Monday, December 22, 2008

Get Out The Stradivarius Violins. And Set Them On Fire.

Very interesting article in Vanity Fair about the collapse of the new Gilded Age.


The New Math

Most 60-year-old ex–Lehman Brothers bankers likely squirreled away enough to at least scrape by on a couple of million a year. As for the 25-year-olds, they never earned enough to have much to lose. But the mid-30s or mid-40s Lehman banker who lived up to his high compensation—or beyond it—is reeling, hurting, and possibly bankrupt.

One Sunday evening in October, a former Lehmanite in his mid-30s settles into a velvet banquette at the Gramercy Park Hotel’s elegant Rose Bar. At first he’s circumspect. But after a couple of Johnnie Walker Blacks on the rocks, he opens up.

“Let’s take a guy who makes $5 million a year,” the banker suggests. “He’s paid two and a half million dollars of that in equity compensation”—Lehman Brothers stock. Plus he gets to buy that stock at a 30 percent discount, so he’s really getting $3.25 million in stock. “Plus appreciation? Over five years? That’s $25 to $30 million!

“Then let’s say a guy in that position borrowed $5 million against the $30 million in stock. It would seem a very conservative loan, right? Until the $30 million goes down to zero, which is what happened. So now he’s negative $5 million.”

True, that same Lehman banker got the other half of his compensation in cash. The banker nods. “For five years, he made two and a half million dollars a year in cash. So that’s twelve and a half million dollars. But of course he’s had to pay more or less 50 percent in taxes, so divide that and he’s got six and a quarter million. He’s probably spent that money over those five years—$1 million a year, it’s not so hard to do, right? So he has nothing—and he has to repay that $5 million loan.”

A month before the bankruptcy, the banker muses, his peers were complaining about the $10,000 or $20,000 they had to pay for lifetime dibs on the best season tickets in the New York Giants’ new stadium. But they were paying. They were complaining about private-school tuitions. “But it was actually a way of saying, ‘I’m rich—rich enough to afford it.’

“The day Lehman went bankrupt, people realized they were going to get no bonuses, no severance, and no equity. Oh—and no health care. And no salary.”

So far, many seem more stunned than angry, or even timidly hopeful now that Barclays, the English bank, has bought much of the firm and offered shell-shocked Lehmanites their jobs—for now. Peter J. Solomon, 70, a former vice-chairman of Lehman Brothers who runs his own investment-banking firm, says, “What I see in the Lehman people is not enough bitterness. They’re still there, they have three months, Barclays is offering them jobs for a while. But that won’t last for most of them. You’re going to see the biggest impact in the first quarter of next year.”

At least the thirtysomething banker in the Rose Bar isn’t married with kids.

Alexandra Lebenthal, a New York–based wealth manager for investors with between $2 million and $20 million in assets—the modest to mid-level rich—offers a keenly authoritative portrait of a thirtysomething Lehman banker, married with kids, in a guest column called “What It Costs” on the Web site NewYorkSocialDiary. Blake and Grigsby Somerset are fictional, their finances all too plausible.

Before Lehman’s stock began to plummet, Lebenthal suggests, Blake’s annual compensation was $9.5 million—much of that in company stock. He was carrying a $2 million loan used for a house in the Hamptons, but felt perfectly able to afford his annual expenses: the Park Avenue apartment maintenance ($120,000); the Hamptons house mortgage ($75,000); the nanny and driver ($100,000); his wife’s clothing ($100,000); the personal trainer three times a week ($18,000); food, including restaurants ($30,000); charitable benefits and other nonprofit causes ($200,000); private school for three children ($78,000); Christmas in Palm Beach ($15,000); spring in Aspen ($15,000); and a wedding-anniversary diamond necklace for Grigsby ($50,000).

At least Blake has been hired on by Barclays. But his Lehman stock portfolio is now worthless. He and Grigsby have to cut their annual living expenses from about $1 million to a fraction of that, and do it in ways that don’t show, for the worst—the worst—would be the public disgrace of falling out of their social class.

First to go: vacations, the trainer, the driver, and entertaining. No restaurants, no shopping excursions, no new ball clothes for Grigsby (last year’s will have to do). But, for now—for appearances—the Somersets will scrimp to keep the kids in their schools, and the nanny, and the Hamptons house. For now.

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