Home › Forums › Financial Markets/Economics › Matt Taibbi’s latest article- Wall Street Hedge Funds Are Looting the Pension Funds of Public Workers
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September 30, 2013 at 10:43 PM #765983September 30, 2013 at 11:33 PM #765984CA renterParticipant
[quote=ucodegen][quote=CA renter]Firstly, the private sector is 100% dependent on the government. Who do you think provides the social, legal, military, and physical infrastructure that private sector depends on?[/quote]I think you are reaching a bit here. We have seen where the private sector provides some of this, and it works. During the Northridge quake, the repairs were from the private sector and private sector contracts. Just because government is the most effective source for some things, does not make it the effective source for all things. Yes, government funded the contracts.. but we fund the government. For some things, it is the most effective.. but not all.
PS: By the way, the borrowings of congress from the Social Security fund, pay into the fund at a rate of 5% interest. Without that interest, the Social Security fund will have been depleted a long time ago.[/quote]
I’ve never suggested that the govt is the best or most efficient provider of goods/services in all cases, but it plays a very major role in all successful, large economies and societies. Without the government either acting directly or indirectly, as they did after the Northridge earthquake, there would be no middle class, and (IMHO) we would not have experienced the social and economic successes that we’ve seen in this country’s history.
September 30, 2013 at 11:36 PM #765985CA renterParticipant[quote=ucodegen][quote=CA renter][quote=ucodegen]
The best way to get it out of the hands of those who have a greater impetus to fudge the numbers and contributions than to be up honest.. is to get it immediately out of their hands on every pay period. They really don’t face any consequences to their ‘fudging’.. but the employee does.[/quote]
The best way to get it out of the hands of those who have a greater impetus to cause damage to public pensions is to keep Wall Street and other *private sector* influences out of public pension funds.[/quote]Sounds good. Implementation is the problem. How do you expect to have return on invested funds, at least enough to offset inflation. Bonds? gotta go to Wall Street, Stocks.. likewise. Any time you have to ‘invest’, particularly large sums, you have to go to Wall Street. All that you have to do is do it in a way that is both transparent, does not ‘trust’ Wall Street, and prevents them from having control of the account.[/quote]
We need to go back to 100% in-house management with NO outside advisors. Anyone found guilty of fraud or corruption, either inside or outside of the institution, should personally lose EVERYTHING and face a very stiff prison sentence.
October 1, 2013 at 7:48 AM #765988livinincaliParticipant[quote=CA renter]
We need to go back to 100% in-house management with NO outside advisors. Anyone found guilty of fraud or corruption, either inside or outside of the institution, should personally lose EVERYTHING and face a very stiff prison sentence.[/quote]Why don’t we just eliminate the middle man completely and just give employees a defined contribution that they are free to invest how they wish. We immediately eliminate all the problems associated with a defined benefit plan. We get rid of all of the following issues.
1) Tax payer risk
2) Pension spiking
3) Lack of employment mobility
4) Corrupt Fund Managers
5) Double dipping
6) Employee Incentives to game the system.If an employee wants income security in old age put more towards retirement and buy an annuity when you retire. You know exactly how much income you’ll get and whether or not you can afford to retire on that income.
The primary benefit of a defined benefit plan is to eliminate the employees personal risk in being able to retire comfortable. Everybody here would probably take a risk free guaranteed rate of return of 7-8%. Why should public sector employees be a special class of citizens that gets a guaranteed 7-8% rate or return in a 2% growth economy.
October 1, 2013 at 8:37 AM #765990LeorockyParticipantSeveral things here…
If you consider taxpayers to be the employers of the public sector that’s fine, but during any *pension holiday* we paid our legally owed taxes. That money was then mismanaged and the unions were fine to turn a blind eye to it as long as they got to “bargain” for a sweeter deal down the road.
As far as the Taibbi article it attempts to paint a picture of big bad Wall St taking over these pensions. Nothing could be further from the truth. The article does highlight decades of underfunding and overpromising by states and local governments and unions. Any money given to Wall St is a conscious decision by governments. I wish the unions would shift their “bargaining” focus to the underfunding and the management of the money instead of continuing to look for ways to enhance their pensions – pensions which increasingly won’t be there for them.
