The Blame Game?
William S. Lerach reports in the Huffington Post, Blame Wall Street, Not Hard Working Americans, For The Pension Funds Fiasco:
confrontations in Wisconsin and other states are the opening salvo of a
political blame game -- who is responsible for the gigantic public
pension fund deficits that threaten states' solvency and workers'
retirement savings? The conservative spin machine blames public
employees, claiming their greedy unions extorted extravagant and now
unaffordable benefits which justify pension cutbacks and union-busting.
This is a false. The real cause of
the pension fund debacle is the greed of Wall Street and its corporate
allies. It's a result of their dismantling of our nation's regulatory
safeguards and Wall Street's capture and abuse of America's public
pension funds -- charging them huge management fees, while losing
trillions of dollars of pension fund assets in risky investments.
Street developed with no regulation. Abuses abounded. Financial
markets were corrupt. Then came the 1929 Crash, a wealth destruction
event that ended the dreams of an American generation. The Pecora
hearings exposed self-dealing and fraud by Wall Street bankers. Wall
Street faced ruin. But instead of wiping out Wall Street or
nationalizing the banks, we chose to save capitalism and protect
investors -- by creating a new system of highly regulated financial
Congress created the SEC to oversee stock exchanges,
require honest accounting and disclosure by corporations and broke up
(and strictly controlled) the Wall Street banks. In time, this new
regulatory framework created the greatest age of economic growth and
prosperity in history. Despite periodic recessions and bear markets --
there were no more investor wealth destruction events.
U.S. became the world's financial powerhouse, no one got more powerful
than the Wall Street banks and their corporate allies. Then they set
about undoing the very regulatory framework that had saved them. As
politics came to depend on massive infusions of cash, no one provided
more of it than corporations and Wall Street banks. They complained
that regulation was restricting American competitiveness and economic
growth -- our citizenry was seduced by promises of greater growth and
prosperity. Government, which had actually been the key to the
solution, became portrayed as the problem. They captured Congress.
And then came the regulatory teardown.
Congress deregulated the
S&Ls. Then it enacted severe cut backs on investor protections and
curtailed their right to sue. Glass-Steagall was repealed -- allowing
the long forbidden financial giants -- investment and commercial banks
-- to recombine. The Wall Street/ Corporate alliance used its power
to see that regulatory agencies passed into the hands of appointees who
were hostile to the regulations they were supposed to enforce.
Investor protection rules were diluted. A pro-corporate Supreme Court
curtailed suits against banks and corporations. The result was
behemoth banks, less regulatory oversight and less accountability.
what came from this era of de-regulation? Increased competitiveness,
economic growth, wealth and prosperity? No -- instead we got repeated
waves of financial fraud and wealth destruction events.
came the S&L blowup of the mid-1980s. Over 3,000 S&Ls
collapsed. A few years later it was the 2000-2001
dot.com/telecommunications meltdowns epitomized by WorldCom and Enron.
Most recently, our major financial institutions were rocked by scandal
-- the worst crash since 1929. Investors lost over $20 trillion in
these three massive wealth destruction events, which were the result of
the teardown of the regulatory framework that had been erected over the
prior 70 years to control our financial markets and protect investors.
America's public pension plans -- guardians of the life savings of
countless working people -- were the biggest victims of these wealth
A pension system is a bet on the future --
some money is set aside currently, but not enough to pay all the
promised benefits. So, how pension funds are invested and safeguarded
is key. Originally, many states required pension funds to invest in
safe, interest-bearing bonds. But Wall Street could not make a lot of
money from that, so it bank-rolled initiatives and legislation to
repeal these protections and permit pension funds to be invested in the
stuff they make big profits by peddling. Then Wall Street money
managers captured pension funds' investment portfolios by assuring
trustees that ever-higher stock prices would pay for the retirement
promises. Charging enormous fees, they made risky stock market bets,
putting up to 80% of pension plan assets in the stock market. The
Wall Street wisdom that ever-rising stock prices would fund pension
plan promises was wrong. In fact, we have seen three major equity
wealth destruction events in last 20 years.
