triggered all this might get theirs. Perhaps that time has come.

Last week (4/13/11) the Senate Permanent Subcommittee on Investigations released its two-years-in-the-making report “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse.” Frankly, given the spineless catering to the special interests over a few modest reforms in the Dodd/Frank Bill, it was hard to imagine that this investigation would amount to much. Surprisingly the members of this Committee were on the job. They were, as the saying goes, “Taking names and kicking butt.”

They paint a detailed picture of the out-of-control atmosphere that saw investment bankers enabling downstream players, mortgage brokers and lenders to spread money across the housing market like there was no tomorrow. All showered with encouragement from the boneheads at Fannie Mae and Freddie Mac, not to mention the rating agencies and –of all people– the head of the Federal Reserve Bank.

People were encouraged –coached if you will– to falsify loan applications. They ended up owning property they could not afford and well, you know the story. These sure-to-fail loans were bundled into increasingly sophisticated –read deceptive– packages and sold as securities by the investment bankers.

It’s not that the bankers didn’t know they were selling crap; they even called it crap inside the trading desks. And they protected themselves; as they sold these so-called toxic securities they bet against them at the same time. Some bankers were more aware than others. Not that any of them had reason to miss what was really going on. Read Michael Lewis’ The Big Short for an inside view.  

Prosecutors are poring through the 650-page Senate Report looking for criminal behavior. Many believe that those who triggered the catastrophe are too big to go to jail, just as their organizations were too big to fail. Maybe not. No major public official in NY State ever headed behind bars until last Friday (4/15/11) when former Controller Alan Hevesi was led out of court in cuffs sentenced to one to four years in jail. So maybe there’s hope that we will see some of these arrogant bankers in cuffs on their way to jail.

It would be nice if the members of the Congress would rethink the laws that allowed all this to happen; that still allow Wall Streeters to gamble. Investment bankers need to get back to creating capital for business. That would help in a real way. It would create jobs. Isn’t that what they keep talking about in DC?

© 2011 GLG