The best part? Hedge funds and PE funds aren’t the magic bullet of performance everyone thinks they are. For every hedge fund that returns 30% there are dozens, if not hundreds more, that are mediocre or underperform. Many of these pensions find themselves having to play catch up thanks to the underfunding. Instead of being responsible and lowering benefits they are chasing yield. And Wall St is more than happy to woo them as clients. Guess how that ends.
Cause we all know that Wall St forced people to buy overpriced homes with exotic loans they couldn’t afford, right?
October 1, 2013 at 5:28 PM #766000CA renterParticipant[quote=Leorocky]Several things here…
If you consider taxpayers to be the employers of the public sector that’s fine, but during any *pension holiday* we paid our legally owed taxes. That money was then mismanaged and the unions were fine to turn a blind eye to it as long as they got to “bargain” for a sweeter deal down the road.
As far as the Taibbi article it attempts to paint a picture of big bad Wall St taking over these pensions. Nothing could be further from the truth. The article does highlight decades of underfunding and overpromising by states and local governments and unions. Any money given to Wall St is a conscious decision by governments. I wish the unions would shift their “bargaining” focus to the underfunding and the management of the money instead of continuing to look for ways to enhance their pensions – pensions which increasingly won’t be there for them.
The best part? Hedge funds and PE funds aren’t the magic bullet of performance everyone thinks they are. For every hedge fund that returns 30% there are dozens, if not hundreds more, that are mediocre or underperform. Many of these pensions find themselves having to play catch up thanks to the underfunding. Instead of being responsible and lowering benefits they are chasing yield. And Wall St is more than happy to woo them as clients. Guess how that ends.
Cause we all know that Wall St forced people to buy overpriced homes with exotic loans they couldn’t afford, right?[/quote]
Wrong. The unions were fighting the pension holidays and warning about the inevitable losses that occur when bubbles burst. They wanted to maintain minimum contribution rates. It was the other special interests who fought the unions so that they could stake a greater claim on the extra money that should have been going toward contributions.
There was no “sweeter deal” that the unions were going to bargain for in the future, either. There was the enhancement in the late 1999/2000 that was passed (wrongly, IMHO) at the peak of the stock/internet bubble. Not sure where you’re getting your (mis)information.
And yes, it was Wall Street’s takeover of the public pension funds, as well as the market distortions caused by Wall Street and the Fed, that caused the “pension crisis.”
October 1, 2013 at 5:43 PM #766002CA renterParticipant[quote=livinincali][quote=CA renter]
We need to go back to 100% in-house management with NO outside advisors. Anyone found guilty of fraud or corruption, either inside or outside of the institution, should personally lose EVERYTHING and face a very stiff prison sentence.[/quote]Why don’t we just eliminate the middle man completely and just give employees a defined contribution that they are free to invest how they wish. We immediately eliminate all the problems associated with a defined benefit plan. We get rid of all of the following issues.
1) Tax payer risk
2) Pension spiking
3) Lack of employment mobility
4) Corrupt Fund Managers
5) Double dipping
6) Employee Incentives to game the system.If an employee wants income security in old age put more towards retirement and buy an annuity when you retire. You know exactly how much income you’ll get and whether or not you can afford to retire on that income.
The primary benefit of a defined benefit plan is to eliminate the employees personal risk in being able to retire comfortable. Everybody here would probably take a risk free guaranteed rate of return of 7-8%. Why should public sector employees be a special class of citizens that gets a guaranteed 7-8% rate or return in a 2% growth economy.[/quote]
Already covered this right here:
[quote=CA renter]…those employees are smart enough to know that a large, well-managed pension fund will be better able to maximize returns while keeping risks low…and that these large pension funds will be better able to weather the periodic storms because they have a much longer horizon.
And taxpayers would bear very little risk if those funds were managed wisely and well by **in-house,** salaried managers who have rules that strictly prohibit outsiders from influencing where these funds are allocated (no corruption).
Always keep in mind that taxpayers bear many risks in this world…from FEMA incidents to wars to tax cuts for the rich, etc., etc. It’s silly to pick just one type of risk and harp on that. Of all the people we should want to bear risk for (and minimal risk at that, if we keep the privatizers out of it), I’d think that the people who do the work that give us a safe, educated society in which to live would be high on the list.[/quote]
Public employers offer these benefits in order to keep their recruiting and training costs down because of the lower employee turnover, and they also attract the best possible candidates for these positions. Contrary to the myths pushed by the Privatization Movement, most government agencies perform very efficiently and have extremely high-quality employees. With the millions of public employees in this country, you’re bound to get a few bad apples, but for the most part, they are very well-trained, responsible, trustworthy employees. And since many of these employees have positions that require high levels of trust and responsibility, it’s incredibly important to hire and retain the best candidates possible.
