Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else

by Chrystia Freeland

  Corporate PR would today cite that line as a cautionary illustration of why bland jargon is the most prudent idiom for business leaders. Prince’s vivid phrase not only made it onto the front page the next day, it has become one of the catchphrases of the crisis: a Google search on it more than two years later turned up nearly one and a half million references. One of the days on which it was evoked most energetically was November 4, 2007, when Prince resigned and his dancing comment became shorthand for Citigroup’s larger failure to anticipate the crisis under his leadership.

  Prince deserved his pink slip: during his tenure in the corner office, Citi increased its exposure to the subprime market, grew its credit default swap business (including the number of swaps it kept on its own books), and stashed billions of dollars in risky off-balance-sheet vehicles. But he wasn’t wrong about dancing to the music. When the music stops, the loser is the one left without a chair, but the rules of modern capitalism don’t allow the big players to sit down prematurely, either.

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  Peter Weinberg is a Wall Street patrician—his paternal grandfather was a seminal early partner of Goldman Sachs and his mother is a Houghton, the great WASP family that founded Corning, Inc. Weinberg sat out the last years of this bubble thanks to what he admits to be lucky circumstance. He’d teamed up with legendary Wall Street deal maker Joe Perella in 2006 to found a boutique advisory firm, and they spent the next twenty-four months focused on raising money and assembling a team. But Weinberg, a seasoned investment banker who rose to run Goldman’s London office before striking out on his own, believes it is almost impossible for the CEOs he has spent a career advising to stop their ears to the boom-time music.

  “I’ve been through probably six crises now in my thirty years in the business, and it’s the pendulum of capitalism,” Weinberg told me in June 2009, sitting in a conference room in his firm’s modernist offices in the GM Building on Fifth Avenue. “It’s very, very hard to lean against the wind in a bubble. Very, very hard. And very few people can really do it. . . . What if one of the heads of the large Wall Street firms stood up and said, ‘You know what? We’re going to cut down our leverage from 30 to 1 to 15 to 1. And we’re not going to participate in a lot of the opportunities in the market.’ I’m not sure that chief executive would have kept his job. . . . It is very hard to separate yourself from the herd as a leader of a large financial institution.”

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  This is an even more familiar story in the entertainment, media, and technology businesses. Consider the music industry. Venerable Warner Music, battered by the Web, is today owned by Len Blavatnik, another Russian veteran of that country’s economic upheaval who, like Milner, hopes his skills can be applied to disruptive technological change in the West. And in the technology industry, the cycles of transformative change are so fast that even successful revolutionaries can swiftly be outflanked.

  That has already happened to Microsoft. The big question today is whether it will happen to Google. Like Sull’s managers—who see the coming threat, but are able to respond to it only by doing more of the same—the Googlers understand what is happening. In 2010, Urs Hölzle, one of Google’s first ten employees and the company’s first engineering vice president, wrote a memo that company insiders called the Urs Quake. In it he warned that Google was falling behind Facebook in social networking and needed to catch up immediately.

  Google’s chiefs listened and they launched an effort to do so, called Emerald Sea, after an 1878 painting by Albert Bierstadt. The painting, which the Googlers working on the project had re-created and displayed in front of the elevators near their desks, depicts a wrecked ship being buffeted by an enormous wave. Google, they believed, was the ship, and the social networking revolution was the wave: Google would either learn to ride it—or drown. Even for Google, a company whose insurgent founders are still in their thirties, responding to revolution is hard.

  One reason Google may have a chance is that the business leaders of Silicon Valley, like those in the emerging markets, made their first fortunes by responding to revolution. For them, constant change is the status quo. Indeed, responding to revolution is so central to Silicon Valley culture that the most successful entrepreneurs have developed a culture of continuous revolution.

