Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else (25 page)

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By any measure, private equity tycoon David Rubenstein is a plutocrat.
Forbes
estimated his personal fortune in 2012 to be $2.8 billion. Carlyle, the private equity group he cofounded, manages $150 billion. The atrium of New York’s premier cultural venue, Lincoln Center, is named after him. Former president George H. W. Bush served as a senior adviser to Carlyle; James Baker, the former secretary of both the Treasury and state, was a partner. John Major, the former British prime minister, was chairman of Carlyle Europe.

One afternoon in 2007, when Rubenstein noticed that the last privately held copy of the Magna Carta was being auctioned off by Sotheby’s, he was suddenly struck by the idea that the Magna Carta wasn’t just the founding document of Britain’s constitutional monarchy, it was the founding document of American democracy, too. The United States, he thought, really should have its own copy of this seminal agreement. So he bought it. For $21.3 million. When he tells this story, with a mixture of pride and lingering incredulity at his own impetuosity, Rubenstein’s favorite moment is talking to his wife at the end of the day and offering a humdinger of a punch line to the classic conjugal question “What did you do today, darling?” Rubenstein’s answer: “I bought the Magna Carta.”

All of which is to say that Rubenstein is no stranger to super-wealth. But the first time I met him, he was fascinated by the years I had spent chronicling the rise of the Russian oligarchs. Now that, he told me, was a time and place where you could make some real money.

Rubenstein is right. Responding to revolution has been particularly profitable in those parts of the world where there has been a real revolution, either overthrowing the ancien régime, as in the former Soviet bloc, or just a shift in the economic system, from central planning to the market. The most dramatic transition—and the biggest opportunity to earn a windfall—was in Russia, where twenty years of capitalism has created around a hundred billionaires, 8 percent of the world’s total. The personal wealth of this group of Russians could buy roughly 20 percent of their home country’s annual economic output.

Russia, of course, gives plutocracy a bad name. The Kremlin version of capitalism has been exceptionally good at producing billionaires—Russia has the world’s highest ratio of billionaires relative to the size of the economy—but the country’s overall performance has been less impressive. The economy shrank by 40 percent in six years and male life expectancy dropped nearly to the levels of sub-Saharan Africa in the 1990s—the decade when most of today’s oligarchs got their start. It has been growing more robustly for the past ten years, but has been outpaced by China, India, and Brazil, and remains largely dependent on natural resources. By 2011, per capita income was $12,993, well above emerging markets like China and India but below Lithuania, Chile, and Barbados, and male life expectancy is a mere sixty-two. Russia remains a tough place to do business: the World Bank rates it at 120, below Nicaragua, Yemen, and Pakistan.

But, as Rubenstein recognized, if you knew how to respond to revolution, there was no better place to be than Moscow in the 1990s. The conventional wisdom, even in Russia, is that the winners of the great privatization windfalls were Kremlin insiders. But that isn’t quite true. Of course, onetime apparatchiks have done extremely well in Russia’s transition to a market economy—one of the country’s richest men is probably Vladimir Putin. But in the former Soviet Union, as in the United States, many of the plutocrats have turned out to be the Russian equivalent of public school kids who went to Harvard: close enough to the levers of power to take advantage of the market transition, but also far enough away that they understood that the regime was crumbling.

Mikhail Fridman, an oil, banking, and telecom magnate worth $13.4 billion in 2012, is an archetypal oligarch. He was born and raised in L’viv, in western Ukraine, one of the Soviet Union’s freest and most cultured cities, but also far from the center of political power. Fridman was smart enough to make it to an elite Moscow polytechnic institute, where he earned a degree in physics. But Fridman was both unconnected and Jewish, which blocked him from becoming a total insider. He wasn’t allowed to do graduate research work, as he wanted, and was instead assigned a job in a provincial factory 150 miles outside Moscow.

