It's no secret that the middle class and the poor have been taking a financial beating since the 2008 meltdown, the deep recession of 2008-2009, and the less than satisfying recovery that began in mid-2009. But while plenty of rich folks on Wall Street were bailed out of poor decisions, a decent chunk of the one percent suffered a fall as well. Yes, plenty of the wealthy suffered the indignity of repossessed jets and yachts, laying off entire household staffs, and seven-figure declines in wealth.
Robert Frank, a reporter at the Wall Street Journal who covers the very wealthy, delves into these tales of woe in his new book, High-Beta Rich: How the Manic Wealthy Will Take us to the Next Boom, Bubble, and Bust. Frank interviewed more than 100 people whose net worth once topped $10 million, "to explore how someone can go from $1 billion to zero." But his goal isn't merely to provide a voyeuristic look into the lifestyles of the no-longer rich and famous. As he tells me in the accompanying video, "I wanted to see what we as consumers and investors can learn from them."
One of the big lessons is not to binge on debt. Frank says that, in percentage terms, the very wealthy have taken a larger hit to income in recent years than the poor and the middle class. ("Hold the violins," he notes.) And while that may make sense — wealthy people tend to have more money in the stock market -- it marks a departure from history. "Prior to 1982, the top one percent were a stable line on the income charts," says Frank. "When things were great, they did OK. When things were bad, they didn't do as bad as the rest."
But things have changed. And It has a lot do with debt. The very rich can easily inflate their net worth by borrowing tens and hundreds of millions of dollars to buy assets, only to see it all disappear in a poof of smoke. High-Beta Rich is full of such tales: the former millionaire who now does odd jobs and lives out of a truck, the guy had to stop building a 75,000-square-foot home near Orlando after his time-share business collapsed under a mountain of debt.
One of the best stories revolves around Tim and Edra Blixseth. After making a fortune in the timber industry, the Blixseths decided to go big by building the Yellowstone Club, an ultra-exclusive ski and golf resort where plots went for $3 million an acre. (Members included Bill Gates, and the trails had names like EBIDTA and Lear Jet.) Demand was so strong for debt backing the project that the Blixseths borrowed several hundred million — more than was needed to build the resort. The cash went to support an insanely lavish lifestyle: seven homes, two private jets, and his and hers Rolls-Royces. During the boom, Frank went to visit one of the couple's homes, which was nestled in a private golf course and full of waiters and other staff. When he returned after the Yellowstone Club went bust and the couple got divorced, Frank rang the bell at the front gates. "I got a Verizon message saying it had been disconnected because they hadn't paid their phone bill." After 25 years in a gilded paradise, Edra Blixseth had to learn how to fill her own gas tank.
Of course, the story of these rags-to-riches-to-rages tales are cautionary ones. Most readers will find it difficult to relate to many of the characters in the book. You won't be able to get through this entertaining, well-reported book without shaking your head in disbelief at the arrogance and stupidity of people who had it all -- and then lost most of it because they wanted even more. But Frank warns that we should try to understand them at a human level. Why? The manic behavior of get-richer-quick types has a larger impact — people using leverage to make big statements and take big risks influence the markets in which we all invest, and the economy in which we work. LINK
Interested in a free copy of High-Beta Rich? Send an email to talkyourbook@yahoo.com and we'll enter your name in a drawing for a free copy.
Daniel Gross is economics editor at Yahoo! Finance.
Follow him on twitter @grossdm; email him at grossdaniel11@yahoo.com
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