  Caroline O’Connor and Perry Klebahn, at Stanford’s design school, call this the ability to “pivot.” Groupon, which began as a platform for collective political action; PayPal, which started as a way of “beaming” money between mobile phones, and then pivoted to become eBay’s banking network; and Twitter, which was a later iteration of a failed podcasting start-up, are all, according to O’Connor and Klebahn, examples of successful pivots.

  Another illustration they cite is WorkerExpress. Joe Mellin and Pablo Fuentes launched that company as a way for home owners to schedule hourly construction workers using text messaging. When the idea didn’t take off, Mellin and Fuentes studied the research they had done before starting WorkerExpress and realized it would be smarter to target their efforts at large contractors who needed temporary help on job sites. Their pivot worked and even in the teeth of the post-2008 construction bust they built a successful Web-platform company.

  One of the examples of a pivot most cited by technorati is the story of Flickr, the photo hosting and sharing site. Flickr’s genesis was in 2002, when its founders, Caterina Fake and Stewart Butterfield, created a multiplayer online game called Game Neverending. Fake and Butterfield could see two revolutions happening in the technology world—the rise of social media and the rise of games. They hoped to cash in by putting them together. But Game Neverending failed and Ludicorp, the Vancouver company Fake and Butterfield established to create it, was running out of money. They had noticed, though, that one of the game’s features, a photo- sharing add-on they’d developed in just eight weeks, was popular. So Fake and Butterfield tried again, this time using the photo-sharing technology to create a stand-alone Web site. It worked. Flickr was launched in February 2004. In March 2005, just thirteen months later, Yahoo! acquired it for a reported $35 million. At the beginning of 2012, the site reported that it was hosting more than seven billion images, about one for each person on the planet.

  The pivot is about recognizing when you are on the wrong track and changing course—and that, too, is central to Soros’s ability to respond to revolution.

  Chanos, who leased office space from Soros’s Quantum Fund in midtown New York between 1988 and 1991, agrees. “One thing that I’ve both wrestled with and admired that Soros conquered many years ago is the ability to go from long to short, the ability to turn on a dime when confronted with the evidence. Emotionally that is really hard.”

  “My conceptual framework, which basically emphasizes the importance of misconceptions, makes me extremely critical of my own decisions,” Soros told me. “I reexamine them all the time and recognize when I am on the wrong track. . . . I know that I’m bound to be wrong and therefore am more likely to correct my mistakes.”

  “It’s an almost aggressive pessimism about his own ideas, that he is going to be the first person to find out what’s wrong with his theory, rather than what’s right with his theory,” his son Jonathan told me.

  Pivoting is so hard for traditional Western companies that Jennings predicts they will be overtaken by bolder, more agile emerging market champions. “The businesses and institutions underpinning the economies currently going through economic transformation will not only be catching up with the West, but eventually taking over leadership,” he said. “At that point, it will be their business models and institutions that may have to be reexported.”

  Already, the premium on responding to revolution has created tremendous upheaval in corporate America. A 2010 study by Deloitte, the tax and consulting firm, measures something it calls the “topple rate,” the speed at which big U.S. companies lose their leadership positions. Between 1965 and 2009, the topple rate more than doubled. Even in the C-suite, it turns out, life is more precarious than eve
r. “The group of winners is churning at an increasing and rapid rate,” the report found. “Nearly every advantage, once gained, is shown to be temporary.”

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  The winners of the entrepreneurial sweepstakes of the technology revolution like to think they are mostly smarter and harder working and more determined than everyone else. Tony Hsieh offered me a gentle version of this view. “I could start off anywhere in America with a hundred dollars and by the end of the year I would be a millionaire,” he said. “I really think I could. That is just how I am.”

  Some of that is surely true. But part of winning from moments of revolutionary change is the lucky combination of having the right skills, the right character, and the right position in society at the right time.

