Jeff Gates - FINANCE FRAUD
History’s Greatest Heist:
How the Law and Economics Cabal Ravage
Our Retirement and Plunder Our Fiscal Future
Jeff Gates ©
As through this world I travel, I meet lots of funny men,
When I became counsel to the Senate Committee on Finance in May 1980, U.S. money managers oversaw funds totaling ~$1,900 billion. By 2003, they held ~$17 trillion, with more than half those funds (~55 percent) subsidized with tax incentives for retirement security, my specialty as counsel from 1980-87. At present, those tax subsidies reduce federal revenues by ~$110 billion per year, ranking the commitment to retirement security second only to national security (and interest on government debt) as a fiscal expense. To date, pension trustees have allowed senior executives to extract ~$500 billion in cash and capital from firms where these retirement funds are invested.[i] By 2000, their investments had helped put $1,540 billion in the hands of just 400 people, according to Forbes magazine’s annual tally of the nation’s most well-to-do.[ii] The size of the funds at stake helps explain why the scale of this heist dwarfs any previous swindle.
By relying on law and economics theory, fiduciaries charged with oversight of retirement funds allowed them to be ransacked by Wall Street, by Wall Street’s most well-to-do clients, and by a highly paid cabal of complicit service-providers, including brokers, bankers, investment bankers, attorneys, accountants, stock analysts and pay consultants. None of the reforms either enacted or proposed help retirees recover the pilfered funds. No pension trustee has been indicted. No one of consequence has gone to jail. And none of the fines imposed for this multi-year heist have exceeded two percent of annual revenues for any of the Wall Street firms fined.[iii] Instead, retirement plans continue to be plundered by an investment model based on law and economics theory that’s guided by an ethic best described as “drink your fill and thirst for more.”
Pension fiduciaries were on hand when boards of directors nationwide became 60 percent staffed by CEOs. By appointing other top executives to their compensation committees, this tacit CEO-conspiracy fueled a rapid racheting-up of top-tier pay as senior executives set one another’s compensation, each professing to be independent of the other, a mutual back-scratching ploy they hired pay consultants to rationalize as comparable pay. That charade remains common practice in the current “post-reform” environment where the invisible hand continues to operate well downstream of the invisible handshake.[iv]
Since enactment of a massive pension reform bill in 1975, the laws governing plans of deferred compensation have become one of the largest and most complex components of a large and complex federal code. The legal foundation of such plans dates from just after World War I, updated by a post-WWII policy environment design that provided fiscal subsidies to supplement the retirement security affordable through personal savings and Social Security. That clear legislative intent makes it clearly corrupt that pension fiduciaries, in collaboration with senior managers and sophisticated service-providers, chose to rely on an investment model that was certain to feather their own nests while fueling the greatest economic divide since the 1920s.
The economic-distribution effects that accompany reliance on law and economics theory lead me to pose a key ethical question: how much financial value should anyone be allowed to strip out of a company in which the public invests to fund retirement security? And in which fiscal resources are invested for that purpose? The abuse of fiscal subsidies multiplies the financial carnage because their intended use for private purposes (i.e., broad-based retirement security) forces the public to forego investing those resources elsewhere – in education, health care, research, foreign assistance, national security, environmental restoration, and so on.
These misappropriated funds must be recovered and this massive fraud undone. Those who’ve long embraced the law and economics model can be expected to cast recovery as a dreaded “redistribution of wealth.” Yet by choosing to rely on an economic theory that’s long been notorious for making the rich richer, pension trustees chose to divert resources from retirees and taxpayers to those least in need of the security these funds are meant to provide. Recovery is required to reverse this (still ongoing) redistribution of wealth from retirees to the well-to-do. Equity mandates a reallocation of funds that were intended for pensioners all along. What’s been offered in the guise of reform is too little, too late.
Absent reform of the underlying investment theory, pension trustees will continue with business-as-usual. Beguiled, seduced and misled by law and economics theorists, retirees will continue to see their prospects for security ravaged in a way that’s certain to further widen today’s fast-widening economic divide, all the while preempting vast fiscal resources meant to address the insecurity that’s long been known to accompany such divides.
As yet, no lawmaker dares concede the full extent of the looting, even though the largest asset collapse since Herbert Hoover has shattered retirees’ already-weak prospects, worsening an emerging fiscal nightmare just as 76 million baby-boomers near retirement. The greatest danger lies in the fiction that a few bad apples are the problem. Or that a few fines are all that’s required to cure an investment model certain to plunder pensions in precisely the same way. Reform will be meaningful only when those responsible for this plunder are prosecuted, the pilfered funds recovered, and the law and economics model reformed. Anything less only confirms lawmakers’ complicity in history’s greatest heist, even as the perpetrators remain at large and the pace of the plunder quickens.
