“I find the whole thing astonishing and what’s remarkable is the amount of anger whether it’s on the Republican side or the Democratic side,” the Wall Street mogul said at the World Economic Forum in Davos. “Bernie Sanders, to me, is almost more stunning than some of what’s going on in the Republican side. How is that happening, why is that happening?”
David Sirota just penned a very important and interesting article zeroing in on how Wall Street is maneuvering to propose and implement a new retirement tax on Americans under a Hillary Clinton Administration.
Leading the charge is billionaire financial oligarch Tony James, who is COO of private equity giant Blackstone. Mr. James is a generous contributor to Hillary Clinton’s Presidential run, and is listed as a “Hillblazer” by her campaign for having raised at least $100,000 toward her candidacy.
While many Americans already know that much, most of you will be totally unaware of his aggressive plan to force a 3% payroll tax on the public which will be immediately funneled to Wall Street management firms, including “alternative managers” such as hedge funds and private equity. It seems like a very bizarre time to initiate such a proposal considering many public pension funds are actively ditching alternative managers after realizing they’ve been paying extraordinarily high fees for pitiful performance. In other words, they’ve been ripped off.
For example, recall what we learned in April’s post, “Let Them Sell Their Summer Homes” – NYC’s Largest Public Pension to Ditch Hedge Funds:
NEW YORK (Reuters) – New York City’s largest public pension is exiting all hedge fund investments in the latest sign that the $4 trillion public pension sector is losing patience with these often secretive portfolios at a time of poor performance and high fees.
The move by the fund, which had $51.2 billion in assets as of Jan. 31, follows a similar actions by the California Public Employees’ Retirement System (Calpers), the nation’s largest public pension fund, and public pensions in Illinois.
“Hedges have underperformed, costing us millions,” New York City’s Public Advocate Letitia James told board members in prepared remarks.“Let them sell their summer homes and jets, and return those fees to their investors.”
With public pensions moving away from alternative managers, the industry is looking toward government under Hillary Clinton to tax American workers in order to guarantee captive money continues to flow into the coffers of private equity and hedge fund managers.
You gotta hand it to these guys. When it comes to endlessly scheming and plotting various ways of getting their hands on your money, Wall Street is absolutely relentless.
International Business Times reports:
While Hillary Clinton has spent the presidential campaign saying as little as possible about her ties to Wall Street, the executive who some observers say could be her Treasury Secretary has been openly promoting a plan to give financial firms control of hundreds of billions of dollars in retirement savings. The executive is Tony James, president of the Blackstone Group.
It is a plan that proponents say could help millions of Americans — but could also enrich another constituency: the hedge fund and private equity industries that Blackstone dominates and that have donated millions to support Clinton’s presidential bid.
The proposal would require workers and employers to put a percentage of payroll into individual retirement accounts “to be invested well in pooled plans run by professional investment managers,” as James put it. In other words, individual voluntary 401(k)s would be replaced by a single national system, and much of the mandated savings would flow to Wall Street, where companies like Blackstone could earn big fees off the assets. And because of a gap in federal anti-corruption rules, there would be little to prevent the biggest investment contracts from being awarded to the biggest presidential campaign donors.
Go ahead and read that again.
A Washington power player who reportedly turned down a slot in President Barack Obama’s cabinet, James first outlined the retirement savings initiative in a speech a year ago to the Center for American Progress (CAP). The liberal think tank was founded by Clinton’s current campaign chairman, John Podesta, and is run by her former top policy adviser Neera Tanden. James and Blackstone made six-figure donations to CAP that year, and the group gave him a platform to propose a new payroll tax that he said would fund guaranteed retirement benefits.
Rather than funneling the hundreds of billions of dollars of new tax revenue into expanding Social Security benefits, as many Democratic lawmakers have called for, James proposed something different: A decade after George W. Bush’s failed attempt to divert Social Security revenue into private retirement accounts, the Blackstone president outlined a plan to create individual retirement accounts, some of whose assets would be managed by private financial firms.
In the blueprint of the plan, James lamented that 401(k) systems “don’t invest in longer-term, illiquid alternatives such as hedge funds, private equity and real estate,” and said the new program could invest in “high-yielding and risk-reducing alternative asset classes.” In a CNBC interview, James said he wants the billions of dollars of new retiree savings to be invested “like pension plans.” He noted that in “the average pension plan in America, about 25 percent is invested in stuff we do, in alternatives, in real estate and private equity and commodities and hedge funds.” Unlike stock index funds and Treasury bills, those investments generate big fees for financial firms — and critics say they do not generate returns that justify the costs.