I’ve worked in both the public and private sectors, and can say for a fact that the employees that I’ve worked with in the public sector were more honest, harder working, and more competent than those I’ve worked with in the private sector. Others I know who’ve also worked for both public and private industry have noted the same thing. These benefits really do help recruit the best available employees.
As for the pension spiking, etc., Governor Brown’s reforms have reduced or eliminated most of the avenues for this type of abuse, thankfully. The fund managers are another thing, but there is a movement to start bringing more of the management back in house, mostly because these private funds and fund managers/advisors are not delivering better results. Keeping my fingers crossed on that one.
October 1, 2013 at 5:46 PM #766004ucodegenParticipant[quote=CA renter]Without the government either acting directly or indirectly, as they did after the Northridge earthquake, there would be no middle class, and (IMHO) we would not have experienced the social and economic successes that we’ve seen in this country’s history.[/quote]Huh? does not follow. Statement is not supported by facts. Remember that the government is allowing Hedge Fund managers to pay a much lower tax rate than people who work for money. Hedge Fund managers get to pay at capital gains rates and not at income rates even though they are paid based upon work and not based upon amount that they have personally invested (amount of capital at risk).
[quote=CA renter]We need to go back to 100% in-house management with NO outside advisors. Anyone found guilty of fraud or corruption, either inside or outside of the institution, should personally lose EVERYTHING and face a very stiff prison sentence.[/quote]How would you know that in-house advisers were being as responsible as they could? How do you prove it? It sounds good, but having dealt with some ‘insider’ behavior, prosecution and proving it is harder to do than say. There are many funds that are well managed with low load fees. Why duplicate the effort. I would want to allow people to select the investments themselves as a potential option. The part I worry about in ‘assigned’ handlers of 401Ks, is potential insider dealing between the employer and paid servicer, as well as an employer who really doesn’t push the 401K servicer to put reasonable funds (and not their junk funds) into the 401K selection.
[quote=livinincali]Why don’t we just eliminate the middle man completely and just give employees a defined contribution that they are free to invest how they wish. We immediately eliminate all the problems associated with a defined benefit plan.[/quote] What I was trying to say in many more words…
Sometimes to get it done right.. you have to do it yourself.
October 1, 2013 at 6:33 PM #766010LeorockyParticipantpension issues are almost entirely caused by 2 things:
underfunding – actual decision’s by politicians to use the money elsewhere
one sided “bargaining” by unions with pols they donated money to and got elected – think pension spiking, credits for uniform allowances, cities purchasing or outright granting time or benefits to people, double dipping etc
the article made it very clear that pensions investing in hedge funds and PE was a relatively new phenomenon. Wall St has not taken over any pension funds. Again, managers make descisions to invest ins tocks, bonds etc. I’m not sure what “market distortions” are.
October 1, 2013 at 8:32 PM #766017CA renterParticipant[quote=Leorocky]pension issues are almost entirely caused by 2 things:
underfunding – actual decision’s by politicians to use the money elsewhere
one sided “bargaining” by unions with pols they donated money to and got elected – think pension spiking, credits for uniform allowances, cities purchasing or outright granting time or benefits to people, double dipping etc
the article made it very clear that pensions investing in hedge funds and PE was a relatively new phenomenon. Wall St has not taken over any pension funds. Again, managers make descisions to invest ins tocks, bonds etc. I’m not sure what “market distortions” are.[/quote]
The pension funds are fairly new in the hedge fund and other “alternative investments” world, but still over a decade deep. But they have been moving toward riskier and riskier investments for many decades. Again, they used to invest almost exclusively in Treasuries, with a very small allocation toward other high-grade bonds. Wall Street (and their insiders) has lobbied over the decades to have these pension funds invest in equities…first the “safer” types, and gradually into riskier equities and then, “alternative investments.”
The “market distortions” comment refers to the booms, busts, and bubbles caused by Wall Street speculation and the Fed’s manipulation of interest rates (causing asset price bubbles in riskier asset classes).
