richistan (5.07)

RICHISTAN
Robert Frank
Wall Street Journal - Wealth Report

May 25, 2007, 12:20 pm
The Yacht Shortage

First we heard about the Gulfstream shortage. Then the Ferrari shortage and the Rothko shortage.

Now, in the latest sign of the skewed economics of today’s wealth boom, we learn about the yacht shortage. According to yacht builders in the U.S. and Europe, the waiting lists for megayachts are now stretching to three years or more. The problem: too many yacht buyers, not enough yacht-making capacity. Yacht makers are expanding as fast as they can to meet demand. But finding qualified labor is difficult — there are only so many plumbers who can install antique French faucets for nautical use. And other yards are leery of expanding too rapidly, lest the boom turn into a bust.

Yet the imbalance between supply and demand in the yachting world has also created an interesting arbitrage opportunity. Meet the yacht flippers — people who commission yachts and then sell the half-finished or almost-finished boats to other buyers for multi-million-dollar premiums. It’s like real-estate flipping, but with $35 million boats. And it’s become a highly profitable business.

My print column today offers a peek into the deals of three of today’s biggest yacht flippers — Terry Taylor, Rick Hendrick and Felix Sabates, the king of flippers. Mr. Taylor, for instance, has purchased five yachts since 2001 but is currently boatless, since he’s sold them all. Mr. Sabates has flipped more than 18 boats over the past 15 years or so, but at least for now his flipping days are over — he was buying so many boats from Trinity Yachts that he decided to become a partner.

Just like real estate, yacht flipping carries risks. If the wealth boom fades and the yacht market tanks, the flippers could be left with pricey boats they’ll have to own. But they’re rich enough that they can afford it. (Who knows, they might even enjoy owning a boat!) And for now, flippers seem to be having the most fun in the boating world.

“Flipping boats,” says Mr. Sabates, “is a better business than building them!”

May 24, 2007, 11:00 am
$100 Million House Sale (House Not Included)

In Richistan, I predicted that by the time the book came out, we would have seen a residential real-estate sale of $100 million or more. Since Richistan comes out in two weeks, I was getting a little nervous.

Lucky for me (and the seller), news of just such a deal broke yesterday: Financier and investor Ron Baron has reportedly purchased 40 acres of beachfront in the Hamptons for $103 million. (See USA Today’s take.)

The price sets a national record for residential real estate. Previously, the record belonged to Ron Perelman, who sold his Palm Beach pad for $70 million, along with a $20 million separate parcel, to housing tycoon Dwight Schar.

The price for the Hamptons land is clearly astounding. And the media (and real-estate agents) are already seizing on the news to further hype the high-end housing market. “It’s amazing how much growth there is in the very high end of the market in terms of wealth,” Rick Goodwin, publisher of Ultimate Homes magazine, told USA Today.

But let’s get real. Yes, the high end of the market is holding up better, generally speaking, than the middle and bottom. And yes, this is due in large part to the explosion in the population of millionaires and billionaires in recent years.

Yet the luxury-housing market isn’t a single market — it’s really several, of varying strength. As I’ve written before, the top of the luxury market is likely to continue to do well, simply because people wealthy enough to buy properties with eight- or nine-digit price tags aren’t concerned about the housing market. They will continue to seek out rare or unique properties, and since there are more superrich people looking for the same rare properties, those prices will remain strong. There are currently three such properties for sale priced at $100 million or more — Prince Bandar’s Aspen pad, Tim Blixseth’s fantasy mountain lodge, and Donald Trump’s Palm Beach palace.

But the bottom of the luxury market — homes priced at $1 million to $5 million — will continue to soften. Those buyers are more sensitive to interest rates and borrowings, and supply of those homes has risen dramatically in recent years.

So while my prediction of the $100 million house has come true, that doesn’t mean all “high-end homes” will sell. It just means that the supperrich have more to spend these days than the merely rich do.

May 23, 2007, 11:33 am
A Richistani Runs for Office

Jared Polis, one of the quirkier millionaires I profile in Richistan, is making interesting news this week.