With hindsight, that exclusion was a blessing. Fridman had been an energetic college entrepreneur, organizing ventures ranging from window washing to a theater ticket purchasing system, and he had accumulated enough rare goods (mostly jeans and caviar) to bribe his way into a choicer work assignment in Moscow. But the experience made him skeptical about his chances to prosper inside the Soviet system and determined to focus on opportunities outside it. By the time the Soviet Union collapsed, and the really big business opportunities materialized, he was already a millionaire, a powerful starting position.

“What I really, really wanted to do, my childhood dream, was to be a physics professor,” Fridman once told me. “If I had been born in America, that is what I would be. Thank goodness for Soviet anti-Semitism.”

The early biographies of the other oligarchs are uncannily similar. Viktor Vekselberg, a metals and oil oligarch, is another Jew from western Ukraine who got a PhD in math from an elite Moscow polytechnic. But he was enough of an outsider that in the late 1980s he decided to supplement his family income—“I really wanted a car,” he told me—by writing and selling computer programs. Again, by the time the Soviet Union collapsed, he was poised to pounce. Boris Berezovsky, an oil, industrial, and media magnate before he lost a power struggle with Putin, was an obscure mathematician and apparatchik when perestroika was first declared, bringing its attendant business opportunities. Vladimir Gusinsky, Russia’s most powerful media baron before he, too, lost a power struggle with Putin, was a Jewish theater impresario who never made it into the first circle of state-supported Soviet cultural intellectuals and who supplemented his income by trading consumer goods like jeans, copper bracelets, and Sony Walkman players in the black market.

In fact, of the seven men who between them controlled half of the entire Russian economy in 1998, and who became known as the oligarchs, six were Jewish and few of them were privileged. The only oligarch who was a real insider, a member of a group known as “the gilded youth” because of their privileged upbringing as the children of the nomenklatura, was Vladimir Potanin, the son of an official in the Ministry of Foreign Trade. Ultimately, that network and that pedigree were a great help to Potanin as he built his metals and banking empire, including control of Norilsk Nickel, the world’s largest nickel producer. And it is no accident that Potanin is the only oligarch who served in the cabinet.

But at the moment of transition, Potanin’s elite background almost blinded him to the biggest economic opportunity in his country’s history. In the late eighties and early nineties, while men like Fridman, Vekselberg, and Gusinsky were experimenting in the small space for private business permitted by Gorbachev, Potanin was still climbing the Soviet political ladder, earning his degree in foreign relations, and winning a coveted job at the Ministry of Foreign Trade. He sensed that the world was changing, and he had just about summoned the courage to start his own trading firm when he was offered a post in Brussels, a plum assignment at a time when travel to the West was highly restricted.

“I was proud and excited and I accepted the assignment,” Potanin told me. “But then, at the last minute, I realized things were changing so quickly in Russia and I had to be part of the change. Everyone thought I was crazy.”

A lot of responding to revolution is about luck. Not just being at the right place at the right time, but also reading the one book or having the single conversation that allows you to spot a nascent opportunity in a fast-changing world. And sometimes, you might have the misfortune to read the wrong book or watch the wrong movie. That is what happened to Kakha Bendukidze, a Georgian-born biologist (yes, another smart outsider) who parlayed his scientific skills and connections into a small manufacturing empire, including ownership of Uralmash, a legendary Soviet heavy machine–building factory.

Bendukidze became a multimillionaire, but he never became an oligarch. Why? “I blame
Wall Street
,” he told me—the film, not the Manhattan neighborhood. “We watched that movie in 1992 and we didn’t understand any of it. I thought to myself, If I can’t even understand as much finance as an ordinary American moviegoer understands, it would be crazy for me to start my own bank.” But at a moment of hyperinflation and slightly lower state interest rates, banking offered an opportunity to make the first big post-Soviet windfall. Even more important, the fortunes earned using state credits provided the future oligarchs with the capital and the connections to muscle their way into the real windfall, the 1995 loans-for-shares giveaway of Russia’s natural resources. Because of Gordon Gekko, Bendukidze missed out.