And not sure what you mean by this: “think pension spiking, credits for uniform allowances, cities purchasing or outright granting time or benefits to people, double dipping etc.”
The pension spiking, “PERSable” income, and “double-dipping” (DROP program) were ALL addressed with Brown’s pension reforms. Also, not sure what you mean by “cities purchasing or outright granting time,” but if you’re referring to purchasable service credit (where the EMPLOYEE, not the employer, could purchase time creditable to PERS — at a very high cost to offset costs to the pension fund), that was also addressed in Brown’s pension reform.
See? Reform CAN happen, and it can be done in a methodical, legal, ETHICAL, and rational way.
October 2, 2013 at 12:47 AM #766018CA renterParticipant[quote=ucodegen][quote=CA renter]Without the government either acting directly or indirectly, as they did after the Northridge earthquake, there would be no middle class, and (IMHO) we would not have experienced the social and economic successes that we’ve seen in this country’s history.[/quote]Huh? does not follow. Statement is not supported by facts. Remember that the government is allowing Hedge Fund managers to pay a much lower tax rate than people who work for money. Hedge Fund managers get to pay at capital gains rates and not at income rates even though they are paid based upon work and not based upon amount that they have personally invested (amount of capital at risk).
[quote=CA renter]We need to go back to 100% in-house management with NO outside advisors. Anyone found guilty of fraud or corruption, either inside or outside of the institution, should personally lose EVERYTHING and face a very stiff prison sentence.[/quote]How would you know that in-house advisers were being as responsible as they could? How do you prove it? It sounds good, but having dealt with some ‘insider’ behavior, prosecution and proving it is harder to do than say. There are many funds that are well managed with low load fees. Why duplicate the effort. I would want to allow people to select the investments themselves as a potential option. The part I worry about in ‘assigned’ handlers of 401Ks, is potential insider dealing between the employer and paid servicer, as well as an employer who really doesn’t push the 401K servicer to put reasonable funds (and not their junk funds) into the 401K selection.
[quote=livinincali]Why don’t we just eliminate the middle man completely and just give employees a defined contribution that they are free to invest how they wish. We immediately eliminate all the problems associated with a defined benefit plan.[/quote] What I was trying to say in many more words…
Sometimes to get it done right.. you have to do it yourself.[/quote]
DIY investing might work well for Piggs and other nerds who spend an inordinate amount of time analyzing economic and various market trends. This is a small group of fortunate people who are inclined to have above-average IQs, financial acumen, and investment returns. Even here, we know that many of us will under-perform at one point or another.
Society and the economy work best when everyone does what he or she is most qualified for — the thing for which he/she has a particular talent or ability. We cannot, and should not, expect everyone to be a trader/speculator/investor with above-average gains (statistically impossible, anyway, as you know). I want my doctor to know medicine better than anyone else, but that will preclude him/her from dedicating sufficient time to his/her investment portfolio. OTOH, a professional financial analyst/investor — one who spends all of his/her time studying markets and financial trends — will most likely be able to grow and protect that portfolio better than the best doctor.
Half of the population has an IQ under 100. I do not think that DIY investing is going to work out for the long-term for most people, whether or not they are blessed enough to be born with a greater intellect. Centrally-managed retirement funds do work when they are managed conservatively and transparently. I’ll be the first to admit that this is not the case at many public pension funds, but that can be changed if there is enough political will.
Transparency and accountability are imperative in all markets, public and private, IMHO. If we make the system transparent enough, and if we hold people accountable, it can absolutely work.
October 2, 2013 at 7:35 AM #766034livinincaliParticipant[quote=CA renter]
Public employers offer these benefits in order to keep their recruiting and training costs down because of the lower employee turnover, and they also attract the best possible candidates for these positions. Contrary to the myths pushed by the Privatization Movement, most government agencies perform very efficiently and have extremely high-quality employees. With the millions of public employees in this country, you’re bound to get a few bad apples, but for the most part, they are very well-trained, responsible, trustworthy employees. And since many of these employees have positions that require high levels of trust and responsibility, it’s incredibly important to hire and retain the best candidates possible.
[/quote]So public sector employees are better than their private sector counter parts.
