Hi-Tech Industry: Stock Making Money

Robert Frank — the WSJ writer, not the Cornell economist — had a fascinating column about what he calls “wealth beta” this weekend. If you’re a member of the 1%, it turns out, you don’t just have a lot of money; you’re also likely to be seeing a huge amount of volatility in your wealth and your income. And this volatility has been measured according to the familiar scale where the broad stock market has a beta of 1:

The new rich have become the high-betas of our economy. With their dependence on financial markets, their leverage and their hyperspending, the top 1% have income swings that now are more than twice as high as those of the rest of the population.

A study by Jonathan A. Parker and Annette Vissing-Jorgensen of Northwestern University found that the beta of the top 1% nearly quadrupled between 1982 and 2007 to 2.39. The top 0.01% had a beta of 3.96, making even the riskiest tech stocks look safe by comparison. Economists and wealth managers say the betas of the rich have likely soared even higher in recent months as markets gyrated sharply.

Frank’s column is based pretty unquestioningly on the idea that this is a bad thing, and he quotes a few wealth-management executives talking about how very rich people can stay rich for decades, and avoid losing all their money.

But my feeling is that high-beta wealth is something to be celebrated — it’s one of the few silver linings to the current rise in inequality. People might become stupendously wealthy, but we’re not really creating a new class of dynasts here. Instead, the money comes, and then, almost as fast as it came, it goes.

One reason is just that the idea of preserving wealth in one’s own family for many generations to come has rather gone out of fashion. If you inherit a fortune which has been in your family for hundreds of years, then you do generally feel a responsibility for maintaining it and passing it on to future generations. But families are smaller now than they used to be, and self-made billionaires don’t necessarily consider multi-generational wealth preservation as a particularly top priority. Indeed, it’s more common to see billionaires swing the other way: Warren Buffett, for instance, likes to say that he wants to leave his children “enough money so that they would feel they could do anything, but not so much that they could do nothing”.

And some billionaires, of course, are childless, which means they can and should do exactly what they want with their money. They’re basically forced to give it away to charity, since it’s pretty much impossible to spend that kind of money.

The fact is that if you’re hugely wealthy, you’ll almost certainly live very well for the rest of your life no matter how much of your money you risk and lose. Short of going to jail, the rich very rarely find themselves completely impoverished. And in any case, self-made plutocrats tend to have extremely healthy egos: they’re confident that if they lose everything, they’d be able to pick themselves up by their bootstraps and do it all over again.

Wealth, at these stratospheric levels, is a way of measuring who’s winning the game; if it’s not rising, you’re not winning. And of course the things that Frank prescribes — like taking on less debt and diversifying your holdings — tend to go directly against the very strategies which created all that wealth in the first place.

We live in a world where millions of people are pursuing dreams and careers which have some small chance of being hugely successful. The number of people who have a chance of achieving such success has never been greater — and when it arrives, that success is increasingly lucrative for those who get there. That’s the game; its winners change from year to year and decade to decade. But the glory goes only to the person who makes the money, not to anybody who inherits it — unless they, too, display a similar knack.

So let’s not encourage the uber-wealthy to squirrel away their money and keep it in their families. It’s a good thing that today’s wealth has high velocity and that if it doesn’t get lost in the marketplace it’s more likely than ever to end up somewhere philanthropic. Even if that frustrates executives at private banks and wealth management companies.

Today, Roll Call reported that Rep. Nancy Pelosi has appeared with her and her husband’s investment partner and her son’s former boss, investment banker Bill Hambrecht, three times at Capitol Hill economic policy forums as an “economic expert” over the last four years without disclosing their financial relationship. None of this is illegal, and none of it would be prevented by the so-called STOCK (Stop Trading On Congressional Knowledge) Act currently gathering steam in Congress.

But as Breitbart editor Peter Schweizer reports in his bestselling book, Throw Them All Out, the Pelosi-Hambrecht alliance runs far deeper and spans as far back as the early 1970s.