Over the next five years, tax incentives for retirement will drain $553 billion from revenues the Treasury would otherwise collect.[v] Federal law mandates that pension fiduciaries invest for the “exclusive benefit” of retirees and “solely for the purpose” of financing pension benefits. Despite a mandate to foster a broadly shared (vs. concentrated) prosperity consistent with a foresighted fiduciary capitalism, pension trustees opted at every turn for a law and economics investment theory that obsesses on short-term returns with no concern for who harvests the long-term capital-accumulating results. That practice remains unfettered, unreformed and unmentioned in today’s post-reform world.
In 1982, a Business Week survey disclosed a 42:1 pay gap between chief executives and employees in the 365 largest firms in which the bulk of pension assets are invested. That divide was already twice the maximum disparity advised by management guru Peter Drucker and even by the late J.P. Morgan, no stranger to wanton greed. Both argued that 20:1 is the widest workable gap between managers and managed. Pension fiduciaries thought otherwise. By 2000, their investments had widened that gap to a 531:1 chasm. Tracking this gap from 1970-2000, Fortune chronicles a steady widening of this divide from 39:1 three decades ago to 1000:1 by 2000. In a bad year (2000), the nation’s 20 top-paid managers claimed an average $117.6 million in compensation, up $5 million from 1999.[vi] By comparison, the FBI reports that, from 1998-2001, bank robbers in the U.S. made off with just $210 million.
In 1975, when an omnibus pension reform bill was signed into law and these tax-favored funds began to swell (pension assets then totaled less than $800 billion) General Electric paid its CEO $500,000, a salary then equal to the combined annual earnings of two dozen typical Americans. By 2000, GE was paying Jack Welch more than 3,000 times that benchmark amount, even though GE’s financial success relied heavily on capital provided from retirees’ tax-subsidized savings. While median family income grew an inflation-adjusted 10 percent since 1970, Welch’s pay multiplied 28,900 percent, to $144.5 million.
On his retirement in 2001, Welch also received a raja-like retirement package on top of the $900 million he amassed as CEO. Consistent with the Great Man Theory on which complicit boards rely to rationalize oversized pay packages, Welch was given not just a $750,000 per month cash pension, he also receives full use of a posh penthouse overlooking New York’s Central Park (estimated cost: $80,000 per month), lifetime use of GE’s Boeing 737, V.I.P. seats for the Metropolitan opera, front-row seats at Wimbledon, courtside seats at the U.S. Open, floor-level seats at the New York Knicks, box seats at Red Sox and Yankee games, fees at his four country clubs, satellite TV, computers and security at his four homes, limousine service while travelling, plus all the amenities befitting royalty while ensconced in his Manhattan digs, including maid service, wine, food, flowers, toiletries, a half-dozen daily newspapers and free meals in the lobby’s four-star restaurant. The estimated annual tab for Welch’s perks: $9 million.
When his regal perks were revealed in a divorce proceeding, Welch agreed to pay taxes on the penthouse, along with the jet, his jet-set dining and his VIP tickets to sporting events. However, he refused to relinquish the GE staffers detailed to handle his personal affairs, including crafting his responses to the fan mail he receives for his Great Man biography, Jack (no last name needed) for which he received a larger advance than the Pope. Tax-subsidized pension plans remain one of GE’s top shareholders while, as a major defense contractor, taxpayers also remain one of GE’s top customers, providing his ex-employer a means to sustain the cash-flow required to maintain The Jack’s lifestyle.
GE is hardly unique. At Disney, pension fiduciaries allowed CEO Michael Eisner to cash in a stock option package in 1998 that netted him a $569,827,702 payday, 18,994 times the typical Disney employee’s annual pay.[vii] When Hollywood super-agent Michael Ovitz bolted Disney after just 14 months on the job, Eisner eased his golfing buddy’s pain with $94 million in cash and stock options, all the while paying women in Bangladesh five cents for every $17.99 Disney shirt they sew. The compensation committee of Disney’s board then included Eisner’s personal attorney, the principal of his kids’ school and an actor under contract to Miramax, a Disney studio. Pension plans remain Disney’s largest single shareholder.
At Oracle, another favorite of pension fiduciaries, CEO Larry Ellison cashed-in expiring options September 7, 2001 for a $706,076,907 gain.[viii] Pension trustees clearly saw that seven-tenths-of-a-billion-dollar-payday as a much-needed incentive in a company where he held only $22 billion in shares after pocketing a $681 million capital gain two years earlier.[ix] By comparison, the Red Cross collected a record $129 million in the first eight days after September 11, 2001. In the major financial-services firms, a popular pension-plan holding, CEOs pocketed 12,444 percent more pay in 2000 than in 1990. After raiding Travelers Insurance Group for several hundred million, CEO Sanford Weill saw his personal portfolio jump $248 million the day Travelers merged with Citicorp to form Citigroup. The typical Citigroup teller would need to work 16,067 years to match Weill’s $482 million compensation from 1998 to 2000. Pension plans remain among Citigroup’s largest shareholders.
