The Next City
March 21, 1999
SOME FABULOUSLY WEALTHY PEOPLE INHERITED THEIR RICHES. OTHERS earned their wealth through their exceptional skills. But a significant number of the extremely rich — perhaps the majority of those who made it on their own — lucked into it. This group includes the Reichmanns, ranked fourth in Forbes 1991 list of the world’s richest people, just behind King Fahd of Saudi Arabia; the Belzbergs, the notorious “greenmailers” who preyed on vulnerable multinationals; Jack Poole, whose high flying Daon Development ruled the West in the 1970s; Garth Drabinsky, who created the Cineplex Odeon and Livent empires; and William Zeckendorf, who built Montreal’s Place Ville Marie and provided the land the United Nations needed to build its edifice. It includes, in short, most of those celebrated as financial geniuses who were — in fact — not geniuses at all. They were gamblers in grey suits who, unbeknownst to them, kept betting against the house. This ignorance, which also blinded them from seeing that they were repeatedly betting the farm, took them straight to the top as long as their luck held. When their luck ran out, so did their fortunes.
Billionaires numbered but a handful during the early 1980s. Starting in the mid-1980s, their number exploded — due partly to President Ronald Reagan’s wealth-promoting tax cuts (one-third of the world’s billionaires are American), partly to the many new fortunes in the computer industry and related technology, and partly to a revolution in financial markets whose myriad mergers, leveraged buyouts, and other innovations permitted rapid wealth creation based on little equity and much debt. Billionaires have become so numerous — Forbes compared them to an unchecked deer population — that, to keep its 1997 numbers manageable, the magazine culled its list of the idle rich. But even without kings, queens, dictators, retirees, and others Forbes calls coupon-clippers, billionaires have became too humdrum for all to merit attention. The magazine now limits itself to the top 200 working billionaires, lists another 150 worthy of honorable mentions, and gives the brush-off to the littlest billionaires and mere megamillionaires.
This explosion in the billionaire population, though impressive, would pale when compared with the number that would exist if everyone followed the example of the reckless rich. It doesn’t take great intelligence, judgment, skill, or connections, or an Ivy League degree to pull off a rapid ascent to wealth (58 of the last Forbes 400 richest Americans didn’t finish college). Quite the contrary. Intelligence and especially judgment prevent most middle-class people from trading their bird in the hand for a billion in the bush.
Robert Campeau demonstrates how someone quite unexceptional in many respects, but possessed of an extreme recklessness, can acquire exceptional wealth.
One of seven children born in Sudbury, Ontario, in 1923, Campeau, the son of a blacksmith/mechanic, quit school in the eighth grade to sweep floors at 50 cents an hour. He then tried millwrighting, hauling logs, and running a small grocery store before noticing that a cousin, who built a home in his spare time, doubled his money when he sold it a few months later.
Campeau and his cousin joined forces, bought a house in Ottawa for $5,000, fixed it up themselves, then sold it for $7,500. This led to more buying and selling of houses, then to the creation of subdivisions on the outskirts of Ottawa, all using borrowed money. Campeau became rich during the post-Second World War building boom, which was fuelled by returning servicemen holding government subsidized mortgages. At that time, gung-ho real estate developers who bet on a continuing building boom borrowed to the hilt and became very rich; cautious ones became less so.
Campeau soon built apartment buildings, office towers, and in a daring move, condominiums and the Harbour Castle Hotel along Toronto’s derelict waterfront, which proved prescient when the city’s waterfront revival occurred. Campeau’s string of successes produced an enterprise worth $200 million. A person with judgment would survey his accomplishments and grant some credit to providence — to make his fortune, Campeau had required not only a robust real estate market but also numerous political decisions to go his way. A person with judgment would minimize his risk by selling some assets to reduce his debt. Campeau was not such a person. He kept betting double or nothing.
Campeau flung himself into other pursuits — a TV station, a life insurance company, a trust company among them — before veering south of the border, first in search of a savings and loan institution (these would soon collapse in one of the greatest financial fiascos in U.S. history), then in an attempt to acquire R.H. Macy, the fifth biggest U.S. department store chain.
He lost Macy’s to one of the continent’s pre-eminent retailers, Edward Finkelstein, Macy’s chairman, who pulled off a $3.6-billion leveraged buyout. Undeterred, Campeau bought the sixth-biggest chain, Allied Stores, in a $3.5-billion hostile takeover that had him frantically trying to cobble together his last bit of financing at the eleventh hour.
Awash in debt and entirely inexperienced in managing department stores, Campeau then plunged himself into a bidding war for Federated, America’s biggest department store chain, against none other than Finkelstein, who was also awash in debt. Campeau emerged the winner with a final bid of $6.5 billion.