Paul and Nancy Pelosi have invested millions with Mr. Hambrecht, and Mr. Hambrecht has invested millions in Democratic Party campaigns and causes–over $2 million, to be exact, at least $38,000 of which went directly to Rep. Pelosi. Indeed, according to Mr. Hambrecht, Nancy Pelosi was the catalyst that ignited his passion for donating money to Democrats. According to a 2006 article published in the San Francisco Chronicle, Mr. Hambrecht “said he never contributed to politics until he was inspired by Pelosi after meeting her in the early 1970s.”

Since the formation of their relationship, the Pelosis have made numerous investments in Hambrecht-related companies, including a $12 million investment in Hambrecht’s United Football League that appears to have floundered. In a 2009 Washington Post article, Paul Pelosi addressed whether his investments or career as a real estate investor presented any potential conflicts of interest for his wife’s role in Congress.

“Let me put it this way,” he added. “I think I have a good radar in terms of what kind of business investments would be inappropriate for me given her position. And I can’t think of an investment I discussed with her and said, ‘Is this a good idea or is it a problem?’ Back in the day when she first went into government and I was in real estate, I never did anything with resolution trust — there were tremendous opportunities there to go buy things and make a lot of dough. I never did because I thought if I did and I made dough that there would be something they would obviously criticize her for.

“So I’ve religiously steered away from anything that would look controversial to her position. My radar tells me there is no problem with this. If there is, I will deal with it.”

As Roll Call notes, one investment that didn’t flop was the one between $5 million and $25 million (members of Congress only have to report ranges of investment, not actual figures) the Pelosis made in a Hambrecht-related investment firm named Matthews International Capital Management. That investment produced between $100,000 to $1 million of income for the Pelosis just last year.

Mr. Hambrecht’s forays into congressional matters extend beyond just the economic forums that he participated in with Rep. Pelosi. On July 19, 2001, Nancy Pelosi honored William Hambrecht from the floor of the United States House of Representatives with a speech lauding him and “acknowledging his contributions and on-going dedication to social justice and the advancement of the Bay Area’s well-being. I applaud his commitment to his community and cherish his friendship,” said. Rep. Pelosi from the House floor.

In December of 2010, William Hambrecht, whom many consider a pioneer in the field of Initial Public Offerings (IPOs), appeared before the House Finance Committee, chaired by Barney Frank, a Pelosi ally, to push for a change in the registration process for stock IPOs, an exemption called Regulation A. In Throw Them All Out, Peter Schweizer reports that “Hambrecht wanted the exemption raised to $30 million, which would greatly benefit his business, making IPOs easier, quicker, and far less expensive.” Washington Examiner reporter Tim Carney called the timing of the hearing “odd” and quoted Rep. Barney Frank as saying that Rep. Nancy Pelosi had been the inspiration for the hearing:

Chairman Barney Frank called a hearing of the committee to discuss new rules for initial public offerings. The timing was odd: It coincided with meetings of the Republican caucus and the Democratic Steering and Policy Committee. As a result, Rep. Frank stepped out of the hearing early on…”I should note also that it was Speaker Pelosi,” Frank said at the beginning of Tuesday’s hearing, “who first called this to our attention earlier in the year.” Frank went on: “It is something that the speaker has taken a great interest in because of her interest in job creation, so we have had to find a way to have this hearing.”

Later in the article, Carney added:

So why would the Financial Services Committee hustle to hold this hearing despite so many other more pressing issues? Maybe because Nancy Pelosi’s friend, donor and business partner wanted it.

Pelosi’s office didn’t return a phone call, but Hambrecht did. I asked him if his ties to Pelosi earned him the hearing. He said Pelosi was motivated only by “genuine desire to find a private-sector solution” to unemployment. Hambrecht added that Democratic Rep. Anna Eshoo, whose Silicon Valley district includes many start-ups, was the real prime mover.

Rep. Nancy Pelosi’s office continues to defend her longstanding financial alliance with Mr. William Hambrecht, and none of her actions appear to have violated House Ethics rules or would be prevented even if the STOCK Act passes.

Still, Rep. Pelosi’s financial and personal relationship with Mr. William Hambrecht further underscores the need to clarify the appropriate relationship between business interests and elected officials, as well as the STOCK Act’s apparent deficiencies.

Hi-Tech Industry

Monday, January 9, 2012

Stock Making Money

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