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The new gilded age

March 29th, 2008 · No Comments

From R-G
Proud of a New Gilded Age
by Louis Uchitelle
The tributes to Sanford I Weill line the walls of the carpeted hallway
that leads to his skyscraper office, with its panoramic view of Central
Park. A dozen framed magazine covers, their colors as vivid as an Andy
Warhol painting, are the most arresting. Each heralds Mr Weill’s genius
in assembling Citigroup into the most powerful financial institution
since the House of Morgan a century ago.

His achievement required political clout, and that, too, is on display.
Soon after he formed Citigroup, Congress repealed a Depression-era law
that prohibited goliaths like the one Mr Weill had just put together
anyway, combining commercial and investment banking, insurance and stock
brokerage operations. A trophy from the victory – a pen that President
Bill Clinton used to sign the repeal – hangs, framed, near the magazine
covers.

These days, Mr Weill and many of the nation’s very wealthy chief
executives, entrepreneurs and financiers echo an earlier era – the
Gilded Age before World War One – when powerful enterprises, dominated
by men who grew immensely rich, ushered in the industrialization of the
United States. The new titans often see themselves as pillars of a
similarly prosperous and expansive age, one in which their successes and
their philanthropy have made government less important than it once was.

“People can look at the last 25 years and say this is an incredibly
unique period of time”, Mr Weill said. “We didn’t rely on somebody else
to build what we built, and we shouldn’t rely on somebody else to
provide all the services our society needs”.

Those earlier barons disappeared by the 1920s and, constrained by the
Depression and by the greater government oversight and high income tax
rates that followed, no one really took their place. Then, starting in
the late 1970s, as the constraints receded, new tycoons gradually
emerged, and now their concentrated wealth has made the early years of
the 21st century truly another Gilded Age.

Only twice before over the last century has five percent of the national
income gone to families in the upper one-one-hundredth of a percent of
the income distribution – currently, the almost 15,000 families with
incomes of $9.5 million or more a year, according to an analysis of tax
returns by the economists Emmanuel Saez at the University of California,
Berkeley and Thomas Piketty at the Paris School of Economics.

Such concentration at the very top occurred in 1915 and 1916, as the
Gilded Age was ending, and again briefly in the late 1920s, before the
stock market crash. Now it is back, and Mr Weill is prominent among the
new titans. His net worth exceeds $1 billion, not counting the $500
million he says he has already given away, in the open-handed style of
Andrew Carnegie and the other great philanthropists of the earlier age.

At 74, just over a year into retirement as Citigroup chairman, Mr Weill
sees in Carnegie’s life aspects of his own. Andrew Carnegie, an
impoverished Scottish immigrant, built a steel empire in Pittsburgh,
taking risks that others shunned, just as the demand for steel was
skyrocketing. He then gave away his fortune, reasoning that he was lucky
to have been in the right spot at the right moment and he owed the
community for his good luck – not in higher wages for his workers, but
in philanthropic distribution of his wealth.

Mr Weill’s beginnings were similarly inauspicious. A son of immigrants
from Poland, raised in Brooklyn, a so-so college student, he landed on
Wall Street in a low-level job in the 1950s. Harnessing entrepreneurial
energy, deftness as a deal maker and an appetite for risk, with a rising
stock market pulling him along, he built a financial empire that, in his
view, successfully broke through the stultifying constraints that flowed
from the New Deal. They were constraints not just on what business could
or could not do, but on every high earner’s take-home pay.

“I once thought how lucky the Carnegies and the Rockefellers were
because they made their money before there was an income tax”, Mr Weill
said, never believing in his younger days that deregulation and tax
cuts, starting in the late 1970s, would bring back many of the easier
conditions of the Gilded Age. “I felt that everything of any great
consequence was really all made in the past”, he said. “That turned out
not to be true and it is not true today”.

The Question of Talent

Other very wealthy men in the new Gilded Age talk of themselves as
having a flair for business not unlike Derek Jeter’s “unique talent” for
baseball, as Leo J Hindery Jr put it. “I think there are people,
including myself at certain times in my career”, Mr Hindery said, “who
because of their uniqueness warrant whatever the market will bear”.

He counts himself as a talented entrepreneur, having assembled from
scratch a cable television sports network, the YES Network. “Jeter makes
an unbelievable amount of money”, said Mr Hindery, who now manages a
private equity fund, “but you look at him and you say, ‘Wow, I cannot
find another ballplayer with that same set of skills’ “.

A handful of critics among the new elite, or close to it, are scornful
of such self-appraisal. “I don’t see a relationship between the extremes
of income now and the performance of the economy”, Paul A Volcker, a
former Federal Reserve Board chairman, said in an interview, challenging
the contentions of the very rich that they are, more than others, the
driving force of a robust economy.

The great fortunes today are largely a result of the long bull market in
stocks, Mr Volcker said. Without rising stock prices, stock options
would not have become a major source of riches for financiers and chief
executives. Stock prices rise for a lot of reasons, Mr Volcker said,
including ones that have nothing to do with the actions of these people.