Critics see James’ proposal as an effort by a politically connected private equity mogul to present a Wall Street-enriching scheme as a social good — at a moment when his own firm has faced lower profits, and at a generally challenging time for the alternative investments industry.
That industry relies on investments from state and local pension systems, which over the last decade have invested billions in alternatives in hopes of reaping above-market returns in exchange for higher fees. Recently, though, regulators, pension trustees, investment experts and academics have questioned whether retiree savings should be invested with firms like Blackstone in the first place.
Some pensions are pulling out their money. Other pension systems have been turned into 401(k)-style plans, which are difficult for the alternative investment industry to break into because of federal laws that discourage those plans from buying into riskier, illiquid investments.
In the face of these challenges, James’ proposal could provide a government-mandated flow of money from workers’ paychecks into the high-fee alternative investment industry.
“This new plan depends on sweeping government mandates, the appropriation of trillions of dollars from the private sector that is then handed over to zillionaire investment managers who make no guarantees about rates of returns or discounted fees,” said South Carolina Treasurer Curtis Loftis, a Republican who serves on his state’s pension investment council, which contracts with Blackstone. “The only guaranteed benefit I see in this plan is one for wealthy money managers and their cronies. Wall Streeters reading this plan will understand, without having specifically been told, that having Hillary Clinton and the federal government use its power to aggregate the existing and future retirement funds of working Americans and entrust it to them is the Holy Grail of finance.”
Chris Tobe, a Democrat who advises institutional investors and who served on Kentucky’s pension board, put it just as bluntly: “James’ plan is a deliberate attempt to get around federal protections for retirees because alternative investments are not generally allowed in the 401(k) world. This is about making Blackstone and other private equity firms even richer than they already are.”
Clinton has cast herself as skeptical of the “shadow banking” world that Blackstone operates in, and she has said she wants to close a loophole that lets private equity managers pay a lower tax rate than most other workers.
Yet for all of Clinton’s tough talk against Wall Street, James and others associated with Blackstone have been among her biggest fundraisers, and during a recent cocktail party in Washington D.C. to promote the plan, James said he was optimistic that a Clinton win could make his proposal a reality.
You know, there are “public positions” and there are “private positions.”
“What the election would mean for our plan: Yes, we’ve spent a fair amount of time with a number of Hillary’s policy advisors. So far they have been very encouraging about the plan,” he told the assembled crowd. “I am hopeful she’ll grab this issue once elected, and run with it. I think the signals are warm on that.”
As an icon of the private equity industry, James is an unlikely champion of retirement security. A recent Harvard University study found that private equity firms have transformed bankruptcy law into “an efficient financial engineering tool for insider sales—and for dumping pensions” — with 51 companies abandoning their pension plans “at the behest of private equity firms since 2001.”
Nonetheless, a spokeswoman for Blackstone, Christine Anderson, said that when it comes to the retirement crisis, “Tony has been talking about this for years.” As the 2016 presidential campaign heated up, James signed onto a new version of Ghilarducci’s plan that reduced the new payroll tax to 3 percent, split between employers and employees, and partially offset by a tax credit. They said the government would guarantee the principal of the account, regardless of market conditions.
Interesting. Since government guarantees the principal, even if the asset managers put up horrible returns, they can still earn big fees while leaving the sucker taxpayer on the hook for any negative performance.
The James-Ghilarducci plan in fact offers substantial potential benefits for companies like Blackstone. It would provide Wall Street with a new, government-guaranteed revenue stream, and would also help the industry circumvent legal and market obstacles to reach a wider swath of the retirement savings business.
Alternative investment firms have tried to break into the $4 trillion 401(k) market for years, but their products, such as real estate and long-term private equity investments, are less easily transferable to cash, making them a difficult fit for 401(k)s. On top of that, 401(k)s are regulated by federal rules that discourage illiquid, high-risk investments — and make 401(k) overseers vulnerable to lawsuits if they move workers money into such investments. A new federal rule could further complicate alternative investment firms’ efforts to access the retail market because it “suggests that there are certain investments that are so costly, complex, or opaque that they cannot be recommended to retirement investors,” said Barbara Roper of the Consumer Federation of America.
The James-Ghilarducci plan would effectively circumvent many of those obstacles, allowing alternative investment firms to access billions of retail customer dollars that have been out of reach.
In terms of private equity, while that industry’s proponents — including Blackstone CEO Stephen Schwarzman — say their firms outperform the stock market, recent researchchallenges that claim, and the industry just experienced one of its weakest quarters. At the same time, academic experts and regulators have warned about hidden fees that eat into investors’ returns. The Securities and Exchange Commission last year sanctioned Blackstone for having “failed to fully inform investors” about fees in a case involving funds that listed James as one of their key overseers.
