Looting the Pension Funds?
In the final months of 2011, almost two years before the city of Detroit would shock America by declaring bankruptcy in the face of what it claimed were insurmountable pension costs, the state of Rhode Island took bold action to avert what it called its own looming pension crisis. Led by its newly elected treasurer, Gina Raimondo – an ostentatiously ambitious 42-year-old Rhodes scholar and former venture capitalist – the state declared war on public pensions, ramming through an ingenious new law slashing benefits of state employees with a speed and ferocity seldom before seen by any local government.I encourage my readers to take the time to read the rest of Matt Taibbi's entire piece here. The language is raw and even though I disagree with many assertions and accusations, it's worth reading because he tackles an issue that rarely receives proper media coverage, namely, the pathetic state of U.S. public pension funds, how they got into this mess and who is being paid to get them out of it.
Called the Rhode Island Retirement Security Act of 2011, her plan would later be hailed as the most comprehensive pension reform ever implemented. The rap was so convincing at first that the overwhelmed local burghers of her little petri-dish state didn't even know how to react. "She's Yale, Harvard, Oxford – she worked on Wall Street," says Paul Doughty, the current president of the Providence firefighters union. "Nobody wanted to be the first to raise his hand and admit he didn't know what the fuck she was talking about."
Soon she was being talked about as a probable candidate for Rhode Island's 2014 gubernatorial race. By 2013, Raimondo had raised more than $2 million, a staggering sum for a still-undeclared candidate in a thimble-size state. Donors from Wall Street firms like Goldman Sachs, Bain Capital and JPMorgan Chase showered her with money, with more than $247,000 coming from New York contributors alone. A shadowy organization called EngageRI, a public-advocacy group of the 501(c)4 type whose donors were shielded from public scrutiny by the infamous Citizens United decision, spent $740,000 promoting Raimondo's ideas. Within Rhode Island, there began to be whispers that Raimondo had her sights on the presidency. Even former Obama right hand and Chicago mayor Rahm Emanuel pointed to Rhode Island as an example to be followed in curing pension woes.
What few people knew at the time was that Raimondo's "tool kit" wasn't just meant for local consumption. The dynamic young Rhodes scholar was allowing her state to be used as a test case for the rest of the country, at the behest of powerful out-of-state financiers with dreams of pushing pension reform down the throats of taxpayers and public workers from coast to coast. One of her key supporters was billionaire former Enron executive John Arnold – a dickishly ubiquitous young right-wing kingmaker with clear designs on becoming the next generation's Koch brothers, and who for years had been funding a nationwide campaign to slash benefits for public workers.
Nor did anyone know that part of Raimondo's strategy for saving money involved handing more than $1 billion – 14 percent of the state fund – to hedge funds, including a trio of well-known New York-based funds: Dan Loeb's Third Point Capital was given $66 million, Ken Garschina's Mason Capital got $64 million and $70 million went to Paul Singer's Elliott Management. The funds now stood collectively to be paid tens of millions in fees every single year by the already overburdened taxpayers of her ostensibly flat-broke state. Felicitously, Loeb, Garschina and Singer serve on the board of the Manhattan Institute, a prominent conservative think tank with a history of supporting benefit-slashing reforms. The institute named Raimondo its 2011 "Urban Innovator" of the year.
The state's workers, in other words, were being forced to subsidize their own political disenfranchisement, coughing up at least $200 million to members of a group that had supported anti-labor laws. Later, when Edward Siedle, a former SEC lawyer, asked Raimondo in a column for Forbes.com how much the state was paying in fees to these hedge funds, she first claimed she didn't know. Raimondo later told the Providence Journal she was contractually obliged to defer to hedge funds on the release of "proprietary" information, which immediately prompted a letter in protest from a series of freaked-out interest groups. Under pressure, the state later released some fee information, but the information was originally kept hidden, even from the workers themselves. "When I asked, I was basically hammered," says Marcia Reback, a former sixth-grade schoolteacher and retired Providence Teachers Union president who serves as the lone union rep on Rhode Island's nine-member State Investment Commission. "I couldn't get any information about the actual costs."
This is the third act in an improbable triple-fucking of ordinary people that Wall Street is seeking to pull off as a shocker epilogue to the crisis era. Five years ago this fall, an epidemic of fraud and thievery in the financial-services industry triggered the collapse of our economy. The resultant loss of tax revenue plunged states everywhere into spiraling fiscal crises, and local governments suffered huge losses in their retirement portfolios – remember, these public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its fraud-riddled mortgage-backed securities in the pre-crash years.
Today, the same Wall Street crowd that caused the crash is not merely rolling in money again but aggressively counterattacking on the public-relations front. The battle increasingly centers around public funds like state and municipal pensions. This war isn't just about money. Crucially, in ways invisible to most Americans, it's also about blame. In state after state, politicians are following the Rhode Island playbook, using scare tactics and lavishly funded PR campaigns to cast teachers, firefighters and cops – not bankers – as the budget-devouring boogeymen responsible for the mounting fiscal problems of America's states and cities.
