The few, the proud, the filthy rich

December 10, 2010

The holidays will be tough times for millions and millions of people suffering the effects of the Great Recession--but as Alan Maass reports, Wall Street has a lot to celebrate.

HE'S NUMBER 69 on the latest Forbes 400 list of richest Americans and head of Blackstone Group, the world's largest private equity firm specializing in corporate takeovers. He lives in a 35-room triplex on Park Avenue in Manhattan, with second "homes"--mansions, really--in the Hamptons, Palm Beach and Jamaica. His private chef regularly spends $3,000 for a weekend's feasting for him and his wife, including those stone crabs he loves at $400 each. Which works out to $40 a claw.

But comfortable as his life is, Stephen Schwarzman isn't the kind of guy to allow tyranny to go unopposed. "It's a war," he declared in July at the board meeting of a nonprofit organization, according to Newsweek. "It's like when Hitler invaded Poland in 1939."

And what cruel injustice was Schwarzman standing against?

Turns out it's all those people who want to tax him to death. Schwarzman was talking about a widely supported Democratic proposal--now abandoned, naturally--to close a loophole that allows private equity firms like Blackstone to pay taxes at less than half the rate of normal corporations.

A party at the Waldorf Astoria to celebrate the life's work of an investment banker
A party at the Waldorf Astoria to celebrate the life's work of an investment banker

Which, when you think about it, is not really in any way like the Nazi blitzkrieg that killed hundreds of thousands of Poles in a country that would become the site of the extermination camps for Jews, Roma, socialists, communists and others.

And yet Schwarzman's out-of-control ranting isn't so out of the ordinary for Corporate America these days. Big business seems to have adopted a motto from the Marine Corps: The few, the proud, the filthy rich--and the rest of you can go to hell.

The profits of U.S. businesses hit another record in the third quarter of 2010, clocking in at $1.659 trillion at an annual rate, according to the Commerce Department--the highest figure in non-inflation-adjusted dollars since the government started keeping track more than 60 years ago. This was the seventh straight quarter of rising profits, and at one of the fastest clips in recent history.

Meanwhile, unemployment has hung on stubbornly at twice its pre-crisis level, and one in six Americans--including one in four children--is at risk of hunger, according to the latest government statistics.

But don't expect any humility from the U.S. Chamber of Commerce. The business federation is spoiling for a new fight--against a "regulatory tsunami of unprecedented force" allegedly coming from the Obama administration. The Chamber's Chief Executive Thomas Donahue says the White House is plotting "thousands of new and questionable regulatory rulemakings."

Any bets on the outcome of that one?

On Wall Street, the top three dozen publicly held banks, hedge funds and investment firms plan to pay $144 billion in compensation and benefits this year, according to the Wall Street Journal's survey--the second-straight record-setting year.

But ask any banker, and they'll tell you sums like that aren't much comfort when people are

"We've been ostracized," one unnamed executive told the Observer newspaper. "I went to jury duty about a year ago, and when I said I'm in investment banking, the people in the jury room were making ugh sounds. And I'm like, fuck you. I'm proud of what I do. And I think this firm did a lot to get the recovery going. Ranked somewhere below a pimp and an oil well operator isn't right."

Corporate America is snarling--rather than laughing--all the way to bank. The Wall Street parasites who set off the crisis with their gambling are swimming in money again, while businesses turn the screws tighter and tighter--throwing people out of work, slashing government programs that the poor depend on, and forcing those who still have a job to work harder for less.

And all the while acting like they are the persecuted ones.

THE GOT-it-flaunt-it rule is back for the super-rich after a few difficult years of cash flow problems.

At Christie's and other New York auction houses that peddle art to the highest bidder, the first two weeks of November were among the most lucrative in history. Dr. Francesca Fusco reports that her Manhattan cosmetic surgery business is booming again--"Wall Street is back spending as much if not more than before," she gushes.

And the bidding action for rentals next summer in the posh Hamptons on Long Island is "hotter and heavier" than ever, says Dolly Lenz of Prudential Douglas Elliman. She has three people ready to pony up more than $400,000 to put a roof over their heads for a few weeks next year.

It isn't just New York City, of course. The vast gap between rich and poor has grown even larger during the Great Recession. Today, the richest 1 percent of Americans takes nearly 24 percent of overall income--nearly tripling their share since 1976 and the most extreme level of inequality since statistics started being kept.

One reason for this, of course, is that the U.S. financial system is up to its old tricks--as if the cataclysmic crisis of 2008 never happened.

In the first nine months of the year, the big six banks in the U.S.--Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley--cleared $35 billion in profits. Thanks to the way the bankers reward themselves, a lot of that money will end up being paid out as bonuses.

And it's mostly on the government's dime, to boot. Not only did the federal government save them with a multibillion-dollar rescue when the crisis hit, but the bankers are still taking advantage of the Federal Reserve Bank's policy of pumping money into the economy by lending to financial institutions at effective 0 percent interest rates.

Some of that free cash is fueling a revival in the market for speculative investments known as derivatives--the very thing that set off the Wall Street crash of 2008. But a healthy portion is being lent back to the government through the purchase of Treasury bills at 3 percent interest. It's a guaranteed profit for the banks, without the bother and risk of making loans for something that might be productive for the rest of society.

