The Rich Prove to be Poor at Looking After Their Fortunes
Credit crunch shows wealthy doesn’t always mean smart
Matthew Lynn 28 December 2008
There should be certain things you can take for granted about wealthy people. They like big yachts. They play golf. And they are usually smart with their finances.
After all, if they were not good at handling money, they would not have managed to accumulate so much of it.
And yet one of the interesting angles on the credit crunch is just how hopeless the wealthy have been at managing their cash.
Examples are everywhere of how some tycoons have come badly unstuck during the market meltdown of the past few months.
The most spectacular is Bernard Madoff, who was arrested this month after owning up to a US$50 billion fraud. All of his clients were among the well-heeled, including the foundations of filmmaker Steven Spielberg and New York Mets owner Fred Wilpon.
All of them were complacent about Madoff’s apparent ability to produce stunning investment returns year after year without really explaining how he did it.
In Britain, David Ross, one of the founders of Europe’s largest mobile-phone retailer, Carphone Warehouse Group, stepped down from the management board when it turned out he had been using company stock as collateral for big loans.
Germany’s billionaire Merckle family has also run into trouble with debt-financed loans and wrong bets on Volkswagen AG stock.
Closer to home, Wong Kwong-yu, also known as Huang Guangyu, the former chairman of Gome Electrical Appliances Holdings and one of China’s richest individuals, was arrested last month on suspicion of stock manipulation.
As for Russia’s billionaires, it is best not to inquire about their finances. The 25 wealthiest Russians on Forbes magazine’s list of billionaires, including Oleg Deripaska and Roman Abramovich, lost a combined US$230 billion from May to October. Even in Moscow, that must hurt.
It seems a sure bet that when Forbes publishes its next list, there will be fewer zeros next to the names. It might even have to become a millionaires list.
There are three lessons to be drawn from the bungling of wealth by the world’s rich people this year.
First, there are a lot of bubble billionaires out there. For the past 20 years, borrowing money and using it to buy assets was a great strategy. It made you rich. But rather like ice-fishing, it is a skill that is useful only in a particular set of circumstances.
That is not to disparage leverage. It takes a lot of guts to borrow on that scale, and most of us do not have the stomach for it. But the rules of the game have flipped. On the way down, leverage hurts you as much as it helps on the way up.
Next, the rich like to take risks. That is how they made their fortunes, rather than by working in, say, the local town-planning office.
They hardly need the money. Nor are they hedge-fund managers who have to keep hitting 15 per cent annual gains to keep their investors on board. The only explanation is that they like to gamble.
It is in the gene pool, and they can no more change it than they can the colour of their eyes.
Last, we have been through a period of extraordinary excess. A world in which Saudi Prince Alwaleed bin Talal can buy an Airbus A380 for his own use, and Russian oligarchs buy soccer teams for little more than their amusement, is one in which the cost of playing with the billionaire set has mushroomed out of control.
It does not matter how rich you are. There is always a guy in the next yacht who has more than you do.
The wealthy are, naturally enough, more prone to peer-group envy than most people. There is nothing hermit-like about them. That is why they became rich. Who wants a private box at a sports event when someone else owns the whole team? It gets on your nerves.
And in a desperate bid to keep up, the wealthy got greedier and greedier, until they took one chance too many. And it all blew up in their faces.
Of course, there are exceptions. Warren Buffett remains resolutely frugal, which is why he hangs on to his fortune. For most other rich people, “smart with money” is a myth that has been shattered this year.
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The Rich Prove to be Poor at Looking After Their Fortunes
Credit crunch shows wealthy doesn’t always mean smart
Matthew Lynn
28 December 2008
There should be certain things you can take for granted about wealthy people. They like big yachts. They play golf. And they are usually smart with their finances.
After all, if they were not good at handling money, they would not have managed to accumulate so much of it.
And yet one of the interesting angles on the credit crunch is just how hopeless the wealthy have been at managing their cash.
Examples are everywhere of how some tycoons have come badly unstuck during the market meltdown of the past few months.
The most spectacular is Bernard Madoff, who was arrested this month after owning up to a US$50 billion fraud. All of his clients were among the well-heeled, including the foundations of filmmaker Steven Spielberg and New York Mets owner Fred Wilpon.
All of them were complacent about Madoff’s apparent ability to produce stunning investment returns year after year without really explaining how he did it.
In Britain, David Ross, one of the founders of Europe’s largest mobile-phone retailer, Carphone Warehouse Group, stepped down from the management board when it turned out he had been using company stock as collateral for big loans.
Germany’s billionaire Merckle family has also run into trouble with debt-financed loans and wrong bets on Volkswagen AG stock.
Closer to home, Wong Kwong-yu, also known as Huang Guangyu, the former chairman of Gome Electrical Appliances Holdings and one of China’s richest individuals, was arrested last month on suspicion of stock manipulation.
As for Russia’s billionaires, it is best not to inquire about their finances. The 25 wealthiest Russians on Forbes magazine’s list of billionaires, including Oleg Deripaska and Roman Abramovich, lost a combined US$230 billion from May to October. Even in Moscow, that must hurt.
It seems a sure bet that when Forbes publishes its next list, there will be fewer zeros next to the names. It might even have to become a millionaires list.
There are three lessons to be drawn from the bungling of wealth by the world’s rich people this year.
First, there are a lot of bubble billionaires out there. For the past 20 years, borrowing money and using it to buy assets was a great strategy. It made you rich. But rather like ice-fishing, it is a skill that is useful only in a particular set of circumstances.
That is not to disparage leverage. It takes a lot of guts to borrow on that scale, and most of us do not have the stomach for it. But the rules of the game have flipped. On the way down, leverage hurts you as much as it helps on the way up.
Next, the rich like to take risks. That is how they made their fortunes, rather than by working in, say, the local town-planning office.
They hardly need the money. Nor are they hedge-fund managers who have to keep hitting 15 per cent annual gains to keep their investors on board. The only explanation is that they like to gamble.
It is in the gene pool, and they can no more change it than they can the colour of their eyes.
Last, we have been through a period of extraordinary excess. A world in which Saudi Prince Alwaleed bin Talal can buy an Airbus A380 for his own use, and Russian oligarchs buy soccer teams for little more than their amusement, is one in which the cost of playing with the billionaire set has mushroomed out of control.
It does not matter how rich you are. There is always a guy in the next yacht who has more than you do.
The wealthy are, naturally enough, more prone to peer-group envy than most people. There is nothing hermit-like about them. That is why they became rich. Who wants a private box at a sports event when someone else owns the whole team? It gets on your nerves.
And in a desperate bid to keep up, the wealthy got greedier and greedier, until they took one chance too many. And it all blew up in their faces.
Of course, there are exceptions. Warren Buffett remains resolutely frugal, which is why he hangs on to his fortune. For most other rich people, “smart with money” is a myth that has been shattered this year.
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