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Old 10-23-2011, 12:00 PM  
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The Wild Ride of the 1%

The Wild Ride of the Wealthiest 1% - WSJ.com

The Wild Ride of the 1%

Jacqueline Siegel paces the floor of her unfinished 7,200-square-foot ballroom. The former beauty queen, with platinum-blond hair, blue eye shadow and a white minidress, clacks along the plywood construction boards in her high heels trailed by a small entourage of helpers and staff.

Bob Croslin for The Wall Street Journal
Jacqueline Siegel, pictured here, and her husband, David, couldn't afford to finish building their 90,000-square-foot house?the largest private home in the U.S.?after the credit crunch.

"This is the grand hall," she says, opening her arms to a space the size of a concert hall and surrounded by balconies. "It will fit 500 people comfortably, probably more. The problem with our place now is that when we have parties with, like, 400 people, it gets too crowded."

The Siegels' dream home, called "Versailles," after its French inspiration, is still a work in progress. Its steel-and-wood frame rises from the tropical suburbs of Orlando, Fla., like a skeleton from the Jurassic age of real estate. Ms. Siegel shows off the future bowling alley, indoor relaxing pools, five kitchens, 23 bathrooms, 13 bedrooms, two elevators, two movie theaters (one for kids and one for adults, each modeled after a French opera theater), 20-car garage and wine cellar built for 20,000 bottles.

At 90,000 square feet, the Siegels' Versailles is believed to be the largest private home in America. (The Vanderbilt family's Biltmore house in North Carolina is bigger at 135,000 square feet, but it's now a hotel and tourist attraction). The Siegels' home is so big that they bought 10 Segways to get around?one for each of their eight children.

After touring the house, Ms. Siegel walks out to the deck, with its Olympic-size pool, future rock grotto, three hot tubs and 80-foot waterfall overlooking Lake Butler. Her eyes well up with tears.

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Versailles was supposed to be done by now. The Siegels were supposed to be living their dream life?throwing charity balls and getting spa treatments downstairs after a long flight on their Gulfstream. The home was the culmination of David Siegel's Horatio Alger story, from TV repairman to chief executive and owner of America's largest time-share company, Westgate Resorts, with more than $1 billion in annual revenue and $200 million in profits.

Evan Newmark invites Euro Pacific Capital president Peter Schiff to Mean Street. Schiff fears as bad as we think the global economy is, things might, in reality, be even worse. Photo: REUTERS/Romeo Ranoco

Yet today, Versailles sits half-finished and up for sale. The privately owned Westgate Resorts was battered by the 2008 credit crunch and real-estate crash. It had about $1 billion in debt?much of it co-signed by the Siegels.

The banks that had loans on Versailles gave the Siegels an ultimatum: Either pay off the loans or sell the house. So it's now on the market for $75 million, or $100 million if the buyer wants it finished.

As she stands on her deck in the Florida sun, Ms. Siegel wipes away her tears. "Maybe it will still work out," she says. "It always does, right?"

The Siegels' Versailles may be the nation's most extravagant monument to the debt-fueled, status-crazed real-estate binge of the past decade. Like many Americans, the Siegels borrowed too much, spent too much and bet that values could only go higher. Even in the age of excess, Versailles was excessive.

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Red Huber/Orlando Sentinel
'I was cocky,' says David Siegel, whose half-built house is now on the market for $75 million?or $100 million finished.

Their story might seem like the exception among the rich, who, we're told, just keep getting richer. Yet episodes like the Fall of the House of Siegel are becoming increasingly common as the wealthy undergo a sweeping and little-noticed revolution. The American rich, who used to be the most stable slice of the personal economy, are now the most volatile, with escalating booms and busts.

During the past three recessions, the top 1% of earners (those making $380,000 or more in 2008) experienced the largest income shocks in percentage terms of any income group in the U.S., according to research from economists Jonathan A. Parker and Annette Vissing-Jorgensen at Northwestern University. When the economy grows, their incomes grow up to three times faster than the rest of the country's. When the economy falls, their incomes fall two or three times as much.

The super-high earners have the biggest crashes. The number of Americans making $1 million or more fell 40% between 2007 and 2009, to 236,883, while their combined incomes fell by nearly 50%?far greater than the less than 2% drop in total incomes of those making $50,000 or less, according to Internal Revenue Service figures.

Of course, the trauma of giving up a Gulfstream or a yacht can't compare with the millions of Americans who have lost their only job or home. The Siegels will make do in their current 26,000-square-foot mansion.
Suddenly, in 1982, the wealthiest broke away from the rest of the economy and formed their own virtual country. Their incomes began soaring higher during good times. The top 1% of earners more than doubled their share of national income, to 20% as of 2008. Looking at another measure, the richest 1% increased their share of wealth from just over 20% to more than 33%.

Those surges were often accompanied by mini-crashes, even though the direction over time was always up. A top 1% that had once been models of financial sobriety set off on a wild ride of economic binges.

This marked a new personality type in the history of wealth: the High-Beta Rich.

"High beta" is a term used in financial markets to describe a stock or asset that has exaggerated up and down swings with the market. Tech start-ups and casino stocks have high betas, for example. Yet studies show that today's rich have higher betas than many of the riskiest gambling stocks. Between 1947 and 1982, the beta of the top 1% was a modest 0.72, meaning that their incomes moved relatively in line with the rest of America. Between 1982 and 2007, their beta soared more than three-fold.

What created high-beta wealth? Economists aren't sure. The rise of the high-betas and the rise in inequality started at the same time, suggesting they have a common cause. Mr. Parker and Ms. Vissing-Jorgenssen cite new communication technologies that allow the best workers and products to be scaled over larger markets, thus making them more sensitive to economic changes. Others cite globalization and the rise of "winner-take-all" pay schemes.

Interviews with more than 100 people with net worths (or former net worths) of $10 million or more, and a wave of new studies on the rich, suggest a different cause: the "financialization" of wealth. Simply put, more wealth today is tied to the stock market than to broader economic growth. A larger share of today's rich make their fortunes from stock-based pay, shares in publicly traded companies, selling a business or working in finance.

Because the stock market is up to 20 times more volatile than overall economic growth, the market-based fortunes of the wealthy are now more unsteady. Fast-moving global capital is also creating more asset bubbles, which have become their own self-destructing wealth machines.
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I'll believe corporations are persons when Texas executes one.: LBJ's Ghost
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