Some major institutional investors appear to be responding to the warnings. Just this month, officials at the California State Teachers Retirement System — one of the largest pensions in the world — announced that high fees had convinced them to follow other major pension systems and pull $20 billion out of its investments with private money managers.
Ghilarducci told IBT that concerns about fees were valid, but that the new federal program would use its market power to negotiate lower levies. Even if the effort to reduce fees was not successful, she argued, their proposal would still give retirees a better deal than 401(k) plans.
“If you are in a defined benefit plan that is paying too many fees to Blackstone, you are still better off than if you are in a Fidelity plan for a 401(k),” she said.
That’s a difficult case to make, though, when some private equity titans — including Blackstone’s own top dealmaker — have suggested the industry may not be able to deliver the high returns it promises in exchange for its high fees.
All told, economist Eileen Appelbaum told IBT, the James-Ghilarducci plan is built on earnings projections that are fanciful.
“The plan’s promise of 6 to 7 percent returns is likely to prove unrealistic, and they fail to discuss the risks inherent in the risky investments that would have to dominate the savings portfolio that could yield such returns,” said Appelbaum, who co-authored the book “Private Equity at Work” and published a study suggesting lower private equity returns are a new normal.
“This proposal is about Wall Street getting more assets under management because that is where they make their money,” she said. “Why would we put more retirement savings into private hands when Social Security or the Thrift Savings Plan could do the same at almost no cost?”
James and others connected to Blackstone have financially aided Clinton’s White House bid.
James is listed as a “Hillblazer” on Clinton’s campaign website, meaning he has donated and/or raised at least $100,000 for her campaign. The Wall Street Journal reported that James held a $33,400-a-person fundraiser for the Hillary Victory Fund at his Manhattan home in December 2015. Blackstone and James also held a lavish reception at the Democratic National Convention in July 2016, and James held another fundraiser for Clinton at his home last month, raising $1.5 million, according to the Associated Press.
Blackstone employees have given a total of more than $107,000 to Clinton’s campaign, according to data compiled by the nonpartisan Center for Responsive Politics (CRP). David Jones and Richard Sullivan, who until 2015 were listed as Blackstone lobbyists, have been among Clinton’s largest fundraising bundlers.
Outside of Congress, Blackstone has donated between $500,000 and $1 million to the Clinton Foundation, and the Associated Press reported that “eight Blackstone executives also gave between $375,000 and $800,000 to the foundation.” James has also built bridges to the Clinton-linked Center for American Progress, beyond his donations and seat on its board.
While Ghilarducci said she supports expanding Social Security, doing so would be more politically difficult than enacting a separate program, she argued — especially since her initiative gets a boost from its association with an industry power player like James.
“Tony certainly helps get an audience that the left couldn’t get,” she said. “The political reality is, you have to have resources and coalition building.”
In today’s America, bolstering social security is a political non-starter, but initiating a new payroll tax on Americans that directly flows to Wall Street is achievable. What a country.
Under their proposal, “Retirement portfolios would be created by a board of professionals who would be fiduciaries appointed by the president and Congress,” James and Ghilarducci wrote in a New York Times editorial. “The fees and investments would be much less prone to corruption because the managers’ income would not depend on the investments.”
Alternative investments, though, are notoriously opaque. The contracts between financial firms and pensions are secret, making it difficult to evaluate whether they are being competitively bid or whether they involve undue influence. A recent whistleblower lawsuit in New Mexico accused Blackstone of being part of an influence-peddling scheme, which Blackstone has denied, and USA Today in 2009 tracked how Blackstone officials had made donations to public officials in states that had awarded the company pension management deals.
Seeking to tamp down donor influence, the SEC enacted rules in 2010 aiming to prevent campaign contributions from influencing political appointees’ decisions about which financial firms get to manage retirees’ savings. But lawyers interviewed by IBT said the SEC’s rule covers only state and local retirement systems — not the federal government.
“Pay-to-play violations are a cornerstone of the alternative investment market,” said former SEC attorney Edward Siedle. “It’s often the only way that money managers can get elected officials to evade their fiduciary duty and invest in low-transparency, high-cost, high-risk investments that consistently trail the S&P 500. Any retirement plan that would allow that to happen at the federal level would be insane.”
Insane, perhaps. Or perhaps just a Banana Republic.
The above is just a sampling from Sirota’s article. Read the entire thing here: Hillary Clinton And Wall Street: Financial Industry May Control Retirement Savings In A Clinton Administration.