Did he pay too much? Many thought not, since Finkelstein was willing to pay as much, and seemingly savvy lenders were backing them both. In truth, Campeau and Finkelstein were in a race to see who would go bankrupt first. Campeau finished ahead of Finkelstein here, too: Allied and Federated entered bankruptcy proceedings in January 1990, two years ahead of Macy’s. Finkelstein is now a consultant in Manhattan; Campeau has started over in Austria, developing a Berlin housing complex with money borrowed from sources unknown. The German press calls him Mr. Bankrupt.
Campeau’s gift was a willingness to repeatedly go for broke, and an ability to find lenders and others willing to join him. The Reichmanns had the same ability, but they exercised it on a grander scale. When the Reichmanns’ luck ran out, they may have accumulated more debt than any other commercial enterprise in history. Like Campeau, Paul Reichmann, too, has started over, in his case with the same development — Canary Wharf in London — whose failure brought down their empire in 1992.
According to Paul Reichmann, luck had little to do with his family’s success or failure. Today, still oblivious to the manner in which they had put their empire at risk, Paul Reichmann blames their downfall on investments in oil, gas, and forestry — outside the real estate sector that was their ken. But the Reichmanns’ folly actually lay in reckless judgments — among them backing the Campeau Corporation, a $600-million-plus mistake — and their reckless assumption that the real estate market would not badly slump. Like Campeau, like the presumed financial wizards in so many other financial sagas, the Reichmanns built a house of cards that came crashing down when the inevitable — a recession or a downturn in an industry — occurred.
The Reichmanns were not alone in making reckless assumptions. Most banks extended credit entirely on the strength of the Reichmann name. Forbes made reckless assumptions, too, in placing the Reichmanns’ wealth at $7 billion in 1991. “We seem to have been off by a nice, round $9 billion,” it admitted in 1992.
EVERY CITY IN THE COUNTRY HAS MIDDLE-CLASS DISTRICTS WHOSE HOMES average $300,000 or more in value. If, through some collective madness, every homeowner was willing to go for broke and risk his home by betting it all in a volatile market — say, on Indonesia’s rupiah during the Asian meltdown or on oil during the next oil crisis — every middle-class neighborhood would be sprinkled with megamillionaires and billionaires: In highly leveraged investments, which let investors borrow 90 or 95 per cent of the amount that they’re betting, that $300,000 could easily become $100 million after just two successful plays and $1 billion after a third, in far less time than Campeau, the Reichmanns, and others became rich.
Because part of the population is attracted to get-rich-quick schemes, the Internet is full of high-risk investment opportunities, and television ads on some U.S. networks promise viewers opportunities to double their money in a matter of months. Some doubtless will. But most people, by temperament, shy away from high-risk investments. The public’s conservatism explains the growing popularity of index funds, which allow investors to invest in the broad economy, and of mutual funds, which typically reduce risk by eschewing debt and diversifying portfolios, among other techniques. Polls show that people invest more to protect what they have than to rapidly augment it. While we may envy the flashy investors who strike it rich, we also regard their successes with a jaundiced eye, in the back of our mind remembering that the bigger they are, the harder they fall. When they fall, they often lose more than their money. Some, such as Campeau, lose their wives to divorce, their relationships with their children in financial disputes, their mental health, and their reputations.
Simply becoming a millionaire is easy, and it also doesn’t require great intelligence, skill, education, or connections. Or luck. Any waitress, mechanic, bus driver, or secretary who puts aside $2,000 at age 20 and increases the previous year’s amount by $200 each subsequent year, investing it at a modest six per cent, will retire a millionaire at age 65. Because this plodding path to modest wealth is so easy to pursue, the majority of millionaires, as documented in The Millionaire Next Door, a 1996 study by Thomas Stanley and William Danko, are plodders — the guy who owns the gas station or the bowling alley down the street.
For most people pursuing financial goals, whether to aim to be a millionaire, or a billionaire, comes down to a lifestyle choice. Methodical savers become millionaires; reckless borrowers — when blessed with luck — become billionaires.
Some mythologize billionaires as risk takers. Yet many billionaires do not deserve our admiration because bad judgment — not good — often took them to the top. Others castigate billionaires merely by virtue of their extreme wealth. Billionaires also do not deserve our opprobrium. In the end, billionaires enliven the world with their insane risk taking at no cost to the general public, much as Evil Knievel did. We can sit by the sidelines and marvel at their feats. And politely decline when offered the choice of great exploits, on the one hand, and of ruin, on the other.