America’s Predatory Elite

By Dave Cohen

baphomet(1)I discussed the elite as opportunistic predators in my long essay Economics As A Moral Science?  That essay was a follow-up to my post Homo sapiens — The Rationalizing Animal. In that first essay I defined the three most important social groups in United States, or indeed, in any other large, complex human society—the elite, the beneficiaries of the status quo, and the disenfranchised.

I spent a lot of time setting that discussion up by laying out a simple but “good enough” theoretical framework which helps us understand why we Americans “are not all in this together.”  That view helps us understand why the vast the majority of ordinary Americans (the disenfranchised and others) are sometimes regarded as “prey” to those at the top.

A more specific discussion helps us understand who makes up America’s current elite, and why those people “they don’t give a fuck about you” (i.e., those outside the group, and paraphrasing George Carlin). In 2011, Professor G. William Dunhoff, who is in the sociology department at UC-Santa Cruz, published an anonymous letter from an investment adviser who is intimately acquainted with America’s predatory elite.

In terms of wealth and income, that adviser suggests that those people make up the top half of the top 1% (= the top 0.5%, approximately 1.5 million people). One can argue about the exact numbers, but what counts is that this small but powerful human social group has extraordinary influence on what happens in the United States.

The Upper Half of the Top 1%

Membership in this elite group is likely to come from being involved in some aspect of the financial services or banking industry, real estate development involved with those industries, or government contracting. Some hard working and clever physicians and attorneys can acquire as much as $15M-$20M before retirement but they are rare. Those in the top 0.5% have incomes over $500k if working and a net worth over $1.8M if retired.

The higher we go up into the top 0.5% the more likely it is that their wealth is in some way tied to the investment industry and borrowed money than from personally selling goods or services or labor as do most in the bottom 99.5%. They are much more likely to have built their net worth from stock options and capital gains in stocks and real estate and private business sales, not from income which is taxed at a much higher rate. These opportunities are largely unavailable to the bottom 99.5%.

Recently, I spoke with a younger client who retired from a major investment bank in her early thirties, net worth around $8M. We can estimate that she had to earn somewhere around twice that, or $14M-$16M, in order to keep $8M after taxes and live well along the way, an impressive accomplishment by such an early age. Since I knew she held a critical view of investment banking, I asked if her colleagues talked about or understood how much damage was created in the broader economy from their activities. Her answer was that no one talks about it in public but almost all understood and were unbelievably cynical, hoping to exit the system when they became rich enough.

Folks in the top 0.1% come from many backgrounds but it’s infrequent to meet one whose wealth wasn’t acquired through direct or indirect participation in the financial and banking industries. One of our clients, net worth in the $60M range, built a small company and was acquired with stock from a multi-national. Stock is often called a “paper” asset. Another client, CEO of a medium-cap tech company, retired with a net worth in the $70M range. The bulk of any CEO’s wealth comes from stock, not income, and incomes are also very high. Last year, the average S&P 500 CEO made $9M in all forms of compensation. One client runs a division of a major international investment bank, net worth in the $30M range and most of the profits from his division flow directly or indirectly from the public sector, the taxpayer. Another client with a net worth in the $10M range is the ex-wife of a managing director of a major investment bank, while another was able to amass $12M after taxes by her early thirties from stock options as a high level programmer in a successful IT company.

The picture is clear: entry into the top 0.5% and, particularly, the top 0.1% is usually the result of some association with the financial industry and its creations. I find it questionable as to whether the majority in this group actually adds value or simply diverts value from the US economy and business into its pockets and the pockets of the uber-wealthy who hire them. They are, of course, doing nothing illegal.

I think it’s important to emphasize one of the dangers of wealth concentration: irresponsibility about the wider economic consequences of their actions by those at the top. Wall Street created the investment products that produced gross economic imbalances and the 2008 credit crisis. It wasn’t the hard-working 99.5%. Average people could only destroy themselves financially, not the economic system. There’s plenty of blame to go around, but the collapse was primarily due to the failure of complex mortgage derivatives, CDS credit swaps, cheap Fed money, lax regulation, compromised ratings agencies, government involvement in the mortgage market, the end of the Glass-Steagall Act in 1999, and insufficient bank capital.

Only Wall Street could put the economy at risk and it had an excellent reason to do so: profit. It made huge profits in the build-up to the credit crisis and huge profits when it sold itself as “too big to fail” and received massive government and Federal Reserve bailouts. Most of the serious economic damage the U.S. is struggling with today was done by the top 0.1% and they benefited greatly from it.

Not surprisingly, Wall Street and the top of corporate America are doing extremely well as of June 2011. For example, in Q1 of 2011, America’s top corporations reported 31% profit growth and a 31% reduction in taxes, the latter due to profit outsourcing to low tax rate countries. Somewhere around 40% of the profits in the S&P 500 come from overseas and stay overseas, with about half of these 500 top corporations having their headquarters in tax havens. If the corporations don’t repatriate their profits, they pay no U.S. taxes. The year 2010 was a record year for compensation on Wall Street, while corporate CEO compensation rose by over 30%, most Americans struggled. In 2010 a dozen major companies, including GE, Verizon, Boeing, Wells Fargo, and Fed Ex paid US tax rates between -0.7% and -9.2%. Production, employment, profits, and taxes have all been outsourced. Major U.S. corporations are currently lobbying to have another “tax-repatriation” window like that in 2004 where they can bring back corporate profits at a 5.25% tax rate versus the usual 35% US corporate tax rate. Ordinary working citizens with the lowest incomes are taxed at 10%.

I could go on and on, but the bottom line is this: A highly complex set of laws and exemptions from laws and taxes has been put in place by those in the uppermost reaches of the U.S. financial system. It allows them to protect and increase their wealth and significantly affect the U.S. political and legislative processes. They have real power and real wealth.

Ordinary citizens in the bottom 99.9% are largely not aware of these systems, do not understand how they work, are unlikely to participate in them, and have little likelihood of entering the top 0.5%, much less the top 0.1%. Moreover, those at the very top have no incentive whatsoever for revealing or changing the rules. I am not optimistic.

This anonymous investment adviser posted an update to his original letter in December, 2013. Here is the beginning of that new letter.

Since I wrote my analysis of the wealth and income of the top 1% for in mid-2011, economic and financial events have supported my original thesis. Wealth and income are streaming to the very top of the system and, particularly, to those who are direct or indirect beneficiaries of the financial industry. Professionals and workers have slipped further behind. The Federal Reserve’s near-zero interest-rate policy and QE programs have pushed over 3 trillion dollars into the economy since 2009, stimulating speculation and Wall Street profits — while punishing conservative investors and savers with record low interest rates.

The US government’s bail-out programs, student and car loan subsidies, state support, and countless other expenditures have cost future taxpayers around $7 trillion. Much of this money has already been spent; at best, it created anemic economic growth on Main Street, while greatly helping Wall Street and masking a weak underlying recovery in the US economy.

The years 2009-2012 saw an enormous transfer of wealth upwards to the top 1% and, particularly, the top 0.1%. According to economists working with Census data at the Pew Foundation, from 2009 through 2011 (the latest available data), the net worth of the top 7% gained 28% while the bottom 93% dropped 4%. These wide variances were driven by gains in stock, bond, and real estate prices. Since the end of 2011, these markets have continued to climb, further enhancing wealth and income at the top…

Follow the link above to read the rest of the update.

TLB recommends you visit for more great articles and pertinent information.

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