By Murtaza Hussain
Today at 10:09 AM
Coverage of the midterm elections has, understandably, focused on the shift in political power from Democrats toward Republicans. But behind the scenes, another major story has been playing out. Wall Street spent upwards of $300M to influence the election results. And a key part of its agenda has been a plan to move more and more of the $3 trillion dollars in unguarded government pension funds into privately managed, high-fee investments — a shift that may well constitute the biggest financial story of our generation that you’ve never heard of.
Illinois, Massachusetts, and Rhode Island all recently elected governors who were previously executives and directors at firms which managed investments on behalf of state pension funds. These firms are now, consequently, in position to obtain even more of these public funds. This alone represents a huge payoff on that $300M investment made by the financial industry, and is likely to result in more pension money going into investments which offer great benefits for Wall Street but do little for the broader economy.
But Wall Street’s agenda goes beyond any one election cycle. It has been fighting to turn public pensions into private profits for quite some time, steering retirement nest eggs into investments that are complex, charge hefty fees, and that generate big profits for management firms. And it has been succeeding. Of the $3 trillion in public assets currently in pension funds throughout the country, almost a quarter of that has already found its way into so-called “alternative investments” like hedge funds, private equity and real estate. That translates to roughly $660 billion of public money now under private management, invested in assets that are often arcane and opaque but that offer high management and placement fees to Wall Street financiers.
Our recent financial crisis demonstrated just how risky and potentially destructive these types of assets can be — so the question becomes, why is so much money going into them?
David Sirota has been one of the few journalists to cover this story in depth, and to expose the widespread political corruption that’s gone along with it. “It’s one of the biggest economic stories in the world because the amounts of money are so huge” says Sirota. “It is happening in every state and every city in the country.”
In 2011 the Wall Street Journal reported that the Blackstone Group — one of the largest private equity firms in the world, with an investment pool of $111 billion dollars — saw “about $37 of every $100” of its funds come from investments from state and local pension plans. That’s a huge sum, and it’s therefore unsurprising that Blackstone lobbies state governments to help steer more pension money its way.
In many cases, the decision to invest state pension money in alternative investments of questionable value seems to have been driven less by concern for the welfare of future pensioners (gasp!) than by political considerations and the concerted efforts of financial industry lobbyists. The simple fact is that these investments are not very good. While they offer lucrative fees for Wall Street middlemen, they have been shown to often significantly underperform against the market.
You’d think that, given the importance of keeping American citizens pensions safe and prosperous, the political representatives overseeing them would hew to safe and stable investments. Unfortunately, however, that presumption would be wrong.