Academics in law and economics have long argued that executive pay should be tied to their employer’s stock price as a way to align the interests of managers and shareholders. Great theory, except it assumes that managers and shareholders negotiate at arm’s length, a notion that only the ivy-towered would dare suggest. That theory also assumes that retiree savings and fiscal resources meant for employees’ retirement security should instead be used to motivate managers, no matter how much they already make. From a tax-policy perspective, it would be far more efficient if fiscal resources were instead used to provide psychiatric counseling for those executives who require another several million -- or billion -- to put in a decent day’s work.
The law and economics-indoctrinated also assume that managers’ pay is fully disclosed rather than vaguely described in obscure footnotes, where stock option costs remain in a post-reform world. Cisco, another pension plan favorite, reported profits of $1.35 billion in 1998, enticing pension funds to further bid-up its stock price just prior to the crash. Had Cisco treated its options as a compensation expense, the firm would have been forced instead to report a $4.9 billion loss.[x]
Law and economics academics also assume that CEOs are overseen by vigilant boards of directors when, in reality, directors have long been both picked and paid by those they’re hired to oversee. Throughout the booming 80s and 90s, CEOs often both chaired the board and appointed members of the board’s three key oversight committees: the nominating committee (which picks managers and directors), the compensation committee (which sets the pay for managers and directors) and the audit committee (which oversees managers and directors). Jack Welch’s world-class fleecing of General Electric enjoyed the full cooperation of a compensation committee he staffed with eight executives, three of whom depend on business with GE.[xi] Plus, consistent with law-and-economics logic, board members at GE and elsewhere are routinely paid in stock and stock options, further merging the interests of overseer and overseen while motivating both to bend the rules to boost the stock price.
In my role as counsel to Russell Long during the last seven of his 38 years in the Senate, I was treated to a richly textured perspective on the political history leading up to today’s results. Elected to the Senate when Harry Truman was president, Long chaired the Senate’s most powerful committee (Finance) for sixteen years, from 1965 to 1981, including throughout the entirety of Lyndon Johnson’s New Society era. Over a lengthy lunch together during the 1980s, when he served as senior Democrat on the panel for six years prior to his retirement in 1987, Long shook his head in amazement at what he saw as the unanticipated magnitude of the funds amassed in tax-favored retirement plans.
He recalled how these funds first surged during WWII when Roosevelt imposed an excess profits tax of 90 percent as a way to preclude war-time profiteering. In calculating profit, tax policy allows firms to subtract their reasonable costs, including their employee benefit costs. Managers did just what tax policy encouraged, socking away funds for their retirement rather than declaring them as taxable profits and sending 90 percent to the IRS. What was good for managers soon became good for labor. Prodded by collective bargaining, ownership of the largest firms gradually shifted from historic, hands-on proprietors to modern-day pension trustees as institutional investors – largely money managers, insurance companies and banks – became the hired hands of pension fiduciaries whose financial holdings now dominate Wall Street.
In a rare display of candor, many corporate managers have dropped even the pretense that their pay bears any relation to financial performance, the oft-cited rationale for their law and economics-rationalized looting. That’s confirmed by a USA Today report on large-company pay practices where CEO pay-hikes averaged 24 percent for 2001 while share prices sank 13 percent. In The Bigger they Come, the Harder They Fall, Boston-based United for a Fair Economy chronicles the financial performance of the nation’s ten top-paid execs from 1993 through 1999. For pension plan trustees who invested $1,000 in 1993 in each of those firms, by 2000 that ten grand was worth $3,585. Much of that value vanished into the long since diversified brokerage accounts of the nation’s most skillful executive-corps skimmers. Labeling them the “bankruptcy barons,” The Financial Times reports that execs at the 25 recent largest corporate failures pocketed $3.3 billion before stiffing their creditors and shareholders (largely pension funds).[xii]
Both employers and employees are now allowed tax deductions for funds put aside for retirement. Plus tax policy allows those funds to grow tax-free so long as they remain in the hands of pension trustees. Because those funds must be invested somewhere, pension plans quickly became a handy market for managers looking to sell their shares when they exercise their options. Enron’s arrangement is commonplace, where execs sold their optioned shares to Enron’s 401(k) plan. In effect, tax policy both bids up and holds up share prices with $110 billion per year in tax subsidies meant to promote retirement savings that, in turn, are constantly on the lookout for investment opportunities. By comparison, Washington commits $10 billion each year for foreign aid, $8 billion for the Environmental Protection Agency and $1 billion to the Centers for Disease Control.