[quote=CA renter]
DIY investing might work well for Piggs and other nerds who spend an inordinate amount of time analyzing economic and various market trends. This is a small group of fortunate people who are inclined to have above-average IQs, financial acumen, and investment returns. Even here, we know that many of us will under-perform at one point or another.
[/quote]Yet they aren’t smart enough to manage their own funds.
So they deserve better pay because they are better. They deserve better benefits because they are superior to their private sector counter parts. When their fund managers and leaders make bad benefit and investment decisions their inferior counter parts can pay more taxes to make up the difference. Sounds fair to me.
October 2, 2013 at 10:20 AM #766056AnonymousGuest[quote=livinincali]So public sector employees are better than their private sector counter parts.[/quote]
All of CAR’s arguments on this subject – thousands of words, hundreds of posts over many years – are all based upon the underlying premise that public sector employees are members of a higher caste.
October 2, 2013 at 7:20 PM #766088ucodegenParticipant[quote=CA renter]Half of the population has an IQ under 100. I do not think that DIY investing is going to work out for the long-term for most people, whether or not they are blessed enough to be born with a greater intellect. Centrally-managed retirement funds do work when they are managed conservatively and transparently. I’ll be the first to admit that this is not the case at many public pension funds, but that can be changed if there is enough political will.[/quote]This is why I believe in giving people the option to go it alone if they wish.. or a percentage of managed and self directed. If a fund manager manages to consistently out perform me.. I’ll let him invest my funds, otherwise I’ll do it. I’ll also let those I know, who might not be as good at investing, that they may want to look for another manager.
[quote=CA renter]Transparency and accountability are imperative in all markets, public and private, IMHO. If we make the system transparent enough, and if we hold people accountable, it can absolutely work.[/quote]
True, but it is an impossible goal to achieve absolutely, this is not to say you can get close. After all, you need one of those ‘specialists’ to be able to understand what they are seeing under that transparency and to tell if it is truly transparant. The problem is that firms hire specialists that don’t spill the beans and pay them handsomely. This creates a disincentive. One way to tell is by comparing performance. If I am consistently outperforming a fund as a ‘part-timer’.. there may be something up. I always believe in giving people the option of choice. Lock-in always prevents transparency and accountability. All that the fund managers have to do is compromise audit and enforcement. It does happen and more than many people know. If a person has choice.. they can always ‘leave’ the fund that is not being transparent and if that happens in droves, it starves the fund, effectively becoming its own form of enforcement.October 2, 2013 at 11:08 PM #766098CA renterParticipant[quote=ucodegen][quote=CA renter]Half of the population has an IQ under 100. I do not think that DIY investing is going to work out for the long-term for most people, whether or not they are blessed enough to be born with a greater intellect. Centrally-managed retirement funds do work when they are managed conservatively and transparently. I’ll be the first to admit that this is not the case at many public pension funds, but that can be changed if there is enough political will.[/quote]This is why I believe in giving people the option to go it alone if they wish.. or a percentage of managed and self directed. If a fund manager manages to consistently out perform me.. I’ll let him invest my funds, otherwise I’ll do it. I’ll also let those I know, who might not be as good at investing, that they may want to look for another manager.
[quote=CA renter]Transparency and accountability are imperative in all markets, public and private, IMHO. If we make the system transparent enough, and if we hold people accountable, it can absolutely work.[/quote]
True, but it is an impossible goal to achieve absolutely, this is not to say you can get close. After all, you need one of those ‘specialists’ to be able to understand what they are seeing under that transparency and to tell if it is truly transparant. The problem is that firms hire specialists that don’t spill the beans and pay them handsomely. This creates a disincentive. One way to tell is by comparing performance. If I am consistently outperforming a fund as a ‘part-timer’.. there may be something up. I always believe in giving people the option of choice. Lock-in always prevents transparency and accountability. All that the fund managers have to do is compromise audit and enforcement. It does happen and more than many people know. If a person has choice.. they can always ‘leave’ the fund that is not being transparent and if that happens in droves, it starves the fund, effectively becoming its own form of enforcement.[/quote]While I personally agree with this option, the funds’ ability to outperform (at the very least, not under-perform) the market over the long run is tied to their ability to withstand the inevitable downturns because of their long-term horizon and locked-in funds. It would harm their ability to do this if people were able to pull money out of the funds during the downturns, and then put it back in when the funds perform better.
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