“The market did not go up because businessmen got so much smarter”, he
said, adding that the 1950s and 1960s, which the new tycoons denigrate
as bureaucratic and uninspiring, “were very good economic times and no
one was making what they are making now”.

James D Sinegal, chief executive of Costco, the discount retailer,
echoes that sentiment. “Obscene salaries send the wrong message through
a company”, he said. “The message is that all brilliance emanates from
the top; that the worker on the floor of the store or the factory is
insignificant”.

A legendary chief executive from an earlier era is similarly critical.
He is Robert L Crandall, 71, who as president and then chairman and
chief executive, led American Airlines through the early years of
deregulation and pioneered the development of the hub-and-spoke system
for managing airline routes. He retired in 1997, never having made more
than $5 million a year, in the days before upper-end incomes really took
off.

He is speaking out now, he said, because he no longer has to worry that
his “radical views” might damage the reputation of American or that of
the companies he served until recently as a director. The nation’s
corporate chiefs would be living far less affluent lives, Mr Crandall
said, if fate had put them in, say, Uzbekistan instead of the United
States, “where they are the beneficiaries of a market system that
rewards a few people in extraordinary ways and leaves others behind”.

“The way our society equalizes incomes”, he argued, “is through much
higher taxes than we have today. There is no other way.”

The New Tycoons

The new Gilded Age has created only one fortune as large as those of the
Rockefellers, the Carnegies and the Vanderbilts – that of Bill Gates,
according to various compilations. His net worth, measured as a share of
the economy’s output, ranks him fifth among the thirty all-time
wealthiest American families, just ahead of Carnegie. Only one other
living billionaire makes the cut: Warren E. Buffett, in 16th place.

Individual fortunes nearly a century ago were so large that just thirty
tycoons – Rockefeller was by far the wealthiest – had accumulated net
worth equal to five percent of the national income. Their wealth flowed
mainly from the empires they built in manufacturing, railroads, oil,
coal, urban transit and mass retailing as the United States grew into
the world’s largest industrial economy.

Today the fortunes of the very wealthiest are spread more widely. In
addition to stock and stock options, low-interest credit has brought
wealth to more families – by, for example, facilitating the sale of
individual businesses for much greater sums than in the past. The
fortunes amassed in hedge funds and in private equity often stem from
deals involving huge amounts of easy credit and vast pools of capital
available for investment.

The high-tech boom and the Internet unfolded against this backdrop. The
rising stock market multiplied the wealth of Bill Gates as his software
became the industry standard. It did the same for numerous others who
financed start-ups on a shoestring and then went public at enormous gain.

Over a longer period, the market lifted the value of Mr Buffett’s
judicious investments and timely acquisitions, and he emerged as the
extraordinarily wealthy Sage of Omaha, in effect, a baron of the new
Gilded Age whose views are strikingly similar to those of Carnegie and
Mr Weill.

Like them, Mr Buffett, 78, sees himself as lucky, having had the good
fortune, as he put it, to have been born in America, white and male, and
“wired for asset allocation” just when all four really paid off. He
dwelt on his good fortune in a recent appearance at a fund-raiser for
Hillary Rodham Clinton, who is vying for Mr Buffett’s support of her
presidential candidacy.

“This is a significantly richer country than ten, twenty, thirty, forty,
fifty years ago”, he declared, backing his assertion with a favorite
statistic. The national income, divided by the population, is a very
abundant $45,000 per capita, he said, a number that reflects an affluent
nation but also obscures the lopsided income distribution intertwined
with the prosperity.

“Society should place an initial emphasis on abundance”, Mr Buffett
argued, but “then should continuously strive” to redistribute the
abundance more equitably.

No income tax existed in Carnegie’s day to do this, and neither Mr
Buffett nor Mr Weill push for sharply higher income tax rates now,
although Mr Buffett criticizes the present tax code as unfairly skewed
in his favor. Like Carnegie, philanthropy is their preference. “I want
to give away my money rather than have somebody take it away”, Mr Weill
said.

Mr Buffett is already well down that path. Most of his wealth is in the
stock of his company, Berkshire Hathaway, and he is transferring the
majority of that stock to the Bill and Melinda Gates Foundation so the
Gateses can “materially expand” their giving.

“In my will”, he has written, echoing Carnegie’s last wishes, “I’ve
stipulated that the proceeds from all Berkshire shares I still own at
death are to be used for philanthropic purposes”.

Revisionist History

The new tycoons describe a history that gives them a heroic role. The
American economy, they acknowledge, did grow more rapidly on average in
the decades immediately after World War Two than it is growing today.
Incomes rose faster than inflation for most Americans and the spread
between rich and poor was much less. But the United States was far and
away the dominant economy, and government played a strong supporting
role. In such a world, the new tycoons argue, business leaders needed
only to be good managers.

Then, with globalization, with America competing once again for first
place as strenuously as it had in the first Gilded Age, the need grew
for a different type of business leader – one more entrepreneurial, more
daring, more willing to take risks, more like the rough and tumble
tycoons of the first Gilded Age. Lew Frankfort, chairman and chief
executive of Coach, the manufacturer and retailer of trendy upscale
handbags, who was among the nation’s highest paid chief executives last
year, recaps the argument.