As a result,
the financial situation of our public employee pension funds is
precarious. These funds lost hundreds of billions in the S&L
disaster and the 2001-2002 market crash. After the 2001-2002 wipeout
-- guided by Wall Street -- fund trustees took much greater risks to
try to make up for the prior losses. They poured billions into hedge
funds, private equity, speculative real estate and that special Wall
Street invention -- collateralized debt obligations. Then, in the
2008-2009 financial crisis, the losses of public funds were stupendous.
109 state funds lost $865 billion
in about one year. CalPERS lost $72 billion! Now virtually all of
these funds are now grossly under-funded. New Jersey and Illinois are
each over $50 billion underwater.
are our public pension systems and plans in such precarious financial
condition? Of course there are some examples of excessive pensions, of
double-dipping and of "gaming" the system to "goose" the pension
amount. But these are few in number. And, even in the aggregate, the
financial impact of these excesses pale in comparison to the gigantic
investment losses of these pension funds. So let's place the fault
where it really belongs -- not with working people -- but with Wall
Street banks. Who made money on these risky investment gambles? Who
takes pension fund trustees to play golf and on so-called "educational"
junkets at lush resorts to enjoy lavish dinners? Wall Street.
inappropriate investments that caused these massive pension fund
losses were not an accident. The pension fund field caught the Wall
Street contagion -- financial corruption. It's called "Pay to Play."
The SEC saw it years ago but, controlled by anti-regulation political
appointees, it did nothing. So a nationwide system of political
contributions to elected officials who sit on fund boards and payoffs
and kickbacks to politically well-connected "Placement Agents" to steer
fund money to Wall Street became widespread. Not surprisingly, the
investments obtained by "pay-to-play" kickbacks and contributions have
generated horrific losses.
An investment officer of the California Public Employee Pension Fund was forced to resign
-- he got an all-expense-paid trip to NYC from an investment group
that got $600 million from the fund. The middle men on that deal --
two former top CalPERs officials -- got some $20 million to arrange
this placement. Two other former CalPERS officials have been sued by
the Attorney General for taking $50 million in placement fees to steer
pension investments. CalPERs lost hundreds of millions on such
investments. Alan Hevesi -- the former head of the New York State Fund
-- pleaded guilty to
doling out billions in that Fund's assets to favored managers in
return for benefits. The SEC has finally outlawed this system of
bribes and kickbacks. But too late -- the damage has already been done
to the pension funds. Nationwide, public pension funds lost billions
on these types of corrupt investments with Wall Street types.
horrible deficit numbers funds admit to actually hide a far more
terrible reality. To determine how well a fund is "funded" it uses an
assumed rate of return. It estimates how much the fund will earn on its
investment portfolio in the future. For decades, public pension funds
have assumed 7.5%-8%, even 9% annual growth, i.e., over 100%
compounded over 10 years. Fat chance!
pension funds are engaged in massive deceptions to conceal the true
extent of their funding deficits. They are concealing the massive
black holes that haunt public budgets. These ridiculous 7.5%-9.0%
assumed rates of return are not "little white lies" -- they are
Everest-sized whoppers. If the three big California Public Funds used a
4.5%-5% rate of return instead of the 7.5%-8% they now use, these
funds would be $500 billion under-funded -- 10 times the $50 billion
shortfall they admit to. Since this is a nationwide deception going on
in virtually all public plans, try extrapolating that out. Public
employee funds are probably $3 or $4 trillion underwater. The massive
shortfalls we now face exist despite prior "Bull Markets" and the
current rally. And the next round of excess of a still under-regulated
Wall Street will produce another wealth destruction event that will
erase recent gains.
This is no academic matter. The time to
keep the retirement promises is now upon us. In the next several
years, some 77 million U.S. baby boomers -- including millions of
teachers and public service workers -- will enter retirement.