For those who don’t know the name (and I didn’t myself until a couple of years ago), Polis is a 32-year-old dot-com tycoon who lives in Boulder, Colo. He’s launched and/or sold more than a dozen companies — many before he graduated college — including online greeting-card company Blue Mountain and ProFlowers.Com, which he sold to Liberty Media for a reported $477 million. The Rich Registry once put Polis’s net worth at $160 million, but sources tell me it’s far more than that, especially after the ProFlowers deal.

Yet Polis’s real passion is politics. Growing up in California, he volunteered for various Democratic candidates and causes. In Colorado, he got elected to the state board of education and helped launch a chain of charter schools for non-English speaking immigrants left behind by the public-school system. He is a self-described “progressive,” liberal on social issues and moderate to conservative on economic ones.

For the past few years, Polis has juggled his multitude of for-profit companies, his non-profit foundation and his political activities. To say Polis has ADD would be an understatement: During one day I spent with him last year, he was usually conducting three conversations at once, talking on his two cellphones and answering emails on his wireless laptop.

On Monday, he announced plans to run for Congress. This article in the Boulder Daily Camera by John Aguilar notes that Polis has “limitless financial firepower and solid name recognition.” He’ll also have plenty of challenges, including being an openly gay candidate who could be accused of using his wealth to buy an election. (He spent $1 million to get elected to the school board.)

Whatever happens, I think Polis represents a new brand of rich-man’s politics. Rather than using government as a tool to cut taxes and boost his personal fortune, he’s using his personal fortune as a tool to change government. The changes he seeks are aimed at lifting up the underclass, rather than providing further support for the overclass. Or at least that’s the way he puts it on the campaign trail.

Even Republicans in Colorado respect Polis and what he’s achieved with education. “He’s not just another rich guy who wants power,” one GOP strategist told me. “He’s actually done some really good, concrete things with education.”

Who knows whether Polis will be successful. But if he is, he has the chance to show that the rich aren’t just getting involved in politics to line their pockets. Like the best philanthropists, these new, independently wealthy politicos may be able to use their money for a greater good.

May 21, 2007, 2:37 pm
How the Rich Spend Their Summer

While the broader retail and consumer sector may be slowing, spending by the rich continues to astound.

A new survey of 198 people worth $10 million or more, conducted by Prince & Associates for Elite Traveler magazine, shows that the wealthy will spend 56% more this summer than in 2005.

Yacht charters top the list, with $384,000 in planned spending, which sounds about right, given that big yachts now charter for $200,000 to $250,000 a week. (See average planned spending of Prince respondents in 10 categories below.)

Ranking second was redecorating. Granted, redecorating may not seem like a popular summer pasttime for the rich. But since they’re usually traveling for the season, it’s an optimal time to let in the contractors and install that new lap pool or home theater.

Another high-ranking spending category: “experiential excursions.” For those unfamiliar with this new breed of primal-luxury vacation, they usually involve paying some high-priced guide to take you and your family running with springbok in Botsawana, trekking with penguins in Chile or learning wine-making in New Zealand.

Of all the categories, however, the one that almost all respondents planned to spend money on was charity. Fully 98% of them planned to donate to charity this summer, averaging $82,000. All those summer fundraisers may also explain why the rich plan to spend $56,000 on entertaining, and $24,000 for wine for entertainment.

Summer Activity Average Planned Spending
Yacht rentals $384,000
Redecorating $129,000
Villa rentals $106,000
Experiential excursions $103,000
Jewelry/watches $94,000
Luxury cruises $92,000
Charitable giving $82,000
Vacation-home rentals $82,000
Out-of-home spa services $61,000
Summer entertaining $56,000

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Read more: Travel, Luxury Goods, Yachts, Experiences, Lifestyle, Philanthropy
More related contentMay 18, 2007, 12:19 pm
The Rich Person’s Guide to PR
For most of the century, the wealthy had a simple rule of thumb when dealing with the press: say nothing. Money was quiet and the media rarely pried — while there’s always been a prurient interest in the rich, it used to be that the wealthy could retreat to their gated estates fairly easily and escape the public gaze.