As financial markets tumbled and the financial meltdown spread, several titans in the financial-services industry felt obliged to show their social solidarity. Sandy Weil, Citigroup’s top employee, proudly announced his intent to pay himself a threadbare $36.1 million for 2001, a mere $694,231 per week. That sacrifice became affordable after he received a $215 million pay package in 2000 ($4.1 million per week), topping off his decade-long skimming at $1 billion.[xiii] Likewise, Goldman Sachs CEO Henry Paulson, with an estimated personal net worth of $280 million, agreed to a 15-percent pay cut for 2001, taking home just $18.9 million ($363,462 per week). Meanwhile, relying on investment advice offered by their firms, the plundering of pension plans proceeds.
Looking back, one can only wonder when pension trustee complacency became outright Wall Street complicity as immense sums in both cash and capital were stripped out of firms in which retiree savings were invested. In April 1999, Aetna acquired U.S. Healthcare and a single employee, CEO Leonard Abramson, was given $900 million in cash and stock plus a $25 million Gulfstream jet along with $2 million a year to run it. Six months later, Sprint employee William Esrey was given a golden parachute that netted him $470 million when he was pushed out as top employee at Sprint. One can only wonder which cabal of financial overseers agreed to give employee Eckhard Pfeiffer $410 million in stock options plus $9.8 million in severance when he was forced out in 1999 as the firm’s senior hired-hand due to his sub-par performance.
Reflecting on his term as a non-executive director at United Wisconsin Services, Marquette University professor Tom Bausch still seethes when he recalls the board’s reaction to a top executive who declined an over-sized pay-hike okayed by pay consultants Hewitt Associates.[xiv] After the CEO protested that the compensation committee’s proposal was out of line by any measure, “the other CEOs on the board,” Bausch recalls, “went catatonic at this ‘anti-free enterprise’ response of the CEO of the company. After all, if this disease escaped the boundaries of our company, think of the damage that could be done.”[xv]
Mutual funds also played a key role in both the heist and the cover-up as their holdings skyrocketed to $7.8 trillion by 2000, up from $135 billion in just two decades. In 2000, more than half of Fidelity’s $9.8 billion in revenue came from employee-benefit services it provides to 11,000 firms, making it unlikely Fidelity would challenge execs who retain their services. At Computer Associates, a Long Island software firm, world-class law-and-economics overseers were on hand to sanction the skimming when three top execs were granted 20 million shares valued at $1.1 billion. Director Alfonse D’Amato, a former GOP Senator from New York, previously chaired the Senate Banking Committee, while board member Richard Grasso currently chairs the New York Stock Exchange.
With the widespread publicity given that official blessing, brazen boardroom complicity accelerated in 2001 when more than half the nation’s top 200 CEOs were given option grants valued at more than $50 million.[xvi] Contrary to CEO lore, these mega-grants are not a sign of managers’ confidence in the company (or vice-versa), they’re a sign of board-facilitated fraud, an in-your-face swashbuckling swindle that abuses rank to filch wealth from shareholders, creditors, retirees and taxpayers.
These modern-day marauders bring world-class cunning to the art of the heist. At Oracle, Ellison outsourced much of the firm’s compensation costs, relying on capital markets -- composed largely of pension funds -- to pay employees with options on Oracle shares that are overvalued, in part, due to that outsourcing. From a law and economics perspective, that compensation strategy beats Ellison coughing up more costly cash and thereby reducing the reported earnings that prop-up the value of his own lavish cash-outs. That cost-containment, earnings-boosting strategy became commonplace in the high-tech sector, encouraged by capital market-savvy venture capitalists who knew that pension funds would prove a reliable market as investors got in early and then bailed out quickly, often liquidating their appreciated holdings by selling to the same pension funds whose earlier purchases helped boost their stock price.
Meanwhile, the (then) Big Five accounting firms mounted a massive lobbying campaign. Led by “New Democrat” Joe Lieberman, the accountants spearheaded a successful fight to block the SEC’s attempt to force candid stock-option accounting. Relying on client-paid fees, the accountants curried favor with well-placed lawmakers in “both” parties. Their successful campaign duped investors, including pension funds, into believing that New Economy firms were virtually devoid of salary expense. Because the survival of these firms often relied on periodic infusions of fresh cash (oftentimes to pay salaries), the bean-counters could have issued qualified opinions to caution investors. But then that warning would have revealed the fudged figures that inflated the stock market bubble that, in turn, enriched both their clients and the investment banking firms whose stock analysts lured the pension funds needed to inflate the bubble.
