“The Most Opaque Investment Schemes Ever Devised”: Cities And States Paying Massive Secret Fees To Wall Street
California’s report said $440 million. New Jersey’s said $600 million. In Pennsylvania, the tally is $700 million. Those Wall Street fees paid by public workers’ pension systems have kicked off an intensifying debate over whether such expenses are necessary. Now, a report from an industry-friendly source says those huge levies represent only a fraction of the true amounts being raked in by Wall Street firms from state and local governments.
“Less than one-half of the very substantial [private equity] costs incurred by U.S. pension funds are currently being disclosed,” says the report from CEM, whose website says the financial analysis firm “serve(s) over 350 blue-chip corporate and government clients worldwide.”
Currently, about 9 percent — or $270 billion — of America’s $3 trillion public pension fund assets are invested in private equity firms. With the financial industry’s standard 2 percent management fee, that quarter-trillion dollars generates roughly $5.4 billion in annual management fees for the private equity industry — and that’s not including additional “performance” fees paid on investment returns. If CEM’s calculations are applied uniformly, it could mean taxpayers and retirees may actually be paying double — more than $10 billion a year.
Public officials are overseeing this massive payout to Wall Street at the very moment many of those same officials are demanding big cuts to retirees’ promised pension benefits.
“With billions of public worker and taxpayer dollars put at risk in the highest-cost, most opaque investment schemes ever devised by Wall Street for a decade now, investigations that hold Wall Street profiteers accountable are long, long overdue,” said former Securities and Exchange Commission attorney Ted Siedle.
Private equity firms have argued that their fees are worth the expense, because they supposedly deliver returns for investors that beat low-fee index funds, which track the broader stock market. But those private equity returns are typically self-reported by the firms over the life of those longer-term investments, meaning there are few ways to verify whether the returns are real. Indeed, a recent study from George Washington University argued that private equity firms are using their self-reporting authority to mislead investors into believing their returns are smoother and more consistent than they actually are.
In a 2014 speech, the SEC’s top examiner, Andrew Bowden, sounded the alarm about undisclosed fees in the private equity industry, saying the agency had discovered “violations of law or material weaknesses in controls over 50 percent of the time” at firms it had evaluated.
To date, however, the SEC has taken few actions to crack down on the practices, but some states are starting to step up their oversight.
In New Jersey, for instance, pension trustees announced a formal investigation of Gov. Chris Christie’s administration after evidence surfaced suggesting that the Republican administration has not been disclosing all state pension fees paid to financial firms.
In Rhode Island, the new state treasurer, Seth Magaziner, a Democrat, recently published a review of all the fees that state’s beleaguered pension fund has paid. The analysis revealed that the former financial firm of Democratic Governor Gina Raimondo is charging the state’s pension fund the highest fee rate of any firm in its asset class.
In Pennsylvania, the new Democratic governor, Tom Wolf used his first budget address to call for the state “to stop excessive fees to Wall Street managers.”
These moves are shining a spotlight on one of the most lucrative yet little-noticed Wall Street schemes. With so much money at issue – and with pensioners retirement income on the line — that scrutiny is long overdue.
By: David Sirota, Senior Writer at the International Business Times; The National Memo, April 24, 2015
“Wall Street’s Threat To The American Middle Class”: Do We Really Need To Be Reminded About What Happened Six Years Ago?
Presidential aspirants in both parties are talking about saving the middle class. But the middle class can’t be saved unless Wall Street is tamed.
The Street’s excesses pose a continuing danger to average Americans. And its ongoing use of confidential corporate information is defrauding millions of middle-class investors.
Yet most presidential aspirants don’t want to talk about taming the Street because Wall Street is one of their largest sources of campaign money.
Do we really need reminding about what happened six years ago? The financial collapse crippled the middle class and poor — consuming the savings of millions of average Americans, and causing 23 million to lose their jobs, 9.3 million to lose their health insurance, and some 1 million to lose their homes.
A repeat performance is not unlikely. Wall Street’s biggest banks are much larger now than they were then. Five of them hold about 45 percent of America’s banking assets. In 2000, they held 25 percent.