But today, avoiding the press is harder. With so much interest in wealth, there’s now a flood of information available about the personal lives of millionaires and billionaires — hedge-fund salaries in Alpha magazine, aerial photos of billionaire homes in Forbes and Vanity Fair, covert photos of yachts posted on yachtspotter.com.

“Wealthy individuals now have a level of celebrity almost on par with professional athletes and celebrities,” says Sean Cassidy of New York’s Dan Klores Communications, which advises wealthy families.

What’s more, the growing attention to inequality has made the wealthy a bigger media target. Some argue that the wealthy have never been more celebrated in the media — consider Donald Trump and Paris Hilton. But others say they’ve become increasing targets of ridicule, held up as models of excess in a society that’s increasingly divided between the haves and have-nots — consider Donald Trump and Paris Hilton.

So what’s a wealthy person to do?

My print column today looks at the various strategies that PR advisors are offering today’s wealthy to help them avoid becoming media pinatas. Their advice includes:

1. Stay quiet, be humble. Yes it’s harder than ever to avoid public scrutiny if you’re rich, but PR experts say granting interviews only breeds more coverage. (As a journalist who covers the wealthy, I respectfully disagree. Unless you are telling your side of your story, others will do that for you — and they may have other agendas.) PR experts say that if you do do interviews, don’t boast about your wealth. A related piece of advice: don’t complain in the press about how you’re yacht is too large, or that you have too many houses. “Some people don’t understand that reporters and their audience may not be sympathetic to the problems of millionaires,” one PR person told me.

2. Act middle class. As I’ve written before, many of today’s wealthy made their own money and grew up middle class. To ease class tensions, it helps to play up your everyday roots and relate to everyday readers. But don’t act “simple” if you’re not; reporters will see through it instantly.

3. Advertise your philanthropy. It worked for Bill Gates, maybe it can work for you. While philanthropy can’t hide all sins, it can certainly help burnish a rich person’s image and make him or her more likeable in the press. But don’t take it too far: giving money to build a stadium with your name on it, for instance, might be seen more as personal advertising than as charity.

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Read more: Lifestyle, Philanthropy, Plutonomy
More related contentMay 17, 2007, 4:29 pm
Control-Freak Philanthropy
Today’s philanthropists love to talk about leverage. Most often this means they’ll give an institution a whopping gift of say, $10 million, in hopes that the institution will use that leverage to attract other donors and raise more millions. In other cases, leverage means the philanthropist asks the institution to invest the money wisely and make it grow so that the original gift grows over time.

For philanthropists, leverage is essential, since it means that their dollars will act as a catalyst, rather than as a one-time windfall. It also means their funds will have greater impact — and impact is what today’s philanthropy is all about.

Most of the time, leverage is a matter of hope rather than directive. But T. Boone Pickens, the legendary oil-trader (read about his recent lavish birthday party here) has taken leverage to the next level. According to an article by Debra Blum in the Chronicle of Philanthropy, Pickens hasn’t just asked that his money be leveraged. He’s making it a condition of his gift.

The article says that Mr. Pickens has given $50 million gifts to the University of Texas Southwestern Medical Center at Dallas and the M.D. Anderson Cancer Center, in Houston. Yet they can’t spend the gifts until they try to invest the money and grow it to 10 times its current size. If they meet the target within 25 years, they can spend all the money. If they don’t, the money they make on those investments will go to Oklahoma State. (They keep the original gift either way.)

On its face, this may seem like classic control-freak philanthropy. What if there are huge market corrections over that time? What if the institutions just miss the mark? Is this charity or an investment competition? And doesn’t this pit one school against another?

I did some calculations and figured out that the fund will have to generate average annual returns of at least 9.6%. That’s not unreasonable. But in an age in which most investors are shooting for 7% or 8% from the stock market, it won’t be easy.

Still, it’s a noble goal. And given that so many nonprofits invest their money poorly, demanding a minimum level of return will be a good incentive for them to invest more wisely. Even if they miss the mark, the money will still go to a worthy cause.