The financial downside of dishonest stock option disclosure was magnified by option-holding execs who periodically directed their firms to repurchase company shares and retire them. By reducing the number of outstanding shares, that ploy often triggered a short-term surge in earnings per share even if earnings didn’t rise. Relying on company-secured loans to fund those buybacks means that Disney and other firms popular with pension fiduciaries now struggle under heavy debt loads, hammering share value for remaining investors, including pensioners, while executives cash in.
Lieberman’s role in this (still ongoing) heist proved pivotal. Though he couched his opposition to accounting reform in “New Democrat” language of concern for the global cost competitiveness of high-tech firms, it helps to recall that Lieberman hails from Connecticut, corporate home to many of the largest insurance firms. Insurance is regulated by the states, not by Washington, with each state setting its own requirements for capital sufficiency, the minimum investment capital required to cover each dollar of insurance sold. Any reform of stock option accounting would have reduced the value of insurance companies’ portfolios as the firms in their portfolios would have been forced to account for options as an expense. In turn, that would have reduced the capital that insurers rely on to pay claims. In practical effect, reform would have forced insurers either to write less insurance or to raise more capital, not a prospect relished by the politically savvy financial services industry, particularly in a bear market where their stock would fetch a depressed price. With Lieberman’s leadership, insurance firms instead continue to defraud both the states and their clients by pretending they retain capital sufficient to cover potential claims.
Most execs share an incentive to squash truthful option accounting. Reform would enable investors to see the financial and dilutive cost of options that even now remain hidden, enabling senior managers to skim ever more capital without spooking investors. Plus, akin to state laws meant to ensure the prudent underwriting of insurance risk, federal pension law also sets minimum capital-sufficiency requirements to ensure that firms don’t promise more benefits than their pension portfolios can deliver. Any change in option accounting would reduce the value of their pension portfolios, lowering the value of pension assets already devastated by the market meltdown. That reduced value, in turn, would force firms to make larger pension contributions under federal law, thereby hammering the firm’s own earnings and lowering the value of executives’ stock options.
Relying on the bull market, many companies contributed little or nothing to their pension plans for many years. Even now, many corporations continue to assume outsize gains on their pension portfolios as a way to reduce pension costs.[xvii] Since the Spring 2000 meltdown, companies have amassed a pension-funding shortfall of about $300 billion according to the Pension Benefit Guaranty Corporation, the federal agency charged with insuring private-sector pension plans. That figure represents by far the largest shortfall since the mid-70s enactment of pension reform legislation.
With the Federal Reserve steadily lowering interest rates, pension plans must assume lower returns. In response, large corporations are pressing for legislation to raise the permissible discount rate used to compute pension liabilities, thereby making obligations appear smaller.[xviii] To use one very large example, their proposed rate change would reduce General Motors’ reported pension liabilities by about $7 billion, helping stabilize their stock price (and the value of stock options) while covering up GM’s pension-funding shortfall a bit longer.
To manage the cost pressure of pensions and stabilize share prices, employers are now turning to “cash-balance” plans where, instead of promising a fixed benefit, employers promise instead to add cash to employees’ pension balances each year. That allows firms to lower costs by no longer linking pension commitments to employees’ pay (defined benefit pensions are typically based on an average of employees’ final 3-5 years of pay). With prodding from the Bush II Treasury, some eight million older workers are poised to see their expected pension benefits reduced by 30-50 percent. Of course, reduced pension costs boost firms’ reported earnings, raising the value of their stock options.
Because accounting reforms typically cost firms money, the result can lead to layoffs and to downward pressure on pay and benefits, which helps explain why employee groups hesitate to press for reforms in stock-option reporting. Due to the many ways that options can be manipulated and misused, plus the many perverse pressures they exert, Paul Volcker, former chair of the Federal Reserve, announced his opposition to options of any sort. As he knows, even the timing of options has been routinely abused. Companies with good news to report tend to award options just before releasing their quarterly reports, while those anticipating bad news tend to delay option grants until afterwards when the stock price is down and the upside potential is greater. In either case, executives are positioned to get the best possible deal, relying on a slick variant of insider trading that has yet to attract a legal challenge.[xix] Rather than ban options, several policy-makers are proposing that their damage be limited by limiting the fraction of total options granted to managers.[xx]
Intimations of insider trading abound, including Oracle as its stock soared and Ellison cashed-in. Now other shareholders are crying foul. That includes Local 144 Nursing Home Pension Fund whose trustees claim that Ellison, often in the top five on the Forbes 400 list, rigged his 1999 windfall by fudging Oracle’s figures before pocketing his $681 million gain, only then publishing less optimistic projections, causing the shares to plummet 21 percent. Billions more were vaporized in overpriced mergers and acquisitions that led to massive write-downs, including a record-breaking pair of write-offs at AOL Time-Warner over a nine-month period that by January 2003 totaled $98.7 billion, the largest in corporate history.[xxi]
At dozens of companies where stock prices have plummeted, retiree plans were (and remain) the largest single market for those high-flying shares, particularly telecom, high-tech and dot-com firms. Pension funds routinely served as a reliable source of funds to drive share prices up, oftentimes buying even more shares as insiders cashed-out and share prices swooned. Senior execs pocketed personal fortunes by cashing out while a cabal of corrupt analysts maintained their upbeat ratings for other investors.