And money is cheaper than ever. The Fed continues to hold the prime interest rate near zero.
This has fueled the Street’s eagerness to borrow money at rock-bottom rates and use it to make risky bets that will pay off big if they succeed, but will cause big problems if they go bad.
We learned last week that Goldman Sachs has been on a shopping binge, buying cheap real estate stretching from Utah to Spain, and a variety of companies.
If not technically a violation of the new Dodd-Frank banking law, Goldman’s binge surely violates its spirit.
Meanwhile, the Street’s lobbyists have gotten Congress to repeal a provision of Dodd-Frank curbing excessive speculation by the big banks.
The language was drafted by Citigroup and personally pushed by Jamie Dimon, CEO of JPMorgan Chase.
Not incidentally, Dimon recently complained of being “under assault” by bank regulators.
Last year JPMorgan’s board voted to boost Dimon’s pay to $20 million, despite the bank paying out more than $20 billion to settle various legal problems going back to financial crisis.
The American middle class needs stronger bank regulations, not weaker ones.
Last summer, bank regulators told the big banks their plans for orderly bankruptcies were “unrealistic.” In other words, if the banks collapsed, they’d bring the economy down with them.
Dodd-Frank doesn’t even cover bank bets on foreign exchanges. Yet recent turbulence in the foreign exchange market has caused huge losses at hedge funds and brokerages.
This comes on top of revelations of widespread manipulation by the big banks of the foreign-exchange market.
Wall Street is also awash in inside information unavailable to average investors.
Just weeks ago a three- judge panel of the U.S. court of appeals that oversees Wall Street reversed an insider-trading conviction, saying guilt requires proof a trader knows the tip was leaked in exchange for some “personal benefit” that’s “of some consequence.”
Meaning that if a CEO tells his Wall Street golfing buddy about a pending merger, the buddy and his friends can make a bundle — to the detriment of small, typically middle-class, investors.
That three-judge panel was composed entirely of appointees of Ronald Reagan and George W. Bush.
But both parties have been drinking at the Wall Street trough.
In the 2008 presidential campaign, the financial sector ranked fourth among all industry groups giving to then candidate Barack Obama and the Democratic National Committee. In fact, Obama reaped far more in contributions from the Street than did his Republican opponent.
Wall Street also supplies both administrations with key economic officials. The treasury secretaries under Bill Clinton and George W. Bush – Robert Rubin and Henry Paulson, respectfully, had both chaired Goldman Sachs before coming to Washington.
And before becoming Obama’s treasury secretary, Timothy Geithner had been handpicked by Rubin to become president of Federal Reserve Bank of New York. (Geithner is now back on the Street as president of the private-equity firm Warburg Pincus.)
It’s nice that presidential aspirants are talking about rebuilding America’s middle class.
But to be credible, he (or she) has to take clear aim at the Street.
That means proposing to limit the size of the biggest Wall Street banks; resurrect the Glass-Steagall Act (which used to separate investment from commercial banking); define insider trading the way most other countries do – using information any reasonable person would know is unavailable to most investors; and close the revolving door between the Street and the U.S. Treasury.
It also means not depending on the Street to finance their campaigns.
By: Robert Reich, The Robert Reich Blog, January 26, 2015
“American Society’s Real Moochers; CEOs”: It’s Not The Working Poor Who Deserve Public Scorn For Dependence On Government Handouts
Holiday bells are silent in the homes of America’s struggling working poor, even with gasoline prices at their lowest levels in years. These are people derided as moochers because their starvation wages force them to accept food stamps to feed their children.
On the other side of town, inside gated communities where guards demand photo ID even from Santa, CEOs’ Christmas plums are super-sugared with record-breaking corporate profits.
These are people somehow not derided as moochers, even though their million-dollar pay packages are propped up by tax breaks.
The parable of Charles Dickens’ A Christmas Carol springs to mind as Wall Street banks and law firms hand out six- and seven-figure year-end bonuses while Wal-Mart and fast food workers protest wages so low that their holiday meals are food pantry dregs. It is CEOs, not the working poor, who deserve public scorn for their dependence on government handouts.