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Read more: Investing, Philanthropy
More related contentMay 16, 2007, 2:38 pm
Art Prices Run Amok
Last night’s much-hyped auction at Sotheby’s actually lived up its hype — at least in dollar terms.

According to Carol Vogel of the New York Times, the Rockefeller Rothko sold for $72 million — far more than the already-outrageous estimate of $40 million and the highest price ever paid for a contemporary painting.

Francis Bacon didn’t do bad either. His “Study From Innocent X” (1962) fetched $52.6 million, way above the estimate of $30 million.

So it was only natural this morning that the New York Sun ran an article by Marion Maneker comparing the prices of Warhol paintings to the Dow Jones Industrials. Not surprisingly, the article says Warhol prices have far outpaced the Dow, toeing the art-industry line that art is a better investment than boring old stocks. For example, Warhol’s “Gold Marilyn,” purchased in 1964 for $2,000, is now worth an estimated $60 million.

“Turning $2,000 in 1964 currency into $60 million in 2007 is, according to calculations done for The New York Sun by Artnet’s Kevin Radell, a 27.09% internal rate of return over the last 43 years,” Mr. Maneker writes. “By comparison, gold itself sold for $35 an ounce in 1962 and $690 recently, which represents a return of 6.85%. Other safe-haven investments like the Dow Jones Industrials or the S&P 500 would give you slightly better returns of 7.07% and 7.44% over the same period. (Though Mr. Radell is quick to point out that these calculations don’t include dividends, which could add another 3%.)”

There is only one problem with this argument, and the whole notion that art is a great investment: It’s highly selective and oftentimes wrong. Yes, you can find some artists, and some pieces by those artists, that have appreciated more over time than the Dow. But what if you measured the entire universe of artists and works — not just the ones that sold at auction and not just the headliners?

Of course, there is no reliable measure for the value of all art purchased in recent decades. But when you talk to experienced collectors, they will tell you that most art never makes money. And many artists — Julian Schnabel or Robert Longo, to name two — fail to live up to their early press.

“The truth of the matter is, 99.9 percent of all contemporary art will never be worth more than what you paid for it,” says Barney Ebsworth, one of the nation’s top collectors, whom I profile in Richistan. “It’s always nice to talk about the winners, and there are big winners. But there are far more losers than there are winners.”

So when young collectors come to Ebsworth for advice, he tells them the honest truth: “If you buy something, there’s a good chance you won’t be able to sell it. There’s only one reason to buy a piece of art, and that’s because you absolutely love it. If you buy it for any other reason, it’s trouble.”

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Read more: Price Breaker, Luxury Goods, Collections, Investing
More related contentMay 15, 2007, 3:43 pm
The Wrong Way to Leave Money to Heirs
Rich parents are always grappling with how to leave money to their children. Beyond the obvious questions — How much is enough? How much is too much? — they wonder whether the money should come with strings attached or just be given to their kids outright.

Inheritances that have strings attached are known as incentive trusts. They might stipulate that a kid can’t have access to his $10 million until he graduates from college or gets a job. Or they might say that the heir gets cut off if he or she is caught with drugs or abuses alcohol. Some are values-based, saying that an heir has to live up to the broader values of the patriarch in order to get the money.

In a survey out today, PNC says that 30 percent of high-net-worth individuals use incentive trusts. At the same time, 62 percent say their kids and grandkids should take responsibility for creating their own wealth.

Martyn Babitz, a senior vice president of PNC Wealth Management, says more families should use incentive trusts. (Not coincidentally, PNC can help you create one!) “When it comes to leaving a legacy, too few individuals are taking the steps to ensure their heirs do not have unfettered access to their money,” he says.

In other words, money can become a shaper of character, acting as an incentive for heirs to become normal, productive members of society.

To my mind, however, incentive trusts are something of an oxymoron: You leave your kid a fortune, but attach conditions designed to mitigate the impacts of that fortune. It’s a bit like giving someone a lifetime supply of Haggen Dazs, but saying that they can only eat it if they agree to diet and lose weight. And if the conditions are values-based, then the parents are using money to impose their views and principles on their kids — another effective way of robbing them of their own identity.