“The professional class that developed in business in the 1950s and
1960s”, he said, “was able as America grew at very steady rates to
become industry leaders and move their organizations forward in most
categories: steel, autos, housing, roads”.

That changed with the arrival of “the technological age”, in Mr
Frankfort’s view. Innovation became a requirement, in addition to good
management skills – and innovation has played a role in Coach’s
marketing success. “To be successful”, Mr Frankfort said, “you now
needed vision, lateral thinking, courage and an ability to see things,
not the way they were but how they might be”.

Mr Weill’s vision was to create a financial institution in the style of
those that flourished in the last Gilded Age. Although insurance is
gone, Citigroup still houses commercial and investment banking and stock
brokerage.

The Glass-Steagall Act of 1933 outlawed the mix, blaming conflicts of
interest inherent in such a combination for helping to bring on the 1929
crash and the Depression. The pen displayed in Mr Weill’s hallway is one
of those Mr Clinton used to revoke Glass-Steagall in 1999. He did so
partly to accommodate the newly formed Citigroup, whose heft was
necessary, Mr Weill said, if the United States was to be a powerhouse in
global financial markets.

“The whole world is moving to the American model of free enterprise and
capital markets”, Mr Weill said, arguing that Wall Street cannot be a
big player in China or India without giants like Citigroup. “Not having
American financial institutions that really are at the fulcrum of how
these countries are converting to a free-enterprise system”, he said,
“would really be a shame”.

Such talk alarms Arthur Levitt Jr, a former chairman of the Securities
and Exchange Commission, who started on Wall Street years ago as a
partner with Mr Weill in a stock brokerage firm. Mr Levitt has publicly
lamented the end of Glass-Steagall, but Mr Weill argues that its repeal
“created the opportunities to keep people still moving forward”.

Mr Levitt is skeptical. “I view a gilded age as an age in which warning
flags are flying and are seen by very few people”, he said, referring to
the potential for a Wall Street firm to fail or markets to crash in a
world of too much deregulation. “I think this is a time of great
prosperity and a time of great danger”.

It’s Not the Money, or Is It?

Not that money is the only goal. Mr Hindery, the cable television
entrepreneur, said he would have worked just as hard for a much smaller
payoff, and others among the very wealthy agreed. “I worked because I
loved what I was doing”, Mr Weill said, insisting that not until he
retired did “I have a chance to sit back and count up what was on the
table”. And Kenneth C Griffin, who received more than $1 billion last
year as chairman of a hedge fund, the Citadel Investment Group,
declared: “The money is a byproduct of a passionate endeavor”.

Mr Griffin, 38, argued that those who focus on the money – and there is
always a get-rich crowd – “soon discover that wealth is not a
particularly satisfying outcome”. His own team at Citadel, he said,
“loves the problems they work on and the challenges inherent to their
business”.

Mr Griffin maintained that he has created wealth not just for himself
but for many others. “We have helped to create real social value in the
US economy”, he said. “We have invested money in countless companies
over the years and they have helped countless people”.

The new tycoons oppose raising taxes on their fortunes. Unlike Mr
Crandall, neither Mr Weill nor Mr Griffin nor most of the dozen others
who were interviewed favor tax rates higher than they are today,
although a few would go along with a return to the levels of the Clinton
administration. The marginal tax on income then was 39.6 percent, and on
capital gains, twenty percent. That was still far below the seventy
percent and 39 percent in the late 1970s. Those top rates, in the Bush
years, are now 35 percent and fifteen percent, respectively.

“The income distribution has to stand”, Mr Griffin said, adding that by
trying to alter it with a more progressive income tax, “you end up in
problematic circumstances. In the current world, there will be people
who will move from one tax area to another. I am proud to be an
American. But if the tax became too high, as a matter of principle I
would not be working this hard.”

Creating Wealth

Some chief executives of publicly traded companies acknowledge that
their fortunes are indeed large – but that it reflects only a small
share of the corporate value created on their watch.

Mr Frankfort, the 61-year-old Coach chief, took home $44.4 million last
year. His net worth is in the high nine figures. Yet his pay and net
worth, he notes, are small compared with the gain to shareholders since
Coach went public six years ago, with Mr Frankfort at the helm. The
market capitalization, the value of all the shares, is nearly $18
billion, up from an initial $700 million.

“I don’t think it is unreasonable”, he said, “for the CEO of a company
to realize three to five percent of the wealth accumulation that
shareholders realize”.

That strikes Robert C Pozen as a reasonable standard. He made a name for
himself – and a fortune – overseeing the investment department at Fidelity.

Mr Weill makes a similar point. Escorting a visitor down his hall of
tributes, he lingers at framed charts with multicolored lines tracking
Citigroup’s stock price. Two of the lines compare the price in the five
years of Mr Weill’s active management with that of Mr Buffett’s
Berkshire Hathaway during the same period. Citigroup went up at six
times the pace of Berkshire.

“I think that the results our company had, which is where the great
majority of my wealth came from, justified what I got”, Mr Weill said.

