How the 1% think about their wealth

By Felix Salmon
May 2, 2012

It’s worth reading Reuters’s blockbuster this morning, revealing that Chesapeake Energy CEO Aubrey McClendon was running a secret hedge fund for his own benefit within Chesapeake’s headquarters, in the light of Adam Davidson’s profile of rich-guy apologist extraordinaire Edward Conard.

McClendon, while Chesapeake CEO between 2004 and 2008, spent an enormous amount of time on his pet hedge fund, Heritage Management, which he invested in and co-owned. Chesapeake is an enormous player in the commodity markets, and of course McClendon would have had advance notice of actions Chesapeake was going to take that might well move the markets. He had every opportunity to front-run such actions at Heritage, and conversely of course he also had the ability to block Chesapeake from taking any actions which risked hurting Heritage’s positions.

Whether McClendon actually did any of that is pretty much beside the point: he could have done it, and, as Tulane University’s Elizabeth Nowicki says, “the failure to disclose that you are engaging in this kind of conduct can constitute a securities fraud problem”.

“A reasonable investor would want to know that the CEO could be in a situation where he’s betting against the interests of the company personally,” Nowicki said. “That, it seems to me, is a slam dunk.”

McClendon didn’t merely fail to disclose the existence of Heritage: he downright covered it up.

Today, McClendon leads the three-man team that oversees Chesapeake’s trading in oil and gas for the purposes of hedging, or offsetting the risk of unfavorable price swings. When Reuters asked McClendon last year whether he traded for himself in energy markets, McClendon said: “No, no, no. I’m part of Chesapeake’s hedging committee.”

That’s a classically Clintonian answer: it might be narrowly true, in that Heritage had closed by the time the question was asked, but it’s clearly not the whole truth. In fact, McClendon wasn’t just trading for himself, he was also making money off trading for others, too, charging his friends and associates 2-and-20 for the privilege of being able to invest alongside him.

McClendon, of course, was already a billionaire when he decided that setting up a secret private hedge fund was probably a really good idea. And as such, he was engaging in exactly the kind of behavior that Conard wants to encourage.

“It’s not like the current payoff is motivating everybody to take risks,” he said. “We need twice as many people. When I look around, I see a world of unrealized opportunities for improvements, an abundance of talented people able to take the risks necessary to make improvements but a shortage of people and investors willing to take those risks. That doesn’t indicate to me that risk takers, as a whole, are overpaid. Quite the opposite.” The wealth concentrated at the top should be twice as large, he said…

If a Wall Street trader or a corporate chief executive is filthy rich, Conard says that the merciless process of economic selection has assured that they have somehow benefited society.

Conard takes this reasoning to its logical conclusion: if accumulating obscene quantities of money is good for society, then giving it away must, in fact, be bad for society.

During one conversation, he expressed anger over the praise that Warren Buffett has received for pledging billions of his fortune to charity. It was no sacrifice, Conard argued; Buffett still has plenty left over to lead his normal quality of life. By taking billions out of productive investment, he was depriving the middle class of the potential of its 20-to-1 benefits. If anyone was sacrificing, it was those people. “Quit taking a victory lap,” he said, referring to Buffett. “That money was for the middle class.”

A lot of extremely rich people have persuaded themselves to think this way, even if they’re self-aware enough not to actually come out and shout it from the rooftops. So long as accumulating wealth is a normatively Good Thing, they can even go so far as to take pity on themselves for all the hardships they went through on the way to helping out society so much.

God didn’t create the universe so that talented people would be happy,” he said. “It’s not beautiful. It’s hard work. It’s responsibility and deadlines, working till 11 o’clock at night when you want to watch your baby and be with your wife. It’s not serenity and beauty.”

Does it ever occur to Conard, I wonder, that there are lots of people in America who work very hard until 11 o’clock or much later — just to be able to feed and house their family? Did he even think, as he was saying this, that he retired at the age of 51, an ultra-wealthy man, and can now spend as much time as he likes watching his children and being with his wife and living a life of serenity and beauty?

I suspect that McClendon doesn’t spend much time on introspection. But insofar as he did, he probably aligned himself pretty closely with Conard’s ideas. He was working hard, he was being successful — these are good things, not something to nitpick or criticize. Somewhere, he probably knew that the hedge fund wouldn’t look good if people found out about it, so he kept it secret. But more broadly, I think the rich really are different from you and me — or, at least, the self-made rich are.

We think of money as a means to an end: we don’t think of making money as being, in and of itself, a good thing. If Reuters were to double my salary tomorrow, that might make me happier, but it wouldn’t confer any obvious benefits on society as a whole. But once you reach the Conard/McClendon stratosphere, your thinking changes. And as Davidson says, there’s every indication that Mitt Romney’s thinking is much closer to Conard’s than it is to those of us in the 99%.

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