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Soros learned about revolutions the hard way. He compares 2008, with its cataclysmic events and his survival of them, with 1944, when as a Jewish fourteen-year-old in Nazi-occupied Budapest he and his family eluded the Holocaust. The Soroses and their circle of friends had lived comfortable, largely secular lives before the Germans arrived. Many in their community were unable to grasp that that life was over and they needed to flee at once. An exception was Tivadar, Soros’s beloved father, whose experience of the Russian Revolution as an Austro-Hungarian officer had taught him the necessity of responding to revolutionary change with equally radical behavior. Over the objections of his wife and mother-in-law, Tivadar immediately sent the family into hiding—a decision that saved all their lives. Now a fit, often tanned eighty-two-year-old who favors beautifully tailored suits and has a thick, graying head of hair as well as a hearing aid, George Soros thinks his father’s “formative” experience of revolutionary change helped him to anticipate and respond to the current crisis.

“I recognize that sometimes survival requires a positive effort. I think that is really a childhood experience, and it was partly taught and partly experienced. . . . I had his [my father’s] experience of where the normal rules don’t apply and that if you abide by the rules, you’re dead. So your survival depends on recognizing that the normal rules don’t apply. . . . Sometimes not acting is the most dangerous thing of all.”

That early life training shaped Soros’s investing style and his investing philosophy. “My theory of bubbles was a translation of this real-time experience. I became a kind of specialist in boom and bust.”

That is certainly the view of his son Jonathan, a triathlete, Harvard Law School grad, and married father of two—but also, as the child of American prosperity and stability, someone who, in his father’s opinion, is not a leader of radical change. Jonathan says of his father: “That experience has allowed him to see through artifice. He can see the things that look like they are very stable—things that look like marble are not marble, they are plaster—and the institutions that we have built are human institutions and aren’t necessarily permanent.”

Although many CEOs and regulators say the crash had been impossible to predict, among professional traders it was commonplace as early as 2005 to believe that inflated house prices and turbocharged derivatives were creating the next asset bubble.

“Whenever I read about people not seeing it coming, I get a kick out of it,” Keith Anderson, Soros’s former chief investment officer, told me. Tall, burly, and soft-spoken, with a modest office decorated largely with photos of his smiling children, Anderson has a friendly, unpretentious air—more Little League dad than Davos man—and a blue-chip money management CV. “Most every intelligent person—we all understood and knew that there was a housing bubble, that the CDOs and the derivatives were creating distortions.”

The difficulty was knowing when the bubble would burst. “What the problem was,” he said, was “that many of us had thought that for too long and were wrong. We knew it was occurring, but you wouldn’t want to be betting against it, because you weren’t getting satisfaction.

“There are multiple versions of history,” Anderson explained. “The common one, in the normal newspaper, is ‘What fools! No one saw it coming.’ Lots of people saw it coming. The question was: When was it going to stop? What was going to cause it to stop? How do you profit from it?”

In mid-2007, when Soros decided he needed to actively manage his money again, Quantum’s funds were mostly entrusted to outside managers. They, and the smaller number of inside managers, operated with “total discretion,” Soros recalled. “They have their own style and their own exposure and some of them have money for extended periods of time.”

Soros “didn’t interfere in the running of their accounts, because that’s not the way we operate,” so he set up an account to counterbalance their positions, which he ran himself. “Basically, it involved a large amount of hedging. It was neutralizing market exposure [of his external and internal managers] and then taking market exposure on the negative side.” Soros was not only unfamiliar with fancy new derivatives; by his own admission, he didn’t know much about individual stocks anymore, either. So one of the world’s great investors set about protecting himself from the coming crash with tools so simple your average booyah Jim Cramer watcher would scorn to use them: S&P futures and other exchange-traded funds. He made simple bets, too: “Basically, I went short—the stock market and the dollar.”

Soros didn’t get it exactly right. “In a time like this, where the uncertainty is so big and the volatility is so big, you must not bet on a large scale,” Soros told me at the end of 2008. “One of the mistakes I made is that actually I bet too much this year, too large positions, and therefore I had to move in and out to limit the risk. I would have actually done better had I taken my basic positions on a smaller scale and not allowed the market to scare me out of those positions. I would have done much better.”