It’s now confirmed that analysts routinely worked hand-in-glove with their investment banking colleagues in financial services firms. The investment bankers quickly learned they could rely on the analysts to fudge their ratings when helpful to entice firms looking for help in marketing initial public offerings – from which investment banks typically retain seven percent of the funds raised. Jack Grubman, Citigroup’s fabled telecom shill, urged pension funds to dump Worldcom shares only after they’d fallen from $60 a share to $1. As Grubman testified in Congressional hearings, his annual salary exceeded $20 million, plus assorted benefits. One of the more revealing benefits included a reported $1 million donation that Citigroup CEO Sanford Weil made to ease the admission of Grubman’s young children to an upscale Manhattan kindergarten after the grateful Dad dutifully upgraded his rating of a telecom security for a Citigroup investment banking client, and then promptly lowered the rating after the public offering closed. Confirming the institutionalized chutzpah that typifies the all-encompassing extent of the (still ongoing) heist, on March 21st, the board of the New York Stock Exchange nominated Weil to its board – not as a voice for the industry but as “a representative of the public.”[xxii] His nomination was withdrawn, but on the objection of New York’s attorney general.
Key members of the financial press were also routinely complicit. In 2000, before Cisco’s shares tanked, top execs cashed in options worth $308 million. That includes $157.3 million by CEO John Chambers, on top of his $122 million stock option gain in 1999. Extolling Cisco’s sizzling finances, The Wall Street Journal assured its readers that Chambers deserved every cent. After all, Cisco’s stock price soared 91 percent in 1999, leading Worth magazine to rate him America’s top CEO. After Cisco shredded more than $400 billion in market value, the Journal argued that Chambers deserved to share none of the financial pain because he could not be held responsible for “market forces beyond his control” –i.e., those same forces that obscured option costs and ravaged retirement plans while enabling him to pocket 8,653 times the $8.74 an hour he pays those who clean his office.
Federal law has long been clear: the tax-subsidized savings invested in these firms are meant “solely for the purpose” of funding future benefits for a broad base of Americans. Instead, as the financial influence of pension trustees grew, so too did the fortunes of corporate insiders and those already the most well-to-do. In 1982, when Forbes published its first list of the nation’s 400 wealthiest individuals, the threshold for inclusion was a personal net worth of $91 million. In 2000, that would have been $161 million, but by that time the cut-off point had risen to $725 million.
Forbes reports that in 2000 the U.S. was home to 274 billionaires, up from 13 just since 1982.[xxiii] The wealth of the Forbes 400 grew, on average, $1.44 billion each from 1998-2000, for a daily increase of $1,920,000. That breaks down as $240,000 per eight-hour day, or 46,602 times the minimum wage.[xxiv] By 2001, these trustee-favored 400 had amassed $1,540,000,000,000 ($1.54 trillion). The $500 billion-plus skimmed by senior managers moved many of them to within shouting distance of those on the top.
Even these trends barely scratch the surface because funds set aside for retirement are only relevant when paid. That’s why pension fund-managers routinely strut their stuff as “futurists” because federal law requires that the pension fiduciaries who hire fund managers take into account the impact of their investments decades hence when paid-in funds are eventually paid out to retirees. Instead, by opting to rely on the law and economics’ rich-get-richer investment model, those funds financed a future that undermines the very purpose for which the sums were set aside, ensuring a future that’s both fiscally perilous and politically plutocratic.
For instance, with steady backing from pension fiduciaries, one family alone -- the five heirs of Wal-Mart founder Sam Walton – have thus far amassed $100 billion. While it’s obvious this mega-retailer produced two decades of attractive financial returns, it’s equally obvious that these fiduciary-futurists are obliged to consider a far broader picture. Wal-Mart operates ~3,300 outlets in the U.S. Its 2002 sales topped $240 billion, up from $1 billion since 1979, accounting for 2.3% of GDP as 70 million people roam its aisles each week. For the first time in history, a retailer leads the Fortune 500 ranking of firms by annual revenues, crowding out Exxon Mobil, General Motors and GE. In December 2002, Wal-Mart executives assured stock analysts that sales will double by 2007 to $480 billion. In response to a recent question about the outer limits of their saturation strategy, CEO Lee Scott responded: “Could we be three times larger? I think so.”[xxv] Already the largest employer in 21 states, the firm has more people in uniform than the U.S. Army.
