Biggest FRAUD ever
America The "Rip off"
First it was "Pension fund socialism" in the 1970s, in which the people owned and shaped the corporations. Next it was "improving shareholder value" in the 1980s by forcing boards of directors to take their fiduciary values more seriously and thereby help ordinary stockholders and institutional investors, such as public pension funds. By the 1990s, it was "investor capitalism" driven by pension fund activists who were going to get rid of underperforming top executives. The beat went on in the 2010s -- despite the lack of any successes by the activists.
There was a new burst of activity, hope, and media coverage in April 2017, when a new generation of pension fund activists tried to oust some or all of the directors of Wells Fargo, a bank whose series of misdeeds gave new meaning to the idea of "white-collar crime." But when the votes were counted, not a single director was opposed by a majority. The big private investors had quietly voted for their many corporate counterparts on the board.
The outcome of the Wells Fargo vote is consistent with the fate of all of the large claims that have been made for the potential importance of public pension funds, working in tandem with union-controlled pension funds, in shaping the decision-making of corporate boards. This emphasis on "shareholder value" led to common cause with liberal elected officials and union leaders, but the movement as a whole has had no lasting successes, just temporary and symbolic ones, as demonstrated by the rapacious and often illegal actions by a good number of corporate boards between 1998 and the present, despite decades of effort by those who thought they could use public pension funds as a way to make corporations better for employees.
This document examines these claims and casts a cold eye on them by tracing the history of the "institutional investors' movement" since the 1980s. It suggests that there always has been far less to this movement than the media attention it receives. At the outset, it was an effort by moderate Republicans and centrists, speaking in the name of stockholders in criticizing allegedly self-serving corporate executives, who supposedly do not look out for stockholder interests in a vigorous enough fashion.
Not only did the movement fail, but many of the public pension funds themselves became money pots for the biggest risk-takers on Wall Street, who carried out hostile corporate takeovers and corporate buy-outs in the 1980s with their help, then bundled mortgages -- including subprime mortgages -- into new kinds of "securities" in the late 1990s and early 2000s, which they sold to naive pension fund managers caught up in the excitement of the housing bubble. Indeed, several public pension funds ended up among the many financial organizations that received government bailouts via the billions of dollars that the Department of Treasury gave to AIG (American International Group, an insurance company) in early 2009.
At about the same time, an April 2010 study for the New York Times, discussed more fully in the next section, showed that "private equity funds" (e.g., hedge funds, venture capital funds, real estate investment trusts) made tens of billions of dollars between 2000 and 2010 by (1) charging public pension funds a "management fee" of 2% on every dollar they managed; and (2) taking 20% of the profits they made through investing the pension funds' money. The 10 largest public pension funds alone paid $17 billion to private equity firms in that time period (Anderson, 2010).
To top it all off, the biggest financiers on Wall Street tried to make money by working insider deals to invest some of the funds held by the same federal government agency -- the Pension Fund Guaranty Corporation -- that manages $50 billion in retirement funds for the unlucky souls who worked for corporations that went bankrupt. They grabbed this business by cultivating relationships with Charles E. F. Millard, the former Wall Street investment banker that the Bush Administration had appointed to head the fund. You can read the story, and excerpts from some of the very revealing e-mails, on the New York Times' Web site. (In July of 2009, under scrutiny from Congress and others, the PFGC revoked the sweetheart deals with Goldman Sachs, BlackRock, and JPMorgan Chase.)
(There are also plenty of scams being uncovered at the state level that are a total embarrassment to those who once claimed that pension funds could have any influence on corporations or be a force for the general good. Instead, they became another source of money for Wall Street to invest in risky deals, and also a way for politicians to help out businesses in exchange for campaign donations. And of course, they lost some of the people's money in the process, which has been the story of Wall Street for well over 100 years: use other people's money to pay for the riskiest gambles. This is an unfolding story, so we add new links to this document from time to time. For example, an article in the New York Times discusses the scandal surrounding the state of New York's pension fund, where one of the scammers did plead guilty.)
Then, just at 2010 ended, one of the most respected Wall Street financiers of the past 25 years, Steven Rattner -- a one-time New York Times reporter who went to work for a fabled investment firm, Lazard Freres, and then opened his own firm, Quadrangle -- sort of and indirectly admitted guilt to bribing a pension fund official via a kickback scheme. He did so by reaching an agreement with the attorney general of New York to pay a $10 million fine and accept a five-year ban on his involvement with any work involving state pension funds. Earlier, he had reached an agreement with the Securities and Exchange Commission to pay a $6.2 million fine and agree to a two-year ban on working in certain Wall Street businesses for the same alleged kickback scheme.
