It turns out that my crucial mistake was believing that the brokers and wealth managers and cable-television oracles who make up the financial-services industrial complex actually had my best interests at heart. Or so say the extremely smart—and wealthy—people I asked to help me figure a way out of my paralysis. One of these people was Robert Soros, the deputy chairman of the fund started by his father, George. I went to see him at his office, where he spent two hours performing an autopsy on my assumptions.
“You think a brokerage should be a place you go to pay commissions for fair and unbiased advice, right?” he asked.
“Yes,” I said.
“It’s not. It never has been.” He then cited another saying of Buffett’s: “‘Wall Street is a place where whatever can be sold will be sold.’ You are the consumer of their dreck. What they can sell to you, they will sell to you.”
“But they told us—”
He went on: “You should be disheartened and disappointed. But don’t kid yourself. You’re a naive capitalist. They were never your advisers. Do not for a moment think that a brokerage firm is your friend.”
“So who’s my friend?”
“You don’t have one. This is the market.”
“Okay, that’s Merrill Lynch. What about the others?”
“They’re not your friends,” Soros said patiently.
“What about Chuck Schwab?”
“All brokers move products based on volume and commission,” he said.
I had a benevolent, advertising-induced understanding of Schwab. It was the billboards: “I’ve got a lot less money. And a lot more questions. Talk to Chuck.” And: “It’s not just money. It’s my money. Talk to Chuck.”
I thought that perhaps Schwab, a discount broker, might be able to answer the question Soros could not: Why had my full-service financial adviser stopped calling me?
I did what I was told, and called Chuck. His spokesman intercepted the call. I explained that I was trying to understand the role financial advisers play in the life of the small investor, but the spokesman, Greg Gable, said that Chuck would not, in fact, talk.
“We’re not going to be able to help you out,” he said.
Finally, I went to another highly successful financial adviser, named Larry Gellman, who is an iconoclast and a critic of his industry. He came up with a plausible reason why Merrill did not actually seem to care about my financial future, or the financial future of my children.
“Throughout the late 1990s, investors were firing their brokers and money managers because they didn’t own enough tech and Internet stocks, so everybody got loaded up at the tech party right before the cops came,” Gellman said. “Most of them were busted and never even got a drink. Some of them got lawyers and came after their brokers. So the brokerage firms all came away saying, ‘Never again.’
“If the head of Merrill Lynch and every other investment firm had their way,” he continued, “no individual broker would ever recommend an individual stock or bond to a retail client again. They have essentially gotten out of the brokering-and-advising business and gone all in on the ‘wealth management’ business. The new model is to gather assets from wealthy people and then place those assets with a whole bunch of managers who will manage different pieces of it in diversified styles so you don’t lose it all at once. And by the way, people with less than $10 million need not apply.
“People like you are in a sort of purgatory because no one would ever come out and tell you that he doesn’t want your business anymore,” he said. “You had to figure that out by yourself.”
There’s quite a bit I have to figure out by myself now, which was one reason why, on a cold night in February, I turned up at the apartment of my friend Boaz Weinstein, who was hosting a gathering to talk about charity in a time of financial cataclysm. Weinstein lives in a not-overly-luxurious-but-luxurious-enough building on Fifth Avenue. It is not the sort of building I could ever afford, but I tell myself I am not inclined to live on Fifth Avenue anyway; long-term exposure to liveried elevator operators would eventually bring me to Marxism.
“Do you like this job?” I asked the operator in Weinstein’s building. He was a sagging man of 65 or 70; his eyes were rheumy and his nose spider-webbed with disintegrating capillaries.
“It’s a job,” he said. He paused. “I’m retired.”
“But you’re working,” I said.
“Yeah. I’m working.”
The coatrack in the hallway outside Weinstein’s apartment was crowded with sensible coats. The passed canapés inside were utilitarian, as passed canapés go. These were my kind of rich people, I thought, not the piggy kind, no John Thains or Stephen Schwarzmans in the bunch, certainly no Bernard Madoffs. (I met Madoff once. He wasn’t very nice. I think he judged me too poor to bother robbing.) We had gotten together to talk about charity, but I was hoping to learn about my own economic future. These were people who were calculating present values as 10-year-olds; people who had actual Swiss bank accounts; people who short Treasuries on their BlackBerrys; and one person, Weinstein himself, who won a Maserati in a poker tournament.
The writer Jonathan Rosen has described New York now as having a posthumous feel, but this was not entirely the case in Weinstein’s apartment, which was vibrating with superficial good cheer. Economic disintegration provokes in some people strange feelings of lightness. Of course, some of the people gathered there—say, those who spent the past year short-selling bank stocks—were experiencing the strange feeling of lightness that comes from acquiring huge, stinking piles of money. But on the whole, anxiety lurked beneath the bonhomie. Within 10 minutes of my arrival, two friends separately and quietly suggested I buy gold, and right now.
“You have to guard against the massive debasement of the dollar,” one said. I explained to him my theory of market peaks—that the moment I buy a stock or a commodity is the moment it peaks. In any case, I would need substantially more of those soon-to-be-debased dollars to buy gold. But his arguments seemed sound.
