A penny saved....

Reading about (and experiencing) the diminution of wealth while the Dow goes back to 1997 levels puts me in mind of the spending habits of a lot of the people I worked with on Wall Street years ago. Once they started making good money, many of them seemed to assume that they were on the gravy train forever.

A typical bond trader who started at an investment bank back in the 1980's might within a few years be making roughly half a million a year. You'd think that would leave plenty of room for savings.

But when I would ask my coworkers what they had invested their bonus money in, they would often reply that it was still in the bank, that they hadn't done anything with it yet. (Translation: instead of going into stocks or bonds, it was being consumed.) There just seemed to be something about a bonus that burned a hole in peoples' pockets. So, instead of saving it, the traders felt obliged to get a summer rental in the Hamptons, a Jaguar, jewelry for the wife, and take fancy vacations.

I would recommend to coworkers that they put their money into a private equity fund our firm offered its employees, which effectively allowed them to invest in private companies at three or four times earnings and then watch our firm take them public at roughly fifteen times earnings. My coworkers who did so might put ten or twenty thousand into this fund and consider themselves sufficiently thrifty.

Part of the problem was that once the lifestyle has expanded, it's hard to downscale. That first summer in the Hamptons seems like a luxury, but after spending a summer there, spending your summer weekends in the city the next year would seem a hardship. So it's back to the Hamptons.

A decade down the road, handsomely compensated the entire way, these guys might be left with as little as two or three hundred thousand. Especially after a divorce.

In all fairness, life in New York City does cost more. I once heard about a guy, a friend of a friend, who was a top salesman at one of the investment banks. He had been making roughly a million dollars a year or so since the mid-80's, yet after twenty years of this had saved virtually nothing. He lived with his wife and four children on the Upper East Side, sent his four children to private school. He owned his condo, a place on Martha's Vineyard, and nothing else.

The friend who told me about this guy (who was bemoaning his poverty) said that he looked at his expenses, and there was really no one item you could point to which was wildly profligate. Public schools in Manhattan are not necessarily very good, so he sent each of his kids to private school, at a cost of twenty thousand per year. And at these private schools, you're expected to donate another five thousand a year to the school if you can, so the education bill totaled a hundred thousand. Although he owned his condo, he had to pay maintenance fees of three thousand a month, for another thirty-six thousand a year. There were still mortgage payments on the place on the Vineyard. They had to pay for parking for their two cars, which ran to twelve thousand a year. They had cleaners come in a couple times a week, the occasional tutor for their kids, and two vacations a year, plus weekly meals out. Then when you take into account that combined federal, state, and city taxes eat up almost half your earnings, there just wasn't much left over. So, after twenty years of well renumerated work, there were only two pieces of real estate to show for it. There was no divorce involved here, no illnesses, no drug addictions, no insanely expensive hobbies. Just "normal" Manhattan living expenses.

I wonder about people like this now that most of the investment banks no longer even exist, at least in their previous form.

Of course, with the market down as much as it is, those who saved and invested their earning in stocks don't have as much to show for it either. And those who invested with Bernie Madoff, Samuel Israel, Allen Stanford, Nicholas Cosmo, or Arthur Nadel have nothing to show for it. So maybe those who lived each day as if it were their last were really the smart ones.

But what will these people do now? Will they even have enough to live on, or will they have to look for work in less well-compensated professions? How much will their lifestyles have to be downscaled? It's easy to get spoiled, hard to get unspoiled.

(Confession: occasional feelings of schadenfreude creep in when contemplating their predicament.)