New Technologies

Others among the very rich argue that their wealth helps them develop
new technologies that benefit society. Steve Perlman, a Silicon Valley
innovator, uses his fortune from breakthrough inventions to help finance
his next attempt at a new technology so far out, he says, that even
venture capitalists approach with caution. He and his partners,
co-founders of WebTV Networks, which developed a way to surf the Web
using a television set, sold that still profitable system to Microsoft
in 1997 for $503 million.

Mr Perlman’s share went into the next venture, he says, and the next.
One of his goals with his latest enterprise, a private company called
Rearden LLC, is to develop over several years a technology that will
make film animation seem like real-life movies. “There was no one who
would invest”, Mr Perlman said. So he used his own money.

In an earlier era, big corporations and government were the major
sources of money for cutting-edge research with an uncertain outcome.
Bell Labs in New Jersey was one of those research centers, and Mr
Perlman, now a 46-year-old computer engineer with 71 patents to his
name, said that, in an earlier era, he could easily have gone to Bell as
a salaried inventor.

In the 1950s, for example, he might have been on the team that built the
first transistor, a famous Bell Labs breakthrough. Instead, after
graduating from Columbia University, he went to Apple in Silicon Valley,
then to Microsoft and finally out on his own.

“I would have been happy as a clam to participate in the development of
the transistor”, Mr Perlman said. “The path I took was the path that was
necessary to do what I was doing”.

Carnegie’s Philanthropy

In contrast to many of his peers in corporate America, Mr Sinegal,
seventy, the Costco chief executive, argues that the nation’s business
leaders would exercise their “unique skills” just as vigorously for “$10
million instead of $200 million, if that were the standard”.

As a co-founder of Costco, which now has 132,000 employees, Mr Sinegal
still holds $150 million in company stock. He is certainly wealthy. But
he distinguishes between a founder’s wealth and the current practice of
paying a chief executive’s salary in stock options that balloon into
enormous amounts. His own salary as chief executive was $349,000 last
year, incredibly modest by current standards.

“I think that most of the people running companies today are motivated
and pay is a small portion of the motivation”, Mr Sinegal said. So why
so much pressure for ever higher pay?

“Because everyone else is getting it”, he said. “It is as simple as
that. If somehow a proclamation were made that CEOs could only make a
maximum of $300,000 a year, you would not have any shortage of very
qualified men and women seeking the jobs”.

Looking back, none of the nation’s legendary tycoons was more aware of
his good luck than Andrew Carnegie.

“Carnegie made it abundantly clear that the centerpiece of his gospel of
wealth philosophy was that individuals do not create wealth by
themselves”, said David Nasaw, a historian at City University of New
York and the author of Andrew Carnegie (Penguin Press, 2006). “The
creator of wealth in his view was the community, and individuals like
himself were trustees of that wealth”.

Repaying the community did not mean for Carnegie raising the wages of
his steelworkers. Quite the contrary, he sometimes cut wages and, in
doing so, presided over violent antiunion actions.

Carnegie did not concern himself with income inequality. His whole focus
was philanthropy. He favored a confiscatory estate tax for those who
failed to arrange to return, before their deaths, the fortunes the
community had made possible. And today dozens of libraries, cultural
centers, museums and foundations bear Carnegie’s name.

“Confiscatory” does not appear in Mr Weill’s public comments on the
estate tax, or in those of Mr Gates. They note that the estate tax, now
being phased out at the urging of President Bush, will return in full in
2010, unless Congress acts otherwise.

They publicly favor retaining an estate tax but focus their attention on
philanthropy.

Mr Weill ticks off a list of gifts that he and his wife, Joan, have
made. Some bear their names, and will for years to come. With each
bequest, one or the other joins the board. Appropriately, Carnegie Hall
has been a big beneficiary, and Mr Weill as chairman was honored at a
huge fund-raising party that Carnegie Hall gave on his seventieth birthday.

The Weills – matching what everyone else pledged – gave $30 million to
enhance the concert hall that Andrew Carnegie built in 1890 in pursuit
of returning his fortune to the community, establishing a standard that
today’s tycoons embrace.

“We have that in common”, Mr Weill said.

Amanda Cox contributed reporting.

Correction: July 19 2007

A front-page article on Sunday about a new era of wealthy and powerful
men misidentified the cable television network that the entrepreneur Leo
J Hindery Jr assembled and sold in 1999 for $200 million. It was
InterMedia Partners, not the YES Network. (He was a founder in 2001 of
the YES Network, which has not been sold.)

Correction: July 21 2007

A front-page article on Sunday about a new era of wealthy and powerful
men incorrectly described the management role of Robert C Pozen at
Fidelity Investments, and referred incorrectly to his pay. Mr Pozen
oversaw the entire investment department at Fidelity; he did not manage
any funds, including one that made a profit of $1 billion one year. The
manager of that fund, not Mr Pozen, was paid $15 million. Also, the
article misinterpreted comments by Mr Pozen about managing a company. Mr
Pozen was referring to the manager of the portfolio that made $1 billion
– not to himself – when he said, “In every organization there are a
relatively small number of really critical people”.