So here’s my advice: If you really want to mitigate the effects of large fortunes on your kids, don’t leave them a large fortune. Let them find their own careers and success, rather than using money to dictate from the grave.

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Read more: Trusts & Estates, Children
More related contentMay 14, 2007, 2:39 pm
Do the Wealthy Win Elections?
The growing speculation about a Michael Bloomberg run for president raises all sorts of interesting questions about wealth and politics. Are the rich buying votes? Or are wealthy candidates more “pure” since they pay their own campaign bills and aren’t indebted to interest groups and lobbyists for money?

And then there’s the basic question that often gets lost in the emotional debate: Do rich candidates win?

Conventional wisdom states that money wins elections, as witnessed by the current quest for cash in the 2008 presidential primaries. Bloomberg, after all, spent more than $140 million of his own money to win his two mayoral elections and would likely spend even more in a presidential bid. The more money a candidate has, the more likely they are to win.

Except when they don’t. For all the Bloombergs and Jon Corzines of the world, there are also plenty of Steve Forbeses, Michael Jon Huffingtons and Ross Perots who plow millions into campaigns that eventually flop.

Indeed, the majority of self-funded campaigns fail. The Center for Responsive Politics says only one of the 30 congressional candidates who spent at least $500,000 of their own money in 2004 got elected. (That one was Michael McCaul, a Texas Republican.)

Acording to Jennuifer Steen, a professor at Boston College who wrote a book on self-financed candidates for Congress, such candidates won only about 30 percent of their elections between 1990 and 2000.

Granted, Steen says that spending millions of your own money on a race can blunt the opposition. But for the most part, money doesn’t guarantee victory. What matters more is the experience of a candidate and his or her appeal to voters. While money helps, it can’t rescue a bad candidate.

Some rich candidates even see self-funding as a liability. I interviewed Jared Polis, a dot-com multi-millionaire who’s now active in Democratic politics, last year and asked him if he planned to fund any future political campaign with his own money. After all, he had used his own money to fund his successful campaign for a statewide school-board seat.

“I would never run solely with my own contributions,” he told me. “If you can’t raise money from other people who are passionate about your campaign and support you, you probably shouldn’t be running.”

Which isn’t to say Polis wouldn’t spend money on his own campaign — he might spend significant amounts. But his point was that fundraising is an important part of campaigning, networking and winning people’s support: “It’s good discipline. It forces you to get out there and talk to other people and understand what they want from government. If you fund yourself, you run the risk of becoming isolated.”

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Read more: Politics
More related contentMay 11, 2007, 12:13 pm
The Billionaire Beach Brawl
Ah, summer. Warm breezes. Lazy afternoons at the beach. And rich people fighting over their oceanfront property.

Every year seems to bring some new dispute involving the wealthy and their ocean views. If it’s not neighbors or noise, it’s the richer guy down the block building an even bigger house or the noisy hoi palloi encroaching on their private sand.

This summer brings an interesting battle in Nanucket, the whaling-port- superrich playground off the coast of Cape Cod. As my print column today explains, some of the wealthy vacationers who own property along Baxter Road of ‘Sconset beach are worried that their houses are going to fall into the ocean because of erosion. Their solution: pool together $23 million of their own money to rebuild the beach. Specifically, their plan calls for dredging up more than 2 million cubic yards of sand from an offershore location and pumping it back onto the beach.

If were only that simple. As it turns out, the dredging plan would ruin a prime fishing area for striped bass. The area has a special “cobble bottom” with rocks and gravel, that attract plankton and bass, and the dredging threatens to turn the area into an underwater desert.

But this being Nantucket, the dispute isn’t just about fish. It’s also about wealth, and the perception by locals that the rich have taken over the island. Like Cape Cod, the Hamptons, and other longtime beach communities, Nantucket has been transformed dramatically by big wealth in recent years, with homes selling for millions. For longtime Nantucketers, the battle is really about the wealthy always getting their way, and protecting their private property at the expense of the rest of the island. They argue that nature should take its course and that the wealthy have enough money to move their homes or buy another place.