But, since Rattner did not have to admit to any wrongdoing, he can still say his record is without blemish. (He can say he paid the unfair fines and accepted the bans because the government is so powerful.) However, his net worth was down to the $188 to $608 million range, according to a 2009 filing with the Securities and Exchange Commission, and his chances of becoming Secretary of the Treasury, a goal made plausible by his role as a major Democratic fundraiser on Wall Street, were probably ended -- at least for the next few years. However, Obama did appoint him to lead the restructuring bailout of the auto industry in 2009 as a counselor to the Treasury secretary. By 2011, he was a regular contributor to the New York Times op-ed pages on the topics of economics and finance, pointing out the flaws in Republican economic policies.
Something even bigger popped up in March 2013, when the former chief executive of the California Public Employees Retirement System (CalPERS) was indicted for stealing $14 million from one of the private firms (Apollo Global Management) that invested money for CalPERS. Apollo had been paying one of the CalPERS chief's buddies to steer at least $48 million in CalPERS business its way, which gave Apollo the opportunity to make hundreds of millions from investing some of the pension fund's billions. But that was apparently not enough for the chief and his partner in crime, so they perpetrated the $14 million fraud. When the chief exec left CalPERS in 2008, he too became a "placement officer" for investment firms, but the law finally caught up with him five years later.
The New York Times called the March 2013 indictment the latest in "a nationwide pay-to-play scandal that erupted several years ago. Regulators from numerous states, including California and New Mexico, have cracked down on widespread influence peddling in how their state pension funds were invested."
As impotent as the pension fund movement was during the bubble years and amidst the wreckage of the post-bubble years, as one scam or scandal after another was revealed, it's back in the headlines in early 2017. In April, CalPERS (the pension fund for California state employees), the New York City pension fund, and many other public pension funds announced they were going to challenge some or all of the Wells Fargo directors for not knowing about the crooked schemes the company was up to, such as opening 2 million false new accounts to make it look like their client base was expanding. Most of these directors were top executives at other corporations, along with a former dean of a business school in Nebraska and the head of a consulting firm. As the board gathered for the annual company meeting in the Florida resort town of Ponte Verda, the New York City comptroller asserted that "If there is a serious failure in oversight, directors need to be held accountable." "Board members are elected by shareholders to be our watchdogs," intoned the treasurer of the state of Rhode Island. He thought it was inexcusable to be unaware of widespread fraud within the company they were "directing." But one of the two richest people in the United States, Warren Buffett. who owns 10% of Wells Fargo's stock, along with numerous other wealthy investors and corporate pension funds, thought it was enough that the CEO had been fired, along with 5,300 other employees; in the end, every director received at least 53% of the overall vote, and nothing changed as far as the Board of Directors (Cowley, 2017; Cowley & Crookery, 2017).
This long introduction was meant to give you some quick -- and hopefully provocative -- highlights of the ongoing story about pension funds, which are always in peril for one reason or another. Now it's time to show how all of this relates to the structure and distribution of power in the United States, and what it tells us about the study of power by journalists and social scientists. It's a history that should prepare readers to expect more allegedly "new" twists and turns in the future, which turn out to not be very new after all.Pension funds and other institutional investors
One of the most persistent claims about corporations in America is that the rich people who benefit from their stock dividends do not control them. The idea is that everybody owns and controls the corporations, even though the corporations seem to dominate the economy to the benefit of a wealthy few. Taking this idea to its extreme, a few analysts have claimed that the accumulations of money owned by everyone through various types of public employee pension funds, union pension funds, mutual funds, and other forms of "institutional investors" might even come to have a significant role in shaping corporate behavior.
The idea that pension funds could be used to control corporations first gained visibility through the claim by management guru Peter Drucker (1976, 1993) that workers' legal right to their pensions -- whether through a company or a local or state government -- meant they now owned a significant percentage of corporate stock. It followed for Drucker that this was a form of socialism. As the dramatic first sentence of his 1976 manifesto put it: "If 'socialism' is defined as 'ownership of the means of production by the workers' -- and this is both the orthodox and the only rigorous definition -- then ...