Copyright 2007 The New York Times Company

http://www.nytimes.com/2007/07/15/business/15gilded.html
Proud of a New Gilded Age

by Louis Uchitelle

The New York Times (July 15 2007)

The tributes to Sanford I Weill line the walls of the carpeted hallway
that leads to his skyscraper office, with its panoramic view of Central
Park. A dozen framed magazine covers, their colors as vivid as an Andy
Warhol painting, are the most arresting. Each heralds Mr Weill’s genius
in assembling Citigroup into the most powerful financial institution
since the House of Morgan a century ago.

His achievement required political clout, and that, too, is on display.
Soon after he formed Citigroup, Congress repealed a Depression-era law
that prohibited goliaths like the one Mr Weill had just put together
anyway, combining commercial and investment banking, insurance and stock
brokerage operations. A trophy from the victory – a pen that President
Bill Clinton used to sign the repeal – hangs, framed, near the magazine
covers.

These days, Mr Weill and many of the nation’s very wealthy chief
executives, entrepreneurs and financiers echo an earlier era – the
Gilded Age before World War One – when powerful enterprises, dominated
by men who grew immensely rich, ushered in the industrialization of the
United States. The new titans often see themselves as pillars of a
similarly prosperous and expansive age, one in which their successes and
their philanthropy have made government less important than it once was.

“People can look at the last 25 years and say this is an incredibly
unique period of time”, Mr Weill said. “We didn’t rely on somebody else
to build what we built, and we shouldn’t rely on somebody else to
provide all the services our society needs”.

Those earlier barons disappeared by the 1920s and, constrained by the
Depression and by the greater government oversight and high income tax
rates that followed, no one really took their place. Then, starting in
the late 1970s, as the constraints receded, new tycoons gradually
emerged, and now their concentrated wealth has made the early years of
the 21st century truly another Gilded Age.

Only twice before over the last century has five percent of the national
income gone to families in the upper one-one-hundredth of a percent of
the income distribution – currently, the almost 15,000 families with
incomes of $9.5 million or more a year, according to an analysis of tax
returns by the economists Emmanuel Saez at the University of California,
Berkeley and Thomas Piketty at the Paris School of Economics.

Such concentration at the very top occurred in 1915 and 1916, as the
Gilded Age was ending, and again briefly in the late 1920s, before the
stock market crash. Now it is back, and Mr Weill is prominent among the
new titans. His net worth exceeds $1 billion, not counting the $500
million he says he has already given away, in the open-handed style of
Andrew Carnegie and the other great philanthropists of the earlier age.

At 74, just over a year into retirement as Citigroup chairman, Mr Weill
sees in Carnegie’s life aspects of his own. Andrew Carnegie, an
impoverished Scottish immigrant, built a steel empire in Pittsburgh,
taking risks that others shunned, just as the demand for steel was
skyrocketing. He then gave away his fortune, reasoning that he was lucky
to have been in the right spot at the right moment and he owed the
community for his good luck – not in higher wages for his workers, but
in philanthropic distribution of his wealth.

Mr Weill’s beginnings were similarly inauspicious. A son of immigrants
from Poland, raised in Brooklyn, a so-so college student, he landed on
Wall Street in a low-level job in the 1950s. Harnessing entrepreneurial
energy, deftness as a deal maker and an appetite for risk, with a rising
stock market pulling him along, he built a financial empire that, in his
view, successfully broke through the stultifying constraints that flowed
from the New Deal. They were constraints not just on what business could
or could not do, but on every high earner’s take-home pay.

“I once thought how lucky the Carnegies and the Rockefellers were
because they made their money before there was an income tax”, Mr Weill
said, never believing in his younger days that deregulation and tax
cuts, starting in the late 1970s, would bring back many of the easier
conditions of the Gilded Age. “I felt that everything of any great
consequence was really all made in the past”, he said. “That turned out
not to be true and it is not true today”.

The Question of Talent

Other very wealthy men in the new Gilded Age talk of themselves as
having a flair for business not unlike Derek Jeter’s “unique talent” for
baseball, as Leo J Hindery Jr put it. “I think there are people,
including myself at certain times in my career”, Mr Hindery said, “who
because of their uniqueness warrant whatever the market will bear”.

He counts himself as a talented entrepreneur, having assembled from
scratch a cable television sports network, the YES Network. “Jeter makes
an unbelievable amount of money”, said Mr Hindery, who now manages a
private equity fund, “but you look at him and you say, ‘Wow, I cannot
find another ballplayer with that same set of skills’ “.

A handful of critics among the new elite, or close to it, are scornful
of such self-appraisal. “I don’t see a relationship between the extremes
of income now and the performance of the economy”, Paul A Volcker, a
former Federal Reserve Board chairman, said in an interview, challenging
the contentions of the very rich that they are, more than others, the
driving force of a robust economy.

The great fortunes today are largely a result of the long bull market in
stocks, Mr Volcker said. Without rising stock prices, stock options
would not have become a major source of riches for financiers and chief
executives. Stock prices rise for a lot of reasons, Mr Volcker said,
including ones that have nothing to do with the actions of these people.