Since I’m not a marine biologist, I don’t know the ins and outs of the plan, and all its costs and benefits. But the rich homeowners, who include Amos Hostetter Jr., Helmut Weymar and others, have offered to pay the fisherman for any lost wages and to build an artificial reef to save the bass.

To me, that sounds like a reasonable solution. Yes, it’s terrible that many longtime residents of Nantucket are leaving town because they can’t afford to live there anymore. But that’s an issue that the town should address through more affordable housing and other measures. The plan by the rich homeowners to compensate the fisherman and to create a new habitat for the bass would seem to resolve the fisherman’s concerns — even if it doesn’t ease the larger concerns over the impacts of wealth on the nation’s waterfronts.

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Read more: Homes
More related contentMay 10, 2007, 10:47 am
Why the Rich Hate Being Called Rich
Last year, I was interviewing Tim Blixseth for Richistan and asked him what it feels like to be a billionaire.

“It’s an abstract word,” he says. “When people say that, it’s like they’re talking about someone else.”

But clearly, I said, you have to know that you’re rich. Right?

Again, he demurred. Regardless of what his bank account said, he didn’t like being lumped together with other rich people.

“I don’t like most rich people,” he said. “They can be arrogant.”

In an article in the Journal by Ianthe Dugan last year, billionaire David Tepper made a similar remark: He didn’t think of himself as “rich” — as he put it, “I’m just a middle-class dad trapped inside a rich man’s body.”

And last week came an article in the Oregonian by Tom Hallman Jr. about a rich guy I’d never heard of (there are so many), who had given $163 million to charity last year. By almost any standard, Lorry Lokey is rich. Still, even as he talked about his various luxuries, he bristled at the term.

Mr. Lokey said: “I have a very nice home in Hawaii that cost more than I should have paid. I have two cars there and two here, but they’re low-price. I live well, but I’ll be damned if I’m going to have a yacht or join some country club. I can’t stand rich people.”

So what is it about today’s rich that make them practically allergic to the word?

Three reasons:

1. They don’t feel rich. To most of America, someone with $5 million is rich. But chances are, the person with $5 million doesn’t feel rich because they see so many people who are richer than they are. While the population of single-digit millionaires has doubled over the past 10 years, so has the population of centi-millionaires and billionaires. It’s like asking basketball star Allen Iverson, a six-footer, if he feels tall. To a large part of the population, Iverson is tall. But Iverson probably would say he’s average or even short — because he compares himself to his 7-foot-tall teammates.

2. They didn’t grow up rich. Most of today’s rich didn’t inherit their money but made it themselves, mostly by starting their own companies and selling them. They may have money, but they still feel middle-class. It’s why they favor open-necked shirts over ascots and jeans over suits. Culturally, they still resent the rich — even if financially, they are rich themselves.

3. They are good at PR. With so much debate over inequality and conspicuous consumption, the wealthy have become experts at faux populism. They can have all the jets, mansions, yachts and Picassos they want. But they’ve learned not to flaunt them publicly, or to boast about their wealth in the press. It’s why Martha Stewart talks about her folksy lifestyle even though I bet her life is endlessly complicated.

This isn’t to say the rich are being disingenuous when they resist the term “rich.” It just means that in many cases, their identities haven’t caught up with their wealth.

It’s one of those “you-know-you’ve-made-it-when” rites of passage, along with the house in the Hamptons (or Aspen or Palm Beach) and the American Express black card.

But today there are so many newly minted multi-millionaires and billionaires around the world that there simply aren’t enough Ferarris to go around. An article in today’s Journal by Gabriel Kahn explains that the waiting list for a new Ferrari has grown from the standard 12 months to 24 months or more in Hong Kong, the U.S., Australia and England.

The reason: huge demand for Ferraris among the new rich in Russia, the Middle East and Asia.

Ferrari’s chairman, Luca Cordero di Montezemolo, swore in 1990 that Ferrari would never make more than 5,000 cars per year. Now they’re making 5,700 and still can’t keep up with demand: “We started to consider 18 months [to wait] ideal, but now we can’t even keep up with that.”

