According to Henrietta, the sister was scared because she knew so many other unemployed Nepalese they could hire. “I can’t make those women understand that if they called her back when they could hire someone new, that’s the time to ask for a raise.”
“You should manage both sisters,” I said.
In fact, Henrietta had already offered to call the Brooklyn brownstoners. Her plan was to say that she was interested in hiring their housekeeper herself and to ask if they could possibly work out some time sharing. By Henrietta’s theory of supply and demand, interest from another employer could only help. “But they’re so scared they won’t even give me the number.”
I suggested that the sister might be illegal.
“So what? They need her!” Henrietta argued.
I started to explain about twenty-four million unemployed, forty years of downward pressure on wages. “The problem is …”
“The problem is that these women are idiots!” Henrietta said. Yet she’ll go on hustling up better-paying jobs for them, I know. It was good to see her back in form.
“You Have to Put It Somewhere”
Henrietta, Prudence, and Brenda aren’t the only individual investors who saw their portfolios reinflate. Merrill Lynch issues an annual World Wealth Report, which tracks high-net-worth individuals (HNWIs) and ultra-high-net-worth individuals (UHNWIs). The highs are worth over $1 million and the ultra-highs over $30 million. That doesn’t include their houses, boats, art collections, jewels, and so on. It only refers to the portfolio wealth that Merrill might invest for them if it got their accounts to manage.
At the start of the Great Recession, “world wealth” took a dive. But in the two years following the crash, the numbers of highs and ultra-highs around the globe rebounded—most dramatically in the United States. The main factor in that comeback was the rise in stock prices. When stock prices went down, many individual portfolios dipped under those $1 million and $30 million marks. But as investors regained their “risk appetite” (to use a financial-page phrase) and got back into the stock market, share prices rose, and bottom lines floated back up.
But why in the world did investors bid stock prices back up when sales at the companies whose shares they were buying were still down? Our three retirees may be relatively small and unsophisticated investors, but they answered that question in exactly the same way as their ultra-high-net-worth brethren.
When Pru told me that her portfolio had more or less recovered, I assumed she would then transfer some money out of the stock market and into the safer, interest-yielding investments that her son thought appropriate.
“We should have done that before the crash,” Prudence said,
“but now no one is offering much interest. And my son says that the investments themselves do look very good, so …” Prudence trailed off, suggesting her helplessness to do anything but what her family brokers suggested. “You have to keep your money somewhere,” she apologized.
Brenda had dumped all of her stock market mutual funds after the crash. “You can’t find out what fund managers are buying, so you just have to trust them—which I don’t anymore.” Now she was buying gold whenever it went down.
“My other strategy is high-dividend stocks. This is what I do. When I get the dividend, it goes into a cash account. I let the cash build up, and when the market dips, I buy more stock. I spend several hours each day doing my research, and when there’s a scare like a few weeks ago, I’m ready with my list—the down triggers my buy order.”
“Weren’t you afraid?” The scare she referred to was so volatile that it made seasoned traders nauseous.
“The economy is in the shits,” Brenda answered, “but banks and mortgage companies are loaded with cash, and they pass it back. Some regular corporations are good buys too if you look at their price-earnings ratios. People are selling because of political crises and debt fears. But frankly, as long as companies keep paying me those 15 percent dividends, I don’t care if their stock drops to nothing.”
“Fifteen percent?!” I was shocked.
“I have one at 18 percent. Most are around 9 percent, but it all adds up.”
So Brenda was taking dividends from companies that couldn’t find profitable uses for money in their own line of business and using the money to buy more stocks in those companies.
“Do you think it’s right to be in the stock market?” I asked.
“The current run-up of the market is a bubble,” Brenda answered. “It’s based on people having billions of dollars that they need to invest, not on the prospects of the companies they’re investing in. But I still see opportunities, so I’m in the market.”
“Well, if your money is inflating another bubble, then, I mean …” I didn’t intend to attack my friend’s ethics, but I finally managed to say, “I’m not asking is it safe to be in the stock market; I’m asking do you think it’s right?”
“Do I think it’s productive? No. Am I going to take advantage of it? Yes.”
Much of Henrietta’s money also stayed in equities. When her portfolio was down by only a few thousand dollars, I decided it was my turn to give her advice. She’s almost ninety and has what she thinks she needs for home care, so I suggested that she preserve her principal even if she earned no return.
“Is it such a sin to keep your money in an insured bank account?!” I asked, adopting her own Socratic style of argument.
“Do you know what a bank pays?” she countered. “Under 1 percent. My broker”—she now knows a name there—“says it doesn’t even keep pace with inflation.”
After a particularly scary stock market week, I returned to the argument. “What if it drops again just when you need the money?” Having made a decision, Henrietta didn’t want to endure more doubt. She cut me off with the ultimate financial wisdom: “You have to put it somewhere.”
“If We Had a Market on Mars …”
Investors with a lot more savvy and a lot more money than my three ladies were saying the same thing.