“The market did not go up because businessmen got so much smarter”, he
said, adding that the 1950s and 1960s, which the new tycoons denigrate
as bureaucratic and uninspiring, “were very good economic times and no
one was making what they are making now”.

James D Sinegal, chief executive of Costco, the discount retailer,
echoes that sentiment. “Obscene salaries send the wrong message through
a company”, he said. “The message is that all brilliance emanates from
the top; that the worker on the floor of the store or the factory is
insignificant”.

A legendary chief executive from an earlier era is similarly critical.
He is Robert L Crandall, 71, who as president and then chairman and
chief executive, led American Airlines through the early years of
deregulation and pioneered the development of the hub-and-spoke system
for managing airline routes. He retired in 1997, never having made more
than $5 million a year, in the days before upper-end incomes really took
off.

He is speaking out now, he said, because he no longer has to worry that
his “radical views” might damage the reputation of American or that of
the companies he served until recently as a director. The nation’s
corporate chiefs would be living far less affluent lives, Mr Crandall
said, if fate had put them in, say, Uzbekistan instead of the United
States, “where they are the beneficiaries of a market system that
rewards a few people in extraordinary ways and leaves others behind”.

“The way our society equalizes incomes”, he argued, “is through much
higher taxes than we have today. There is no other way.”

The New Tycoons

The new Gilded Age has created only one fortune as large as those of the
Rockefellers, the Carnegies and the Vanderbilts – that of Bill Gates,
according to various compilations. His net worth, measured as a share of
the economy’s output, ranks him fifth among the thirty all-time
wealthiest American families, just ahead of Carnegie. Only one other
living billionaire makes the cut: Warren E. Buffett, in 16th place.

Individual fortunes nearly a century ago were so large that just thirty
tycoons – Rockefeller was by far the wealthiest – had accumulated net
worth equal to five percent of the national income. Their wealth flowed
mainly from the empires they built in manufacturing, railroads, oil,
coal, urban transit and mass retailing as the United States grew into
the world’s largest industrial economy.

Today the fortunes of the very wealthiest are spread more widely. In
addition to stock and stock options, low-interest credit has brought
wealth to more families – by, for example, facilitating the sale of
individual businesses for much greater sums than in the past. The
fortunes amassed in hedge funds and in private equity often stem from
deals involving huge amounts of easy credit and vast pools of capital
available for investment.

The high-tech boom and the Internet unfolded against this backdrop. The
rising stock market multiplied the wealth of Bill Gates as his software
became the industry standard. It did the same for numerous others who
financed start-ups on a shoestring and then went public at enormous gain.

Over a longer period, the market lifted the value of Mr Buffett’s
judicious investments and timely acquisitions, and he emerged as the
extraordinarily wealthy Sage of Omaha, in effect, a baron of the new
Gilded Age whose views are strikingly similar to those of Carnegie and
Mr Weill.

Like them, Mr Buffett, 78, sees himself as lucky, having had the good
fortune, as he put it, to have been born in America, white and male, and
“wired for asset allocation” just when all four really paid off. He
dwelt on his good fortune in a recent appearance at a fund-raiser for
Hillary Rodham Clinton, who is vying for Mr Buffett’s support of her
presidential candidacy.

“This is a significantly richer country than ten, twenty, thirty, forty,
fifty years ago”, he declared, backing his assertion with a favorite
statistic. The national income, divided by the population, is a very
abundant $45,000 per capita, he said, a number that reflects an affluent
nation but also obscures the lopsided income distribution intertwined
with the prosperity.

“Society should place an initial emphasis on abundance”, Mr Buffett
argued, but “then should continuously strive” to redistribute the
abundance more equitably.

No income tax existed in Carnegie’s day to do this, and neither Mr
Buffett nor Mr Weill push for sharply higher income tax rates now,
although Mr Buffett criticizes the present tax code as unfairly skewed
in his favor. Like Carnegie, philanthropy is their preference. “I want
to give away my money rather than have somebody take it away”, Mr Weill
said.

Mr Buffett is already well down that path. Most of his wealth is in the
stock of his company, Berkshire Hathaway, and he is transferring the
majority of that stock to the Bill and Melinda Gates Foundation so the
Gateses can “materially expand” their giving.

“In my will”, he has written, echoing Carnegie’s last wishes, “I’ve
stipulated that the proceeds from all Berkshire shares I still own at
death are to be used for philanthropic purposes”.

Revisionist History

The new tycoons describe a history that gives them a heroic role. The
American economy, they acknowledge, did grow more rapidly on average in
the decades immediately after World War Two than it is growing today.
Incomes rose faster than inflation for most Americans and the spread
between rich and poor was much less. But the United States was far and
away the dominant economy, and government played a strong supporting
role. In such a world, the new tycoons argue, business leaders needed
only to be good managers.

Then, with globalization, with America competing once again for first
place as strenuously as it had in the first Gilded Age, the need grew
for a different type of business leader – one more entrepreneurial, more
daring, more willing to take risks, more like the rough and tumble
tycoons of the first Gilded Age. Lew Frankfort, chairman and chief
executive of Coach, the manufacturer and retailer of trendy upscale
handbags, who was among the nation’s highest paid chief executives last
year, recaps the argument.