In other words, in their blind pursuit of financial returns, those entrusted with retirees’ financial future invested retirees’ savings to create an economy where six cents of every retail dollar builds more wealth for a family who already have more wealth than the richest robber barons of the Gilded Age. Wal-Mart now opens roughly one new store a day as it fills the gaps between its box stores with “Small-Marts” featuring conveniences like drive-through pharmacies. Sensitive to emerging baby-boomer demographics, it’s experimenting with stand-alone pharmacies and is contemplating the purchase of a pharmaceutical firm. Retirees are already in such poor financial shape that Medicare will soon be expanded to cover prescription drugs for seniors. Many of those prescriptions will be filled at Wal-Mart’s 2,500-plus pharmacies, ensuring that any fiscal subsidy offered today’s seniors is certain to worsen a fast-emerging fiscal disaster for tomorrow’s seniors.
By choosing to follow the advice offered by law and economics-inspired fund managers, pension trustees misled an entire generation, attuning their investment strategy not to a shared-prosperity fiduciary mandate – which is perpetually 20-30 years in the future -- but to Wall Street’s seductive sales pitch: “Maximize financial returns now and, trust us (after all, we’re from Chicago), the future will work out fine.” If only the future were so facilely formulistic and deterministic. By choosing to rely on that reductionist rationale, trustees ensured that retirees now find themselves part of a demographic bubble of 76 million people, ages 39 to 57, a majority of them barreling toward retirement with profoundly inadequate assets to sustain themselves in what is likely to be lengthy retirements.
With their savings used to chase dynamite returns and dysfunctional results, baby-boomers have every right to be outraged. In addition to coping with the costliest health-care system and the lowest life-expectancy of any major developed country, Americans find themselves working 184 hours longer each year than in 1970, an additional 4-1/2 weeks on the job for roughly nine percent more pay, [xxvi] a portion of which was entrusted to pension fiduciaries who invested those funds in a corrupt model that remains, even now, highly touted by law and economics ideologues. The certainty of retirees’ need for financial support in retirement is sure to worsen the nation’s fast-deteriorating fiscal condition while the inflation-fueling pressure of those needs is certain to endanger the security of all those dependent on fixed incomes, both public and private pensioners.
The full implications of this fiscal train wreck remain just over the financial and political horizon, obscured from view by the pundits and panderers of this long-dysfunctional model. Social Security, already the largest tax paid by four-fifths of Americans (90 percent of Generation X), is destined to become the sole pension for a majority of baby-boomers. Thus, after decades of gearing investment decisions solely to Wall Street’s reductionist standards, the largest pension for most Americans remains the same as in 1935: a political promise that their retirement income depends on the willingness of the employed to pay a job-tax – in a globalizing economy where labor costs are fast being arbitraged worldwide.
Meanwhile, the largest tax hike of the past two decades was enacted in 1983 when a Reagan-Bush presidential commission, chaired by Alan Greenspan, persuaded Congress to hike the Social Security payroll tax, ensuring that a hugely regressive “flat tax” -- 15.4 percent on the first $80,400 of income – would become the nation’s largest single levy. Turning logic on its head, a national full employment policy is now paired with a massive tax on employment, accelerating the massive export of manufacturing jobs, long the financial mainstay of America’s fast-shrinking middle class.
In retrospect, the law and economics model is itself a form of control fraud, its financial effects similar to a modern-day enclosure movement. Akin to a form of mass autism, its proponents insist that pension assets be invested in a way that ensures a total disregard for their impact on economic distribution patterns or any other impact – on civil cohesion, fiscal foresight, environmental sustainability, and so forth. Rather than grant rightful deference to financial returns, their insistence on the perfection of capital markets means that financial signals must be granted outright dominance, regardless of outcome.
In effect, law and economics theory represents a breathtaking attempt to insist that all of life adapt to fit into a finance-myopic theory. Not only does the theory, in practice, result in serial financial frauds, its core premise undermines the core premise on which the moral foundation of markets is built – i.e., that markets are consistent with democracy because they respond to those who inhabit them. By its indifference to the resulting patterns of both ownership and income, the theory confirms its tenuous moral grounding. By failing to ensure that, in operation, the theory results in broad-based ownership and income, the theorists deny people the very relationships required to make that core premise a practical reality.[xxvii] Markets respond not to people but to people with money. Yet they undermine markets by their embrace of a theory that concentrates income. Private property, the foundation of free enterprise, depends for its legitimacy on its lack of exclusivity. By concentrating ownership, they also imperil private property.
