Sunday, February 08, 2004

Concentrating wealth leads to startling extravagance

Title: Extravagance makes comeback on Wall St.
Source: The Wall Street Journal
Date: February 8, 2004

From the article:
    A year ago, Bret Grebow, a 28-year-old who runs hedge fund HMC International, was taking cheap flights on JetBlue Airways and keeping a lid on his spending. But his fund's investment portfolio surged nearly 40 percent last year, and Grebow says he's confident that the market has regained its footing. So two months ago he bought a new $160,000 Lamborghini Gallardo. He says it was his first "treat" in months.

    These days when Grebow and his girlfriend travel between his Highland Beach, Fla., home and his New York office, he charters a catered plane with a bar, paying as much as $10,000 for the three-hour flight. Last weekend he spent more than $12,000 to fly himself and some friends on a Learjet 55 to the Super Bowl.
    In recent weeks, Wall Street firms have begun paying what's expected to total $10.7 billion in bonuses - the bulk of the compensation for most on Wall Street - for 2003. That's almost a 25 percent increase from 2002, though still less than the $19.5 billion bonanza of 2000. Also fattening wallets: Stock prices of most securities firms are at their highest levels in three years.
    One apartment drawing interest is the Fifth Avenue co-op of L. Dennis Kozlowski, former chairman and chief executive of conglomerate Tyco International Ltd. His $15,000 poodle-shaped antique umbrella stand, $6,000 shower curtain and $38,000 backgammon table became symbols of 1990s excess. Now several Wall Street professionals are showing interest in buying Mr. Kozlowski's apartment, according to Sharon Baum, a real-estate broker at Corcoran Group involved in showing the place. With 11 rooms, including a master bedroom with Central Park views and staff quarters, the apartment is listed at around $28 million.
Where does all of this money come from? Quite a bit of it comes from people like you and me investing money for retirement, or from pension funds. See this post for an explanation.

This is the sort of thing that happens as the concentration of wealth gets out of control. Take Kozlowski for example since he is mentioned above. He is "charged with stealing $600 million from the company," according to this article. The article states:
    Local officials were under the impression that Tyco Plastics and Adhesives would be expanding its Macedon facility soon.

    However, with Wednesday’s announcement that the plant would close, those same officials are shocked and dismayed.

    “Six months ago, there was a news story about Tyco hiring new people,” Macedon Mayor Jim Hoteling said. “There were Tyco people in the village office getting paper notarized for the Empire Zone (application).

    “This has come as a terrible, terrible shock.”

    Hoteling said part of the reason for the Macedon plant closure can be traced to legal problems regarding former Tyco chief executive L. Dennis Kozlowski and former financial chief Mark H. Swartz. In September, they were charged with stealing $600 million from the company. They currently are on trial in New York City.

    “Those guys crippled the company, and we aren’t the only small community that will be affected,” Hoteling said. The Macedon plant will close July 2, leaving 173 workers without jobs.
In this case, the concentration of wealth by executives at Tyco has led to plant closings and cutbacks across the country.

Because of their immense wealth, Kozlowski and other Tyco executives have money to manipulate the legal system, to hire lobbyists and to make generous campaign contributions. For example, this article from the Atlanta Journal states:
    Defense attorneys for Tyco International Ltd.'s former top executives asked a judge Wednesday to dismiss an indictment against them, saying prosecutors failed to prove their case after nearly four months of trial testimony.

    The arguments came a day after New York prosecutors rested their case against L. Dennis Kozlowski, Tyco's former chief executive, and Mark H. Swartz, its former financial chief. The former executives are charged with stealing $600 million from the Bermuda conglomerate in unauthorized pay and illicit stock sales.
For example:
    Prosecutors voluntarily dismissed a grand larceny count related to a $2 million bonus paid to former Tyco general counsel Mark Belnick, and a count that alleges the falsification of business records.
Belnick is off free and clear on these charges, and the concentration of wealth continues.

In a corporation, how can there be "unauthorized pay and illicit stock sales"? Every check of any significant size, along with any stock grant, would need to go through the board of directors, the CFO, the controllers, the auditors, the payroll system, the IRS, the SEC, etc. All of these systems, unfortunately, are being corrupted by the concentration of wealth.


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