Then another friend approached. “You don’t want to be long gold. The dollar is the currency of last resort for the entire world. There’s little chance of debasement.” His argument also seemed sound. Everyone seemed to be in possession of sound arguments. Even people on CNBC sometimes seem to be in possession of sound arguments.
Weinstein stood up to make introductions. He was one of the early innovators in the field of credit-default swaps, and he earned billions of dollars for his former employer, Deutsche Bank—and tens of millions for himself—until last year, when his trades cost the bank $1.8 billion (though some of the bank’s positions rebounded by $600 million). I am in no position to judge what happened; Weinstein’s attempts to explain to me the workings of credit-default swaps have not borne the fruit of enlightenment.
Bill Ackman, the founder of Pershing Square Capital, was to lead the discussion. Ackman is tall, prematurely gray, and immoderately self-assured, the sort of winning figure who could be elected to the Senate one day, if the country ever decides to stop hating hedge-fund managers. Weinstein introduced Ackman as a perspicacious investor, which he is, generally. Early in the current crisis, he suggested publicly that the decision of the bond-insurance company MBIA to guarantee billions of dollars of complicated mortgage investments would come to no good. But, like Weinstein, Ackman was not having the best year; one of his funds was betting solely on the resurgence of the Target corporation’s stock, and Target’s performance was not covering Ackman in glory.
“I thought this was a perfect time to talk about philanthropy and investing, because they’ve merged; they’re both tax-deductible at this point,” Ackman said, opening his talk. He spoke mainly of the psychic rewards of charitable giving, and of specific projects he supported. He asked for questions, which mainly concerned his prodigious charitable giving. Then someone asked a question about Ackman’s reputation:
“It used to be that in America, if you were a successful businessman, you were well-regarded. Now it seems that you are an evildoer if you’re successful, particularly in the financial world. Your profile is getting bigger. Do you think that’s good, or do people say, ‘He should be spending more time in the office and not so much out there’?”
Ackman responded: “A lot of hedge-fund managers I know are incredibly charitable and also fundamentally great people. But the press—first of all, you don’t make that much money working for the press. Take The New York Times. The New York Times doesn’t make that much money, and the people who work there don’t make that much money. So you think about people who work for the press—generally, they resent people who have financial success. A combination of that, plus some bad actors in the business, is a negative. Why did I go on Charlie Rose? Why have I been a little more public? Part of that is to blunt some of the negative associations with our industry.”
Hmmm. Yes, well.
It only seemed right for me to stick up for my fellow ink-stained proles, so I decided to make an intervention. But then I thought, This is Bill Ackman standing before me. He’s a great investor. Maybe he can give me some advice.
So this is what came out of my mouth: “What do you tell the ordinary mortal—say, the person who works in the press that you talked about—what do you say to the person who has $20,000, $50,000, $100,000, or $200,000, maybe, parked somewhere doing nothing? What is your advice right now for that person?”
I looked around. The wizards in the room were having difficulty calculating figures of such humble size. I had thought $200,000 sounded like a large and unembarrassing number. But the room reacted as if I had asked, “Bill, I have 75 cents in my pocket. Do you think I should buy Twizzlers or a big red gumball?”
Ackman answered: “First, it depends on when you’re going to need the money. I’ve always said that if you want to take risk—any risk—you have to be prepared to put your money away for five years or more. If it’s that kind of money, I would give someone a couple of alternatives. Do you have enough money in the bank that if you were to lose your job, you’ve got a good window to get reemployed? You’ve got to make sure you have a safety net. Buy a house. I think it’s a great time to buy a house. But put a 20 percent down payment, get a good mortgage from Fannie and Freddie … It’s one of the best investments you could make. The rest of the money, either invest in a very broad index fund—a Wilshire 5000 type of index fund—or if you want to do a bit of homework, I’d invest in a few great unlevered businesses that earn attractive returns. In my opinion, McDonald’s, Visa, maybe Berkshire Hathaway.”
I think Ackman might not have been accustomed to talking to people like me, which would help explain why he sounded suspiciously like … a Merrill Lynch financial adviser.
He was, however, infinitely more compelling on the macro questions, and this was where the evening took a dark turn. “One of the things that’s interesting about the last year is that you realize how much of our capital system is based on confidence—business confidence,” he said. “If I’m confident I can refinance my debts when they come due, I’ll spend money. If I’m not confident I can refinance my debts when they come due, I’m not spending any more money. So if I can’t renew my home-equity loan and I’m not sure I can keep my job, I can’t spend. And you get into this death spiral.”
I asked him, “What’s the chance we’re going into that death spiral?”
“We’re in it!” he said. “Whether we’re going to die or not is another question.”
“What’s the percentage chance we’re going to move to a barter economy?” I asked.
“I think it’s small,” Ackman said.
“Small”? I had been hoping for “Zero.” “Zero” would have been a fine answer, and not because I have nothing to barter except for a stack of old SmartMoney magazines, but “Zero” because, by the time my 12-year-old turns 18, I would like to be able to use my portfolio of stocks and bonds as a flotation device, and not as kindling.