Unfortunately, the U.S. public pension system has become a
fraud-infested house of cards. Wisconsin shows us this house of cards
is starting to collapse, sparking a major political battle.
conservatives will "scapegoat" public employees as a privileged --
protected -- class. But it was not firemen, cops, clerks, or teachers
(or their unions) who lost trillions of dollars in risky investments in
an under-regulated stock market over the past 20 years. The Wall
Street money managers lost it in investments acquiesced in by the
pension fund trustees they had wined and dined. It's the same old
story. The bankers pocket gigantic fees. The privileged few get fat.
Ordinary people get run over. And now are even to be blamed -- even
punished -- for a mess they did not create.
We cannot allow
these public pension plans to collapse. Nor can we break our promises
to workers who relied in good faith on promised pensions. Fortunately,
there is a solution that could help protect retirees and at the same
time help finance our huge federal deficit -- if we act fast.
-- stop allowing Wall Street money managers to speculate with workers'
retirement savings in risky equities and other crazy investments.
-- create a new 7% or 8% inflation-indexed U.S. Treasury bond only for
retirement funds, in staggered 10-30 year maturities. Require all
pension plans to buy and hold these bonds. To allow an orderly
transition -- require that over the next seven years -- 80%-90% of all
pension plan assets must be put in these safe, high-yield bonds.
These bonds will provide low-cost returns for pension funds. This
will stop Wall Street's gouging the funds with huge fees and speculating
with workers' retirement savings. This solution will also help
finance our huge federal deficit. While the interest rate is high --
we taxpayers are going to end up paying to solve this problem one way
or the other. And, at least this way, the interest payments will go to
support our fellow retired citizens -- not the Chinese. It's a
simple, elegant solution -- but Wall Street and the politicians they
control will never permit it.
While I empathize with the
spirit of this article, Mr. Lerach fails to mention a few things. First,
an agreement between the Clinton administration and congressional
Republicans, reached during all-night negotiations on October 22, 1999
introduced the most sweeping banking deregulation bill in American history.
It's simply wrong to blame "Conservatives" for deregulation of the
American financial system. Both major parties catered to the financial
elite to introduce sweeping banking deregulation.
Second, as I wrote back in January,
while a large part of the blame lies with Wall Street, it's too easy to
use greedy bankers as scapegoats for the pensions fiasco. Poor
governance, rosy investment assumptions, bad asset management (which
didn't focus on protecting the downside) and bad political decisions all
played a role too. Nobody forced pension fund managers to buy the crap
Wall Street was aggressively peddling to them and other institutional
investors. So many people fell for the utter nonsense that the Street
was selling back then. They hired "rocket scientists" to slice and dice
risky mortgage debt, turn it into "AAA" tranches which the rating
agencies certified and presto, these investments became eligible for
pension fund managers to invest in (sigh!). Anyone who's read Michael
Lewis' The Big Short
must be appalled at how pension fund managers totally abdicated their
fiduciary duties by not questioning what was actually backing these
Third, while I like the idea of introducing more inflation-sensitive US
Treasury bonds, I don't like the idea of forcing pension plans to invest
the bulk of their assets in these bonds. This idea has been floating
around for years (I believe Zvie Bodie came up with it), but it flies in
the face of good governance and exercising fiduciary responsibility.
There are no guarantees that inflation-sensitive bonds will outperform
in the future, especially in a deflationary environment. That's why it's
better to invest in a diversified portfolio of private and public
Finally, as I mentioned in an update to my last comment on California pensions,
there is a concerted effort going on right now to weaken public pension
plans or abolish them altogether. I'm of the school of thought that
this is pure fear mongering and total nonsense. While Wall Street
continues to enjoy record bonuses, private and public pension plans are
getting decimated. But instead of blaming people, we got to get on with
it and start introducing meaningful regulations and reforms which will
bolster pensions and the financial system.
The damage is done. We're not going to change the past, so let's focus
on building the future. We can address the pension funds fiasco as
responsible adults, recognizing that changes will require sacrifices
from all stakeholders, or we can continue down this ridiculous path of
public and private pensions attrition ensuring more pension poverty down
the road. Keep this in mind as the political rhetoric on pensions heats