  Timing is equally important in the Silicon Valley gold rush. Consider Jonathan Kaplan, creator of the Flip video camera. Kaplan isn’t a scientist or an engineer. But from the time he graduated from college in 1990 he knew he wanted to be an entrepreneur; early on, he decided the technology industry and San Francisco were where his odds were the greatest. He spent a decade barely getting to first base, mostly with software start-ups that were good, but not great. Then, in 2005, a friend told him technology had advanced so much it was possible to make a video camera as small and easy to use as most regular cameras were at the time. From that powerful insight, the Flip camera was born. It was such a success that Cisco acquired the company for $590 million in 2009.

  The Cisco deal turned out to be as well timed as Kaplan’s original epiphany—two years later, video technology had advanced so much further that smartphones had become video cameras, and Cisco closed down Flip, taking a huge corporate write-down.

  Kaplan, a multimillionaire, had left his job at Cisco two months earlier. But that, Kaplan insisted, shouldn’t detract from the inspirational power of his initial ability to respond to revolution.

  “There are a lot of young entrepreneurs who look at Flip as a huge success, and they should continue to,” Kaplan told the New York Times. “The demise of Flip has nothing to do with how great a product it is. Companies have to make decisions that sometimes people like you and I don’t always understand.”

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  Sheryl Sandberg, the world’s most successful female executive, is another example of the power of being in the right place at the right time. Sheryl is brilliant—she was one of Larry Summers’s smartest students—and one of the best operating executives around. But the skill that made her fortune is the ability to understand where the action is. She made the perfect, unconventional choice—twice.

  The first was in 2001. She had just finished a stint as Larry Summers’s chief of staff at the U.S. Treasury—a high-profile job that gave her, with her MBA and a résumé that already included McKinsey and the World Bank—a plethora of options in corporate America, particularly Wall Street. Instead, Sandberg chose to work for Google, a company the economists and politicos in her Washington universe had barely heard of. In 2008, she made another inspired, iconoclastic decision. Google was flourishing, but Sandberg had a job offer from the new kid on the block, Mark Zuckerberg, who wanted her to come in and be the adult who transformed Facebook into a real company. Again, Sandberg, by then one of the most high-profile women in Silicon Valley, had a number of safer, more prestigious choices. She picked Facebook, whose 2012 IPO made her among the richest self-made woman in the world.

  If you are fastidious about taxonomy, you’d probably have to describe Sandberg as an outstanding member of the managerial aristocracy—she is a hugely talented executive, but she isn’t an inventor in her own right or the founder of her own firm. But her instinct for picking the right job at the right time is so finely honed that it surely qualifies as responding to revolution. As Warren Buffett put it in his 2006 letter to shareholders, quoting “a wise friend,” “‘If you want to get a reputation as a good businessman, be sure to get into a good business.’”

  In his study of the Nobel scientists, Robert Merton discovered a similar talent for choosing the right work—a skill that was as important as the ability to do the work itself. “Almost to a man, they lay great emphasis on the importance of problem finding, not only problem solving,” Merton wrote in 1968. “They uniformly express the strong conviction that what matters most in their work is developing a sense of taste, of judgment, in seizing upon problems that are of fundamental importance.” In an echo of Buffett’s wise friend, Merton quoted one Nobel laureate who explained, “I learned that it was just as difficult to do an unimportant experiment, often more difficult, than an important one.”

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  The power of choosing the right work is equally pronounced for members of what Graeme Wood, writing in the Atlantic, called the lucky job choice club: being an early employee at a company that prospers dramatically. These aren’t the entrepreneurs who have a talent for responding to revolution. They are the people lucky—and maybe savvy—enough to be among the first hires of those paradigm-changing entrepreneurs.

  When the IPO comes, this group—the first few dozen employees of Microsoft, or Google, or Groupon—is also catapulted into the super-elite. Two California psychologists, Stephen Goldbart and Joan DiFuria, were so concerned by the psychological impact of joining the lucky job club that, in 1997, during the first Internet boom, they gave a name to its baleful outcome—“sudden wealth syndrome”—and set up an institute to treat folks afflicted by it.