“The professional class that developed in business in the 1950s and
1960s”, he said, “was able as America grew at very steady rates to
become industry leaders and move their organizations forward in most
categories: steel, autos, housing, roads”.

That changed with the arrival of “the technological age”, in Mr
Frankfort’s view. Innovation became a requirement, in addition to good
management skills – and innovation has played a role in Coach’s
marketing success. “To be successful”, Mr Frankfort said, “you now
needed vision, lateral thinking, courage and an ability to see things,
not the way they were but how they might be”.

Mr Weill’s vision was to create a financial institution in the style of
those that flourished in the last Gilded Age. Although insurance is
gone, Citigroup still houses commercial and investment banking and stock
brokerage.

The Glass-Steagall Act of 1933 outlawed the mix, blaming conflicts of
interest inherent in such a combination for helping to bring on the 1929
crash and the Depression. The pen displayed in Mr Weill’s hallway is one
of those Mr Clinton used to revoke Glass-Steagall in 1999. He did so
partly to accommodate the newly formed Citigroup, whose heft was
necessary, Mr Weill said, if the United States was to be a powerhouse in
global financial markets.

“The whole world is moving to the American model of free enterprise and
capital markets”, Mr Weill said, arguing that Wall Street cannot be a
big player in China or India without giants like Citigroup. “Not having
American financial institutions that really are at the fulcrum of how
these countries are converting to a free-enterprise system”, he said,
“would really be a shame”.

Such talk alarms Arthur Levitt Jr, a former chairman of the Securities
and Exchange Commission, who started on Wall Street years ago as a
partner with Mr Weill in a stock brokerage firm. Mr Levitt has publicly
lamented the end of Glass-Steagall, but Mr Weill argues that its repeal
“created the opportunities to keep people still moving forward”.

Mr Levitt is skeptical. “I view a gilded age as an age in which warning
flags are flying and are seen by very few people”, he said, referring to
the potential for a Wall Street firm to fail or markets to crash in a
world of too much deregulation. “I think this is a time of great
prosperity and a time of great danger”.

It’s Not the Money, or Is It?

Not that money is the only goal. Mr Hindery, the cable television
entrepreneur, said he would have worked just as hard for a much smaller
payoff, and others among the very wealthy agreed. “I worked because I
loved what I was doing”, Mr Weill said, insisting that not until he
retired did “I have a chance to sit back and count up what was on the
table”. And Kenneth C Griffin, who received more than $1 billion last
year as chairman of a hedge fund, the Citadel Investment Group,
declared: “The money is a byproduct of a passionate endeavor”.

Mr Griffin, 38, argued that those who focus on the money – and there is
always a get-rich crowd – “soon discover that wealth is not a
particularly satisfying outcome”. His own team at Citadel, he said,
“loves the problems they work on and the challenges inherent to their
business”.

Mr Griffin maintained that he has created wealth not just for himself
but for many others. “We have helped to create real social value in the
US economy”, he said. “We have invested money in countless companies
over the years and they have helped countless people”.

The new tycoons oppose raising taxes on their fortunes. Unlike Mr
Crandall, neither Mr Weill nor Mr Griffin nor most of the dozen others
who were interviewed favor tax rates higher than they are today,
although a few would go along with a return to the levels of the Clinton
administration. The marginal tax on income then was 39.6 percent, and on
capital gains, twenty percent. That was still far below the seventy
percent and 39 percent in the late 1970s. Those top rates, in the Bush
years, are now 35 percent and fifteen percent, respectively.

“The income distribution has to stand”, Mr Griffin said, adding that by
trying to alter it with a more progressive income tax, “you end up in
problematic circumstances. In the current world, there will be people
who will move from one tax area to another. I am proud to be an
American. But if the tax became too high, as a matter of principle I
would not be working this hard.”

Creating Wealth

Some chief executives of publicly traded companies acknowledge that
their fortunes are indeed large – but that it reflects only a small
share of the corporate value created on their watch.

Mr Frankfort, the 61-year-old Coach chief, took home $44.4 million last
year. His net worth is in the high nine figures. Yet his pay and net
worth, he notes, are small compared with the gain to shareholders since
Coach went public six years ago, with Mr Frankfort at the helm. The
market capitalization, the value of all the shares, is nearly $18
billion, up from an initial $700 million.

“I don’t think it is unreasonable”, he said, “for the CEO of a company
to realize three to five percent of the wealth accumulation that
shareholders realize”.

That strikes Robert C Pozen as a reasonable standard. He made a name for
himself – and a fortune – overseeing the investment department at Fidelity.

Mr Weill makes a similar point. Escorting a visitor down his hall of
tributes, he lingers at framed charts with multicolored lines tracking
Citigroup’s stock price. Two of the lines compare the price in the five
years of Mr Weill’s active management with that of Mr Buffett’s
Berkshire Hathaway during the same period. Citigroup went up at six
times the pace of Berkshire.

“I think that the results our company had, which is where the great
majority of my wealth came from, justified what I got”, Mr Weill said.