To its credit, Ferrari isn’t doubling its production to keep up with the demand (thus avoiding the mass-luxury trap that has beset Jaguar, Mercedes and others).

But the result is a new V-VIP economy, where mere millionaires are bumped down the Ferrari waiting list by Arab sheikhs and Russian oligarchs who have been longtime customers and are buying two or three cars at a time. (Ferrari denies that it fiddles with the list, but let’s get real — the have-mores get better treatment than the haves in all luxury businesses.)

And Ferraris aren’t the only luxury product with a waiting list. Try commissioning a new 250-foot yacht these days. You’ll find yourself on a waiting list of at least a year, sometimes two. Want to buy one of Gulfstream’s new top-of-the-line G550s? Prepare to wait at least a year.

The millionaire glut is even appearing in the investment world. There are so many rich investors trying to get into the top hedge funds and private-equity funds these days that many are getting turned down. Private banks say one of the biggest problems for their clients today is “access” — finding top managers who are willing to take money from their rich clients.

What to make of this new luxury logjam? For the wealthy, it’s a constant headache. After all, they worked hard to make their fortunes and now they want the rewards. Spending $125 million for a boat and then being told to “get in line” has got to be humiliating for today’s rich.

Yet the rich have to realize that the economic forces that are making them rich — liquidity, globalization, technology — are making lots of other people rich too. And as more and more people get rich, they can’t all have the same luxury goods. Or if they can, they’re no longer luxury goods.

So the wealthy need to adjust their sense of privilege. They should accept that they may be rich, but they’re no longer that special. There are plenty of people just like them — and plenty more who are even richer. If today’s wealthy really want a sports car that they can buy today and drive tomorrow, they might have to settle for a Porsche.

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Read more: Yachts, Planes, Lifestyle, Investing
More related contentMay 7, 2007, 11:30 am
Why Are the Rich Borrowing So Much?
In financial markets, the risks are often greatest when bankers say there are no risks.

So it seems like a good time to add a few words of caution to the overly rosy discussion about lending money to the wealthy. While loans to the sub-prime market and even the middle class have slowed dramatically, loans to the wealthy have continued at a rapid clip. Between 1998 and 2004 (the latest period for which data is available), America’s richest 1% more than doubled their total debt load to $650 billion.

Citi Private Bank, J.P. Morgan Private Bank, Bank of America and others are all doing a brisk business in high-net-worth loans. “Creative lending” is the new mantra — meaning banks are willing to write loans against assets that are difficult to value, such as art, horses, wine, hedge-fund investments, and even private-equity portfolios.

One of the fastest-growing areas is “non-recourse” loans, meaning that a rich borrower doesn’t have to put up any collateral to get a loan. The borrower’s reputation and net worth is enough. “These days, all I have to give a bank to borrow a few million dollars is my signature,” one real-estate mogul told me last month.

A recent article in American Banker (subscription required) says Boston Private Bank had a 60% jump in unit volume in the first quarter — much of it to families using the money to buy homes in the $1.5 million to $3 million range. John Sullivan, an executive vice president at the bank, says mortgage companies that once catered to the subprime borrowers are moving “up the credit ladder” to cater to wealthier clients.

The banks’ argument is simple: The rich are wealthy and have plenty of assets to back up their loans, so why worry? And this is true, to a point: The wealthy do have lots of assets that they can sell off if they get into a cash crunch.

And banks say they aren’t being careless. Timothy Vaill, CEO of Boston Private Wealth Management Group, which owns Boston Private Banks, says that the bank is fully aware of the risks and maintains strict underwriting standards. “I think there’s a risk in every kind of loan, no matter how rich someone is,” he says. “You don’t want what happened in the late ’80s and ’90s, where banks were handing out loans and doing the work on the back of an envelope. You have to watch those underwriting standards like a hawk.”

Indeed you do. A “why worry?” philosophy about loans to the rich ignores two fundamental points about today’s wealthy. First, they are more reliant than ever on volatile financial markets. And that paper wealth can vanish in a matter of days. In Richistan, I profile a billionaire who lost everything in a matter of weeks, all because of unexpected changes in the stock market. This gets even more risky when the client starts borrowing against their stock for personal spending, creating the classic house of cards.