The Institute for Policy Studies issued a report last month that details the mooching of the nation’s top corporations and CEOs. It’s called “Fleecing Uncle Sam.” The findings are pretty galling.
Of America’s 100 top-paid CEOs, 29 worked schemes that enabled them to collect more in compensation than their corporations paid in income taxes. The average pay for these 29: $32 million. For one year. And corporations mangle tax the code to deduct that too.
Though their corporations reported combined pre-tax profits of $24 billion, they wrangled $238 million in tax refunds out of the federal government. That’s refunds — the government gave money to highly profitable corporations.
That’s an effective tax rate of negative 1 percent.
That means middle class taxpayers helped cover the cost of million-dollar pay packages for CEOs. Middle class taxpayers, whose median family income is $51,324 and whose federal income taxes are withdrawn directly from their checks before they see a cent of pay, support CEOs who pull down $32 million a year.
That qualifies CEOs as first-class fleecers!
Their corporations pay nothing for essential government services that middle class taxpayers provide. That includes patent protection, the Commerce Department’s sanctions against foreign trade rule violations and federal court dispute resolution.
Some corporations haven’t developed schemes enabling them to tax the federal government. Instead, they pay, but not at that 35 percent rate they’re always whining about. Between 2008 and 2012, the average large corporation, according to Fleecing Uncle Sam, paid just 19.4 percent. Individuals earning $50,000 a year pay 25 percent. Clearly, corporations are not paying a fair share at 19 percent.
There’s this wacky theory that if governments excuse corporations from paying their share, then they’ll expand and create jobs. It’s wacky because it’s fiction. Highly profitable corporations aren’t expanding and creating jobs; they’re buying back their own stock.
A study by University of Massachusetts professor William Lazonick, president of the Academic-Industry Research Network, showed that between 2003 and 2012, S&P 500 corporations used 54 percent of their earnings – $2.4 trillion – to buy their own stock.
This isn’t creating jobs. This isn’t investing in a corporation’s future. This is adding to CEO wealth. It works like this: Stock buybacks push up stock prices. Forty-two percent of compensation for S&P 500 CEOs comes from stock options. Thus, as Lazonick points out, stock increases equal CEO pay raises.
Corporations don’t expand just because untaxed profits are sitting around anyway. They expand to meet demand. And corporate practices have deflated demand.
Part of the problem is that CEOs and top executives are taking an increasing portion while doling out less to workers. As the New York Times reported in January, wages have fallen to a record low as a share of gross domestic product, dropping to 43.5 percent last year. It was 50 percent in 1975. The decline means less demand.
But there’s more. Just last week, The New York Times noted two other trends that contribute to weak demand. One is wage theft. The U.S. Department of Labor found that more than 300,000 workers in New York and California are victims of minimum wage violations each month, costing them between $20 million and $29 million each week. If corporations didn’t cheat them out of those earnings, their spending would generate greater demand.
The other trend is insecure income. Millions of Americans are unsure week to week how much money will be coming into their households. This occurs for many reasons, but among the most prominent is the refusal of employers to provide workers with steady weekly hours and practices like sending workers home when retail or restaurant traffic is light. A survey by the Federal Reserve suggests the problem of unreliable income may have worsened as Wall Street has strengthened. Families that can’t pay their bills reduce demand.
Instead of giving workers raises and steady hours, corporations have rewarded only those at the top. The Fleecing Uncle Sam study found that companies that paid their CEOs more than they paid in federal income taxes gave those CEOs fat raises. The average pay of these CEOs rose from $16.7 million in 2010 to $32 million in 2013.
They’ve got trillions for CEOs and stock buy-backs, but nothing for workers or the federal government. This isn’t an accident. It’s not some invisible hand of the market. It’s CEOs freeloading.
No ghosts are going to show up to convert these Scrooges into humans. Instead, the first step in that process is recognizing that the moochers are the CEOs, not the hapless food stamp recipients who desperately want steady, full-time, decently-paid work. The second step is to demand that corporations pay their fair share of taxes and provide steady, full-time, decently-paid work.