  When you make your fortune by responding to revolution, the one rule is that there isn’t One Rule. Getting out at exactly the right time may be the smartest business decision Jonathan Kaplan made. But at other times and places, the difference between the millionaires and the billionaires is the difference between those who cashed in early and those who held their nerve.

  In 1993, when he had already made $100,000—an unimaginable windfall by Soviet standards—Viktor Vekselberg had a partner who decided it would be prudent to cash in his chips and step away from the table. “I had one friend—let’s not criticize him, it was his personal choice—who said, ‘What vouchers! What privatization! I don’t need that,’” Vekselberg told me. He withdrew his share of the group’s profits so far—about $100,000, Vekselberg recalls—while his erstwhile partners went on to become billionaires. Having worked together for twelve-hour days at the beginning of their capitalist metamorphosis, he and Vekselberg haven’t been in touch for years. “We don’t have much in common anymore,” Vekselberg said.

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  On September 23, 1932, six weeks before the election that would begin his service as one of America’s most consequential presidents, Franklin Delano Roosevelt addressed the Commonwealth Club of San Francisco. The speech he delivered is a model of rhetoric—U.S. political scientists in 1999 judged it to be one of the best addresses of the twentieth century—and it made the intellectual case for what would become the New Deal. From a distance of eight decades, what is striking about the address is its characterization of the robber barons. FDR paints them as business titans, geniuses at responding to revolution who ushered America into the industrial age.

  It was the middle of the nineteenth century that a new force was released and a new dream created. The force was what is called the industrial revolution, the advance of steam and machinery and the rise of the forerunners of the modern industrial plant. The dream was the dream of an economic machine, able to raise the standard of living for everyone; to bring luxury within the reach of the humblest; to annihilate distance by steam power and later by electricity, and to release everyone from the drudgery of the heaviest manual toil.

  Bringing this dream to life required the robber barons: “To be made real, it required use of the talents of men of tremendous will, and tremendous ambition, since by no other force could the problems of financing and engineering and new developments be brought to a consummation,” the president explained.

  But FDR was also firmly of the view that the interests of these talented “men of tremendous will and tremendous ambition” didn’
t perfectly coincide with those of society as a whole:

  So manifest were the advantages of the machine age, however, that the United States fearlessly, cheerfully, and, I think, rightly, accepted the bitter with the sweet. It was thought that no price was too high to pay for the advantages which we could draw from a finished industrial system. The history of the last half century is accordingly in large measure a history of a group of financial titans, whose methods were not scrutinized with too much care, and who were honored in proportion as they produced the results, irrespective of the means they used. The financiers who pushed the railroads to the Pacific were always ruthless, often wasteful, and frequently corrupt; but they did build railroads, and we have them today. It has been estimated that the American investor paid for the American railway system more than three times over in the process; but despite this fact the net advantage was to the United States.

  From today’s polarized perspective, what is striking is how FDR gave the business titans their due for bringing the industrial revolution to America, yet at the same time insisted that their self-interest differed from that of the nation as a whole. We live—or at least until the 2008 financial crisis, we lived—in the age of triumphant capitalism, in which the titan is, as Pitch Johnson told the Moscow MBA students, “the hero of our time.”

  But the reality is more nuanced. The heroic businessman who brilliantly surfs the wave of revolution is driven by the imperative to build his business. That usually creates a lot of value for the rest of us—the railroads of Roosevelt’s speech—but profit, rather than nation building, is the titan’s North Star. Being good at responding to revolution doesn’t necessarily mean focusing on those businesses that are most important for the nation’s long-term growth.

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  The buzzword in Russia today is “modernization.” That is because, despite the country’s shift to a market economy and its relatively strong economic growth over the past decade, Russia’s leaders have started to worry that they have built a version of capitalism appropriate to the twentieth century rather than to the twenty-first. Where, they wonder, is Russia’s Bangalore, not to mention its Silicon Valley?