In 2011, Terry Gross of the NPR show Fresh Air interviewed the renowned hedge fund “quant,” or quantitative analyst, Ed Thorp. She introduced him as the mathematician who basically invented card counting at blackjack tables and went on to develop the financial equivalents—mathematical formulas for trading mortgage derivatives and credit-default swaps.
“Things that were basically behind the market collapse of 2008,” Terry said. Her guest didn’t demur.
Thorp told Terry that the hedge fund industry had gone back to its risky practices once it seemed that there wasn’t going to be significant derivatives regulations anytime soon.
With her characteristic directness Terry asked, “So how’s that affecting how much you want to have invested in the market?”
“Well, it’s tough,” Thorp answered. “The question is, you know, where do you go? There’s—we only have one world we live in. If we had a market on Mars, you might think about going there. But …”
So a man who thinks in billions is also saying, “You have to put it somewhere.”
That “have to” is even more imperative for a financial institution than an individual investor. Whoever pays interest has to earn interest. A bank can’t keep your money in the bank. Even during a recession it has to put your money somewhere.
Goldman Sachs has emerged from past recessions in good shape because of its greatly admired acumen at buying up distressed assets, including bad debts, excess shopping malls, discounted mortgages left after a bust. (Buying Litton was supposed to aid with that strategy.)
But according to a front-page story in the Financial Times on February 6, 2011, that was hard in this recovery even for Goldman:
Goldman Sachs’ attempt to spend some of its $170bn excess capital on distressed assets … is being hampered by a prolonged rebound in risk appetite that has lifted prices on many would-be bargains …
The rapid return of risk appetite … has left a number of [other] distressed assets funds bereft of opportu
nities.
What, then, would Goldman Sachs do with its “excess capital”? When its chief financial officer was asked that question, he said, “Our number one choice will be to find opportunities to use the capital profitably, and if not we would probably give some more back [to shareholders].”
Companies give money back to shareholders through dividends or stock buybacks. At that point it becomes the problem of people like Pru, Brenda, Henrietta, and much larger investors to figure out what to do with it.
In theory, these big returns should mean that my three investors have bigger heaps of capital to finance businesses that will produce goods and services while generating jobs and more profit to reinvest in more production. That’s what capital not only is supposed to do but has actually done at certain times in history. I know the three women would like to use their wealth to create new business and employment. Why is it so hard for them to do that now?
Before I answer that question and think about how we’ll emerge from the Great Recession, I’d like to introduce an investor who lost all his money and hasn’t gotten a penny back yet. Being penniless was so new to him that he has some refreshing takes on the subject.
Chapter Thirteen
RICH OR POOR, IT’S GOOD TO HAVE MONEY
“Completely Vulnerable”
Richard Bey (his real name) is a longtime radio and TV talk show host who invented some of the best and worst features of the genre. (You can see him playing himself, the archetypal TV host, in the Sacha Baron Cohen movie Brüno.)
Over the years Bey had earned as much as $1 million a year in broadcasting. But when the recession started, he had quit an early morning show to concentrate on the child in his life, the eleven-year-old son of a former girlfriend. “He was experiencing serious issues in school, and his home support system couldn’t deal with them at the time.”
Money would be no immediate concern since Richard had sold his river-view apartment—“same building as Al Pacino,” he volunteered—in 2005 at the height of the market. He added this windfall to the rest of his savings, which he kept in a fund run by a boyhood friend from Far Rockaway High School. As it happens, Bernie Madoff went to school there too.
But Richard’s friend Bill is no Madoff. When the fund crashed, Bill wound up in the hospital with Richard consoling him. Another of the fund’s executives tried to commit suicide on the Long Island Rail Road tracks but apparently changed his mind and wound up losing only an arm and a lung. Richard feels certain that his friend Bill never actually stole from his investors, but the fund’s finances are still murky.
What’s definitely known is that a couple of real estate deals went bad and a German bank was defrauded. Then one bank after another froze all the money left in the fund’s accounts.
Investors learned by e-mail, from a new set of managers, that all disbursements were canceled (Bey had been drawing out $8,000 a month while he wasn’t working) and all funds were frozen till things could be straightened out.
When he learned that he couldn’t get at his money, Richard went to the nearest ATM and found, he said, “I had $3.29 in my bank account. I had $200 in my wallet. Without a job, without income, that was all the money I had in the world. And I had just had $8,000 of oral surgery that I put on my credit card.
“At that moment I looked at the other people walking down the street. ‘They can get where they need to go. But I can’t buy a MetroCard. I can’t put gas in the car.’ I was completely vulnerable.” Everyone without enough money to live for the rest of his life is vulnerable that way. But Richard was the first person who said this to me.
“Fortunately, I have friends. One old friend from Yale Drama School is an Obie Award–winning actress, but now she only earns $27,000 a year as a proofreader. She offered me a $1,000 loan.
“I said, ‘I can’t do that.’
“She said, ‘Richard, all your life you’ve done things for your friends. You take us to dinner; you paid for Broadway shows.’ But that’s how I enjoy myself, going to dinner with my actor friends and talking about shows we just saw. I did that for myself. Besides, I hate to owe credit cards; I hate to owe friends. It’s not in my nature to borrow.”