The financial sector of the economy accounts for more than a quarter of the profits of U.S. businesses, up from around one-seventh 25 years ago. As Paul Wooley, a veteran of the British financial system-turned-critic of the banks, said, "It's like a cancer that is growing to infinite size, until it takes over the entire body.

But then again, Corporate America as a whole isn't acting any differently from the banks.

Business profits as an overall dollar amount hit a new record in the third quarter. Calculated as a percentage of the gross domestic product--the total production of goods and services in the economy--profits reached 11.2 percent, close to the high point of the 2000s boom. In other words, for every $9 produced in the U.S. economy today, the ruling class is pocketing $1.

But the corporate profit boom isn't leading to an investment boom, at least not investment in the U.S. Earlier this year, the Federal Reserve estimated that non-financial corporations were sitting on $1.8 trillion in cash and other so-called liquid assets, up 26 percent from the year before, the fastest increase for cash on hand since records started being kept in 1952.

This is the reason for the anemic jobs reports issued each month by the government. In most months this year, private-sector employment crept upward, though it was offset several times by job losses in the public sector. But in any case, the increases are too small to keep up with the rise in the working-age population, much less replace the jobs lost during the recession.

Since December 2007, the U.S. economy has lost 5.4 percent of non-farm payroll jobs--roughly one lost out of every 19. And with Corporate America banking its profits, there's no sign of that collapse being made up soon. At the same time as profits for the third quarter jumped 28 percent over the year before, business spending on compensation for employees rose only 7.6 percent, or about one-quarter as fast.

That statistic reveals the old-fashioned secret of the profit boom--corporations are making workers work harder for less. According to the Bureau of Labor Statistics, the output of the U.S. economy rose 4.1 percent in the third quarter compared to the year before, the number of hours worked increased by 1.6 percent, and unit labor costs fell by nearly 2 percent.

It doesn't take a genius to figure out that big business is going to be plenty happy as long as profits roll in without making new investments in jobs and higher wages--something the Federal Reserve recognized when it revised its prediction last month to project official unemployment staying above 9 percent throughout 2011 and above 8 percent for the election year that follows.

AND STILL Corporate America's filthy rich few play the victim--like Schwarzman with his outbursts against "big government" and the terrible injustice of being made to pay taxes at something closer to the rate that working people do. turns out that Stephen Schwarzman isn't opposed to all "big government."

The Blackstone Group's last big deal before the Wall Street crash in 2008 was the takeover of the Hilton Hotel chain. Blackstone and a group of investors agreed to pay $26 billion for the company. They put in $5.6 billion of their own money and borrowed over $20 billion from a group of seven banks.

That's how buyout firms work: They finance their massive purchases with huge loans, they then cut costs ruthlessly--meaning they lay off workers and close factories--and they sell what's left as quickly as possible, leaving the takeover target saddled with the debts.

In the case of Hilton, though, the recession made it difficult to find a buyer for the restructured company or to refinance the massive loans from the 2007 purchase. Only this year was Blackstone able to reach a deal with banks that reduced its debt load by about $4 billion--by extending some of the loans and paying for others at a steep discount over what they had been worth.

But one of the lenders in the Blackstone deal for Hilton was under slightly different management.

The investment bank Bear Stearns had contributed about $4 billion in loans for the Hilton takeover. Less than a year later, when Bear was careening toward bankruptcy, the Federal Reserve Bank of New York took over those Hilton debts--at full value--in order to entice JPMorgan Chase to buy the collapsing Bear.

So when Schwarzman and Co. wanted to refinance, they were negotiating in part with the federal government, in the form of the New York Fed. Which graciously agreed to sell back $320 million of the total Hilton debt at a cost to Blackstone of $142 million.

In other words, Blackstone and Hilton got a gift of $178 million from their friends at the Fed--the equivalent of 10 percent of Blackstone's revenue in all of 2009.

Not that they were hurting, mind you. "We were in good shape before," Hilton CEO Chris Nassetta said of the effect of the debt deal, "and we're in exceptionally good shape now."

Workers at Hilton, on the other hand, aren't in such "exceptionally good shape." Almost a year and a half after the union contract expired, the Blackstone-owned chain is demanding that workers represented by UNITE HERE accept concessions--$200 a month toward their health care plan, and a freeze on pension contributions.

"They got all this money from the federal government, and yet they won't give us a contract," said Gloria King, who was among four dozen workers picketing outside a Hilton in the posh shopping district near Chicago's downtown during a three-day strike by UNITE HERE in October. The workers carried signs reading "Taxpayers on Strike."

Probably the worst among Hilton/Blackstone's demands is the speedup--management wants housekeepers to clean 20 rooms a day, a 40 percent increase in work that is already physically exhausting.

That's why Xiomara Cruz is worrying not about the invasion of Poland, but Hilton's war on her health. As the room cleaner in San Francisco told's Ragina Johnson in October:

I have numbness in my fingers, shoulder and back problems. Everyone has back and shoulder pain and numbness in their fingers. We are supposed to have two breaks and a dinner break. I am not taking time for dinner and breaks because there's too much work, but we have to sign off on the sheet saying we took our breaks, even when we didn't.

It's a crime that union workers like Cruz are being told that they have to work harder for less because Hilton doesn't have the money--at the same time as its owners at Blackstone are proudly predicting a 50 percent increase in revenues for 2010.

But for the filthy rich in Corporate America, crimes like that pay--very, very well.

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