The second point is that today’s wealthy, like other Americans, are more highly leveraged than ever. When a bank lends a multi-millionaire money, the bank may think the client has plenty of homes, cars, artwork and investments to back it up. But they often don’t know just how leveraged the client may be. All those assets may be pledged as collateral for other loans. Just because someone lives richly doesn’t mean they’re actually rich.

I’m not predicting a lending crisis with the rich. The wealth boom is creating more and more millionaires and billionaires with plenty of borrowing capacity. Yet when banks start rushing to lend millions of dollars to people based only on their signatures, and boasting about “no risk” loans, it’s time to start talking about the risks.

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More related contentMay 4, 2007, 10:41 am
The $800,000 Duck Decoy
Over the next two weeks, we’ll hear news that Christie’s and Sotheby’s have once again set new records for contemporary art. There will be the inevitable $40 million Rothko (or at least $30 million), the $20 million Warhol and the now-routine crowd of rich people waving their auction paddles like metalheads flashing lighters at a rock concert.

But the media obsession with art has obscured a broader phenomenon: Collectibles of all kinds are suddenly soaring in price. Stamps, duck decoys, antique toys, even doorstops are suddenly hot commodities. Stuff that just a few years ago would have been considered garage-sale junk — or useless artifacts for obsessive collectors — have suddenly become status symbols.

My print column today tells the tale of duck decoys selling for $800,000, stamps going for millions and a cast-iron doorstop selling at auction for $72,600.

Why? The obvious answer is too many people have too much money. But that’s an oversimplification. The deeper reason has to do with the relationship between scarcity and liquidity, and a new breed of sophisticated collector.

Today’s rich, as I’ve often mentioned, are looking for long-term investments that will increase in value. They’re also looking for scarcity — rare objects that others can’t own. Any time you have piles of capital chasing the same rare object — say, the only Lothrop Holmes red merganser duck decoy left in private hands — prices will rocket.

But there’s another reason for the price hikes: sophisticated traders. Today’s wealthy collectors aren’t buying out of passion — they’re buying out of value. Consider Bill Gross. I’m sure Bill is genuinely fond of stamps. But instead of going out and buying pieces on gut instinct, he developed a complicated pricing model that looks at the prices for certain stamps over a 75-year period. He found that certain stamps track nominal GDP growth, and those are the stamps he buys, since he figures nominal GDP is likely to increase in the future (though at varying rates, of course).

This trading mentality pushes up prices for pieces that have already traded at a profit — and the buying snowballs.

So the next time you see that old doorstop in the antique store, pay attention. It could be the hot non-correlated asset.

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More related contentMay 3, 2007, 2:52 pm
The $72 Million Party
A week after being pilloried for their billion-dollar salaries, hedge funders came out in droves last night to try to shore up their reputations as philanthropists.

More than 4,000 people attended the annual fundraising bash for the Robin Hood Foundation, the charity founded by Tudor Investment Corp. founder Paul Tudor Jones II. The bash was held in the cavernous Jacob Javits Center in Manhattan — not the most glamorous ballroom, but one of the only spaces in Manhattan large enough to hold the event. Attendees paid between $3,000 to $25,000 a ticket — if you could get one.

“The Daily Show” funny guy Jon Stewart was the host and the musical guest was Aerosmith. But the real star of the show was money. According to people close to the foundation, the event raised $72 million. That’s as much as 30 times the usual amount raised at charity balls and far above last year’s Robin Hood total of around $48 million.

A big chunk of the money came from feverish bidding contests between the top hedge- funders to win trips, dinners, luxury goods and all manner of other high-end services. One of the biggest hauls of the night: a chance to sing with Aerosmith singer Steven Tyler. Two unknown bidders ended up paying more than $800,000 combined for the prize.

“I couldn’t believe the way these people were bidding,” said one attendee. “It was crazy.”

At least the donors know their money is being well-spent. Since all of Robin Hood’s administrative, marketing and other costs are paid by the board, every dollar donated last night goes to helping alleviate poverty in New York City.