By: Leo Gerard, President of the United Steelworkers International Union; In These Times, January 1, 2015
“The Government Problem”: The Central Issue Is Whom The Government Is For
Some believe the central political issue of our era is the size of the government. They’re wrong. The central issue is whom the government is for.
Consider the new spending bill Congress and the President agreed to a few weeks ago.
It’s not especially large by historic standards. Under the $1.1 trillion measure, government spending doesn’t rise as a percent of the total economy. In fact, if the economy grows as expected, government spending will actually shrink over the next year.
The problem with the legislation is who gets the goodies and who’s stuck with the tab.
For example, it repeals part of the Dodd-Frank Act designed to stop Wall Street from using other peoples’ money to support its gambling addiction, as the Street did before the near-meltdown of 2008.
Dodd-Frank had barred banks from using commercial deposits that belong to you and me and other people, and which are insured by the government, to make the kind of risky bets that got the Street into trouble and forced taxpayers to bail it out.
But Dodd-Frank put a crimp on Wall Street’s profits. So the Street’s lobbyists have been pushing to roll it back.
The new legislation, incorporating language drafted by lobbyists for Wall Street’s biggest bank, Citigroup, does just this.
It reopens the casino. This increases the likelihood you and I and other taxpayers will once again be left holding the bag.
Wall Street isn’t the only big winner from the new legislation. Health insurance companies get to keep their special tax breaks. Tourist destinations like Las Vegas get their travel promotion subsidies.
In a victory for food companies, the legislation even makes federally subsidized school lunches less healthy by allowing companies that provide them to include fewer whole grains. This boosts their profits because junkier food is less expensive to make.
Major defense contractors also win big. They get tens of billions of dollars for the new warplanes, missiles, and submarines they’ve been lobbying for.
Conservatives like to portray government as a welfare machine doling out benefits to the poor, some of whom are too lazy to work.
In reality, according to the Center for Budget and Policy Priorities, only about 12 percent of federal spending goes to individuals and families, most of whom are in dire need.
An increasing portion goes to corporate welfare.
In addition to the provisions in the recent spending bill that reward Wall Street, health insurers, the travel industry, food companies, and defense contractors, other corporate goodies have been long baked into the federal budget.
Big agribusiness gets price supports. Hedge-fund and private-equity managers get their own special “carried-interest” tax loophole. The oil and gas industry gets its special tax subsidies.
Big Pharma gets a particularly big benefit: a prohibition on government using its vast bargaining power under Medicare and Medicaid to negotiate low drug prices.
Why are politicians doing so much for corporate executives and Wall Street insiders? Follow the money. It’s because they’re flooding Washington with money as never before, financing an increasing portion of politicians’ campaigns.
The Supreme Court’s decision this year in McCutcheon vs. Federal Election Commission, following in the wake of Citizen’s United, already eliminated the $123,200 cap on the amount an individual could contribute to federal candidates.
The new spending legislation, just enacted, makes it easier for wealthy individuals to write big checks to political parties. Before, individuals could donate up to $32,400 to the Democratic or Republican National Committees.
Starting in 2015, they can donate ten times as much. In a two-year election cycle, a couple will be able to give $1,296,000 to a party’s various accounts.
But the only couples capable of giving that much are those that include corporate executives, Wall Street moguls, and other big-moneyed interests.
Which means Washington will be even more attentive to their needs in the next round of legislation.
That’s been the pattern. As wealth continues to concentrate at the top, individuals and entities with lots of money have greater political power to get favors from government – like the rollback of the Dodd-Frank law and the accumulation of additional corporate welfare. These favors, in turn, further entrench and expand the wealth at the top.
The size of government isn’t the problem. That’s a canard used to hide the far larger problem.
The larger problem is that much of government is no longer working for the vast majority it’s intended to serve. It’s working instead for a small minority at the top.
If government were responding to the public’s interest instead of the moneyed interests, it would be smaller and more efficient.
But unless or until we can reverse the vicious cycle of big money getting political favors that makes big money even bigger, we can’t get the government we want and deserve.
By: Robert Reich, The Robert Reich Blog, December 23, 2014
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