Nevertheless, Richard took her $1,000. “We all thought the money would unfreeze in a few weeks,” he explained. But because he disliked borrowing, he also raised emergency cash by selling things.
“Everything I owned became an asset—my mother’s jewelry, my father’s coins. I had a comic book collection of Spider-Man and Iron Man. I’d saved them for forty years, but with only a few dollars left in my wallet, they became disposable. I tried to evaluate them on the Internet, but were they in ‘good’ condition or ‘fair’ condition? Would a creased cover page knock $100 off the price? As I looked at each cover, I swear I remembered the moment when I slipped it off the rack and paid twelve cents at Milty’s Candy Store.
“Eventually, I sold twenty comic books for $300 at Midtown Comics. I felt like a fool selling them that cheaply, but my wallet was once again stuffed with twenties. Later I sold the lithograph I had on my wall for fifteen years. I got $4,000. I paid $5,000. But that wasn’t as painful as the comic books. After that I sold my mother’s jewelry, but I still had the Liberty quarters and Indian head nickels my father had left us.”
“Richard,” I couldn’t help asking, “didn’t you ever think of the risk of having all your money in one fund?”
“Yes, Barbara, I did think about it,” he said in answer to my annoying question. “In fact, I can’t tell you how many times I thought of taking a chunk out of the fund for the security. But Bill made it so convenient for his investors.”
Richard also wanted me to understand why it took him a while to grasp his new situation and make long-term changes.
“My rent was $4,600 a month. I had a beautiful two-bedroom. One room was fixed up for the child. That was essential. So I paid the rent by borrowing against credit cards. It didn’t seem like such a bad idea, because I was expecting to pay back the loans in full as soon as the money was unfrozen. At that point they said June, so no more than two months.
“Besides, I figured that something would turn up. In my life it always has whenever I needed it. And it did. A friend of mine knew someone who was starting an Internet television talk network. Al Sharpton was going to be on it, Bob Grant, Curtis Sliwa. Most of the hosts were either working for free or simulcasting current radio shows. My friend suggested that with my experience and notoriety I could ask for a small salary, and I did. Six hundred dollars a week. Half the rent,” he said, shrugging. “But I was working.”
Many performers would be too proud or too stunned to make a quick compromise like that. But Richard, who’d had nationally syndicated TV shows, didn’t worry who thought of him as a has-been, or how he’d explain it to himself. He jumped into the Internet show with his full heart.
“For the rest of the summer”—at this point the money would unfreeze in September—“I paid my debts as near the penalty dates as possible. Every Friday, I deposited my paycheck, calculated when it would clear, figured when each credit card payment had to be deducted, and double-checked my balance at the ATM. One mistake and I would face a default interest rate of 29.5 percent. I was walking on financial thin ice and finally …
“One Friday, I deposited my check inside, then walked out to the ATM, and the screen said negative balance. An American Express card payment of $800 was about to be withdrawn the next day. Chase must have made a mistake. I raced back into the bank to find a manager.
“When he looked at his screen, he saw that an employment check from five weeks earlier had just been reclassified as bounced. Well, five weeks before that TD Bank merged with somebody or other, and there was some computer problem during the switchover, and they stopped all the checks issued that day. Now, five weeks later, they were retrieving that stopped check from my funds. ‘How can you take my money back? I thought once a check cleared, it cleared.’
“The manager explained that there were new rules
, that banks had to clear checks faster now, that it was just blips, not actual money they’d move to me. But those ‘just blips’ left me an actual $800 short for American Express the next day.
“It was 2:00 p.m., and Chase would close at 6:00. I had less than four hours to come up with $800, and it had to be cash!
“I called that same friend from Yale. She worked from home, so I could count on her to be available. She said she would meet me at the bank at 3:00 p.m. and withdraw the money from her ATM. I jumped on the subway and met her on the Upper West Side. But it turned out her ATM limit was $500. I was three hundred short.
“I still had my father’s coin collection. I ran home, grabbed it, and headed over to Stack’s on West Fifty-seventh Street. The owner lit up when he saw me. ‘Oh, I used to watch your show all the time. You gave me a lot of good laughs.’ I explained my situation as he looked over the coins. He told me that in consideration of all the viewing enjoyment I had given him over the years, he could give me $200 for the lot!
“It was 5:00 p.m. now, and I was still $100 short. Chase banks are as ubiquitous as Starbucks, so I had a lot of options where to deposit the money. But to get more money, do I go uptown? Do I go downtown? I only had to come up with another $100. Then I remembered …
“In 1992, I shot a documentary in Turkey and bought a chain in a gold factory. I had never taken it off, not because I love gold, but because it reminded me of a wonderful experience in my life. There was a jewelry store on the Upper West Side that had given me a good price on a necklace of my mother’s. That’s where I unclasped the chain for the first and last time in years and laid it on the scale. The offer was $145. Forty-five more than I needed. Maybe I could take the kid to a movie that weekend. I passed the cash over to a Chase teller at exactly 5:45. I’d made it!”
“Just in the nick of time!” I cheered.
“But I was living with a daily fear that I never want to feel again.”
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