Book review: The High-Beta Rich

In: Daniel In The News

2 Dec 2011

This is my latest book review for the Financial Times. The version in the newspaper can be read here.

Protests such as Occupy Wall Street and the demonstration outside London’s St Paul’s Cathedral have probably only intensified the popular preoccupation with the lives of the rich. Slogans such as “we are the 99 per cent” naturally raise questions about the remaining 1 per cent. Of course, the wealthy have long been the subject of both fascination and condemnation. Popular television series such as the UK’s Downton Abbey and the USA’s Real Housewives, along with teen dramas such as 90210, Gossip Girl and The OC, give a voyeuristic glimpse into the supposed lives of the loaded. At the same time high-profile media figures such as Arianna Huffington, Paul Krugman, Joseph Stiglitz and Elizabeth Warren bemoan widening inequality in US society.

The publication of The High-Beta Rich therefore comes at an opportune time. Robert Frank, a veteran Wall Street Journal writer, presents vivid sketches of how the rich, and the formerly rich, really live. He also advances some interesting ideas on how the nature of the wealthy has changed since 1982. His book is a sequel to Richistan, published in 2007, in which he profiled the lives of the rich before the recent financial bust.

Frank’s new book is based on interviews with more than 100 people with net worths (or former net worths) of $10m or more. These include the Blixseth family, former billionaires who had to lay off all 110 staff in their enormous residence; the Siegels, who had to abandon the largest private house in the US before it was completed; and Jack Warner, who built a fortune from various business, but ended up a penniless handyman.

It is also a tale of how the financial crash has affected the US more generally. It includes numerous unemployed butlers, unoccupied mansions and falling tax revenue for fiscally-pressed state governments. In addition, Frank tells the story of upmarket repo men who specialise in repossessing planes, yachts and the like from indebted millionaires.

The “high-beta” in the book’s title refers to how the nature of wealth has changed since the 1980s. A high-beta investment is one that is relatively volatile. For instance, if a stock moves, say, 2 per cent a day on average while the market moves by 1 per cent it is said to be a high-beta stock. The high-beta rich are those who made much of their wealth from volatile financial assets.

Frank argues that 1982 was a watershed year for the wealthy. That was when the incomes of the top 1 per cent started to drift out of line with those in the rest of the economy. He points to three reasons why that year was a turning point in the nature of wealth: deregulation and pro-government policies; technological innovation; and financial speculation.

The rich gained enormously as the financial bubble bolstered their incomes, although they also lost heavily after the Lehman crash of 2008. Of course, losing a personal Gulfstream jet or private yacht can still leave many of the super-rich hugely wealthy.

Although the book is both astute and entertaining, it is let down by a disappointing epilogue, entitled “the future of high-beta wealth”. The epilogue claims to offer five tips to help governments, companies and individuals survive in the age of high-beta wealth. In the event, it provides broader observations on the nature of wealth, many of which are highly questionable.

Most strikingly, Frank endorses the argument put forward by Alan Greenspan, a former chairman of the Federal Reserve, that the stock market drives the economy. As Frank puts it: “In an economy dominated by the rich, S&P is the new GDP.” In confusing real wealth and paper wealth, Frank echoes the mistake made by many of the high-beta rich whom he profiles.

If someone has a stock portfolio of, for example, $100m, it does not represent real wealth. Rather it is a claim on the profits that it is believed the underlying companies are likely to make in the future. If expectations change, the value of the portfolio can easily slump, as many of the wealthy have discovered to their horror.

The confusion between real wealth and paper wealth helps explain why many of the rich were surprised to see their fortunes plummet from 2008 onwards. It is also an obstacle to understanding the forces that drive the creation of prosperity.

The High-Beta Rich: Why the unstable super-wealthy will lead us to the next boom, bubble and bust, by Robert Frank, Crown Business.