New Technologies

Others among the very rich argue that their wealth helps them develop
new technologies that benefit society. Steve Perlman, a Silicon Valley
innovator, uses his fortune from breakthrough inventions to help finance
his next attempt at a new technology so far out, he says, that even
venture capitalists approach with caution. He and his partners,
co-founders of WebTV Networks, which developed a way to surf the Web
using a television set, sold that still profitable system to Microsoft
in 1997 for $503 million.

Mr Perlman’s share went into the next venture, he says, and the next.
One of his goals with his latest enterprise, a private company called
Rearden LLC, is to develop over several years a technology that will
make film animation seem like real-life movies. “There was no one who
would invest”, Mr Perlman said. So he used his own money.

In an earlier era, big corporations and government were the major
sources of money for cutting-edge research with an uncertain outcome.
Bell Labs in New Jersey was one of those research centers, and Mr
Perlman, now a 46-year-old computer engineer with 71 patents to his
name, said that, in an earlier era, he could easily have gone to Bell as
a salaried inventor.

In the 1950s, for example, he might have been on the team that built the
first transistor, a famous Bell Labs breakthrough. Instead, after
graduating from Columbia University, he went to Apple in Silicon Valley,
then to Microsoft and finally out on his own.

“I would have been happy as a clam to participate in the development of
the transistor”, Mr Perlman said. “The path I took was the path that was
necessary to do what I was doing”.

Carnegie’s Philanthropy

In contrast to many of his peers in corporate America, Mr Sinegal,
seventy, the Costco chief executive, argues that the nation’s business
leaders would exercise their “unique skills” just as vigorously for “$10
million instead of $200 million, if that were the standard”.

As a co-founder of Costco, which now has 132,000 employees, Mr Sinegal
still holds $150 million in company stock. He is certainly wealthy. But
he distinguishes between a founder’s wealth and the current practice of
paying a chief executive’s salary in stock options that balloon into
enormous amounts. His own salary as chief executive was $349,000 last
year, incredibly modest by current standards.

“I think that most of the people running companies today are motivated
and pay is a small portion of the motivation”, Mr Sinegal said. So why
so much pressure for ever higher pay?

“Because everyone else is getting it”, he said. “It is as simple as
that. If somehow a proclamation were made that CEOs could only make a
maximum of $300,000 a year, you would not have any shortage of very
qualified men and women seeking the jobs”.

Looking back, none of the nation’s legendary tycoons was more aware of
his good luck than Andrew Carnegie.

“Carnegie made it abundantly clear that the centerpiece of his gospel of
wealth philosophy was that individuals do not create wealth by
themselves”, said David Nasaw, a historian at City University of New
York and the author of Andrew Carnegie (Penguin Press, 2006). “The
creator of wealth in his view was the community, and individuals like
himself were trustees of that wealth”.

Repaying the community did not mean for Carnegie raising the wages of
his steelworkers. Quite the contrary, he sometimes cut wages and, in
doing so, presided over violent antiunion actions.

Carnegie did not concern himself with income inequality. His whole focus
was philanthropy. He favored a confiscatory estate tax for those who
failed to arrange to return, before their deaths, the fortunes the
community had made possible. And today dozens of libraries, cultural
centers, museums and foundations bear Carnegie’s name.

“Confiscatory” does not appear in Mr Weill’s public comments on the
estate tax, or in those of Mr Gates. They note that the estate tax, now
being phased out at the urging of President Bush, will return in full in
2010, unless Congress acts otherwise.

They publicly favor retaining an estate tax but focus their attention on
philanthropy.

Mr Weill ticks off a list of gifts that he and his wife, Joan, have
made. Some bear their names, and will for years to come. With each
bequest, one or the other joins the board. Appropriately, Carnegie Hall
has been a big beneficiary, and Mr Weill as chairman was honored at a
huge fund-raising party that Carnegie Hall gave on his seventieth birthday.

The Weills – matching what everyone else pledged – gave $30 million to
enhance the concert hall that Andrew Carnegie built in 1890 in pursuit
of returning his fortune to the community, establishing a standard that
today’s tycoons embrace.

“We have that in common”, Mr Weill said.

Amanda Cox contributed reporting.

Correction: July 19 2007

A front-page article on Sunday about a new era of wealthy and powerful
men misidentified the cable television network that the entrepreneur Leo
J Hindery Jr assembled and sold in 1999 for $200 million. It was
InterMedia Partners, not the YES Network. (He was a founder in 2001 of
the YES Network, which has not been sold.)

Correction: July 21 2007

A front-page article on Sunday about a new era of wealthy and powerful
men incorrectly described the management role of Robert C Pozen at
Fidelity Investments, and referred incorrectly to his pay. Mr Pozen
oversaw the entire investment department at Fidelity; he did not manage
any funds, including one that made a profit of $1 billion one year. The
manager of that fund, not Mr Pozen, was paid $15 million. Also, the
article misinterpreted comments by Mr Pozen about managing a company. Mr
Pozen was referring to the manager of the portfolio that made $1 billion
– not to himself – when he said, “In every organization there are a
relatively small number of really critical people”.

Copyright 2007 The New York Times Company

http://www.nytimes.com/2007/07/15/business/15gilded.html

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