Not only did these middle-class workers already lose huge chunks of retirement money to huckster financiers in the crash, and not only are they now being asked to take the long-term hit for those years of greed and speculative excess, but in many cases they're also being forced to sit by and watch helplessly as Gordon Gekko wanna-be's like Loeb or scorched-earth takeover artists like Bain Capital are put in charge of their retirement savings.
It's a scam of almost unmatchable balls and cruelty, accomplished with the aid of some singularly spineless politicians. And it hasn't happened overnight. This has been in the works for decades, and the fighting has been dirty all the way.
There's $2.6 trillion in state pension money under management in America, and there are a lot of fingers in that pie. Any attempt to make a neat Aesop narrative about what's wrong with the system would inevitably be an oversimplification. But in this hugely contentious, often overheated national controversy – which at times has pitted private-sector workers who've mostly lost their benefits already against public-sector workers who are merely about to lose them – two key angles have gone largely unreported. Namely: who got us into this mess, and who's now being paid to get us out of it.
Over the years, I've written many critical comments on fast times in Pensionland. I've seen it all, the good, the bad and the downright ugly. Public pensions are big business and they feed the Wall Street machine. From asset managers, to hedge funds, to private equity funds, to pension consultants, to accountants, lawyers, brokers, advisors, vendors, and everyone else that wants a piece of the public pension pie.
Taibbi brings up excellent points but he fails to delve deeper into a topic that is far more complex than his article leads you to believe. He points fingers at "ambitious" politicians who fund "greedy" hedge fund and private equity managers in exchange for political contributions, but fails to see the bigger problem is the lack of proper pension governance which has literally crushed the U.S. public pension system over the last 30 years.
And when you focus on governance, you will quickly see that everyone is to blame for the great retirement heist: governments, unions, pension funds, corporations, and all the financial intermediaries in between. No doubt, it's a scandal that states failed to top up their pensions for many years, but it's equally abhorrent that many unions and governments cling to the pension rate of return fantasy in order to keep contribution rates as low as possible or that they fight any attempts to increase the compensation of their public pension fund managers.
Earlier this week, I discussed how U.S. public pension assets hit a record high and mentioned how hedge funds and private equity funds are thriving no thanks to these public pension funds, noting the following:
So long as these pension plans offer their beneficiaries gold-plated retirement benefits, money will need to earn high rates of return in order to fund these payments. And despite the ample criticism that has been lobbed at hedge funds and private equity funds since 2008, there has been little traction in attacks on the premise that the best funds really don't deliver high returns. Certainly not all funds are able to deliver the jaw-dropping returns, but enough are to maintain the momentum of investor allocations necessary to keep the industry afloat.In that comment, I also discussed how low compensation of U.S. public pension fund managers and lack of independent investment boards continue to plague the performance of these funds.
If there is to be a day of reckoning for hedge funds and private equity funds, it will necessarily only spring from a crisis in confidence in the minds of those individuals in California, New York, Texas and many other states who have as their main priority ensuring that retirement checks get sent to former public workers when there are due.
Until then, checks will continue to be written by investors eager to earn 20-30% on their money, and managers of alternative funds will still eagerly cash those checks and then promptly look for opportunities in the market that they can pounce on to quickly double and triple their money.
I explained that there is a symbiotic relationship between Wall Street and public pension funds and that there are ingrained interests fighting the overhaul of the governance system because it will affect their pockets. As large Canadian and international funds move to dodge Wall Street, in the U.S., the opposite is happening. Everyone is embracing the new asset allocation tipping point, shoving billions into hedge funds and private equity funds to make their ridiculous 8% bogey, with little or no regard for the outrageous fees being doled out.
Of course, it's not that cut and dry. In some cases, the fees are justified, but in many cases, they're not and the big guys are getting bigger while smaller funds who are often outperforming them are struggling to survive. But again, why pay fees to external managers if you can replicate many strategies in-house for a fraction of the cost? Of course, to do this, you need to PAY public pension fund managers properly and get rid of political interference once and for all.
The points I raise above only scratch the surface of the problem. My biggest concern is how income inequality is growing and far too many people in the U.S. and elsewhere who are not properly covered will succumb to the new pension poverty. Pointing fingers at opportunistic politicians and greedy hedge fund managers will increase your magazine's sales but it does nothing to rectify the structural issues underlying America's retirement crisis. Now more than ever, we need new thinking to tackle this crisis.
Below, Matt Taibbi discusses how Wall Street firms are now making millions in profits off of public pension funds nationwide. "Essentially it is a wealth transfer from teachers, cops and firemen to billionaire hedge funders," Taibbi says. "Pension funds are one of the last great, unguarded piles of money in this country and there are going to be all sort of operators that are trying to get their hands on that money."