Most telling of all, in operation, their theory foreseeably concentrates wealth and income, confirming they actively prefer plutocracy over democracy, and favor the dominance of finance-calibrated values over the economic relationships required to reflect that broader bandwidth of values essential to robust free enterprise democracies. By working their anti-democratic ends through pension-fund means, law and economics idealists mask the theory’s immoral consequences through physical and temporal distancing. In explaining how this distancing converts us into “ethical eunuchs,” attorney-author Andrew Kimbrell describes this process as the ideology and pathology of Cold Evil, “a psychological disconnect between the doer and the consequences of the deed.”[xxviii] Just maximize (abstract) financial returns and, trust us, all will be well…. Thus, the evil shows up anonymously where no one appears responsible, certainly not the theorists.
What is systemic evil if not the anonymous wielding of a society’s dominant power (i.e., financial power) combined with results that concentrate the benefits while diffusing the costs? Gradually imbed the theory in academia and the media, with multi-decade assistance from tax-subsidized nonprofits,[xxix] and complicity becomes diffused, even invisible, as individuals internalize the theory’s abstract standards, innocently pursuing their 401(k) returns whilst systemically ensuring evil results that appear not to require evil people to purvey. The apparent legitimacy of the model, now successfully imbedded in the dominant worldview, then serves to protect the perpetrators against sanctions even as their flawed theory becomes a vehicle for massive fraud.
Thus, for instance, in 1980, the U.S. had ~$1900 billion in the hands of institutional investors. By 2000, that amount totaled ~$1900 billion in the hands of just three money managers (Fidelity, Barclays Global and Merrill Lynch) who had the entire ~$1900 billion indexed, invested solely to reflect the make-up of capital markets as a whole. That money, much of it pension money, operates not just self-reflexively (responding to analysts’ expectations) but also self-reflectively, a money-on-autopilot system designed by theorists to ensure that it both seeks and responds solely to those values that register as financial values.[xxx] While great evil may be done in the myopic pursuit of those returns, there is no longer any evil-doer, but simply money-managers dutifully doing their job at the behest of those dutifully following the prime directive of law and economics.
The last time wealth and income were this concentrated, an upstart presidential candidate emerged on the political scene – Louisiana populist Huey P. Long. The broad appeal of his redistributive ‘Share Our Wealth’ program was confirmed in April 1935 by the nation’s first-ever scientific political poll, a story relayed to me by Russell Long who was 16 when his father was assassinated in August 1935. That postcard poll was undertaken by ‘Big Jim’ Farley, head of the Democratic Party and Roosevelt’s postmaster general.[xxxi] The results revealed that Long’s populist message resonated nationwide at a time when FDR’s advisers hoped that Huey’s appeal was a uniquely southern phenomenon. More importantly, the poll showed that his candidacy appeared certain to throw the 1936 election to the Republicans, including New York, Roosevelt’s home state.
Soon after the poll results were compiled, this Hyde Park patrician announced his support for Social Security, then widely regarded as a radically socialist notion. In retrospect, in lieu of a populist policy based on Share Our Wealth, America settled for a progressive policy based on Tax Our Paychecks (i.e., Social Security). Modern-day populists argue – I suggest rightly in Democracy at Risk[xxxii] -- that the economic debate hasn’t much shifted since 1935. The massive tax subsidies directed at private pensions were meant to supplement Social Security’s modest safety net for seniors. Instead, pension trustees – consistent with law-and-economics indifference to economic distribution patterns -- transformed retirement savings into a Reverse Robin Hood, relying on an investment model that perverts retirement funds into a means for financing more wealth for the well-to-do while Social Security payroll taxes continue to work their depressing effect on employment.
What’s not yet clear is when those harmed by this multi-decade heist will grasp the all-embracing extent of the law-and-economics swindle. After several decades of policy-making slavishly attuned to the maximization of financial returns – with no concern for the resulting economic distribution patterns -- even local broadcasting, a key building block of democracy, has been converted from a community-anchored asset into a financial-market asset as federal rules against media concentration were gradually relaxed, largely in the name of greater “efficiency” (i.e., measured by financial returns). As locale-attuned media morphed into distant and abstract financial holdings, broadcasting rapidly consolidated, along with the range of on-the-air opinions.
A single firm, Texas-based Clear Channel Communications, now controls programming on 1,225 radio stations, one-tenth of all broadcasting nationwide, ranking first in five of the top-ten media markets and second in four others with programming that reaches 110 million listeners each week. Standardized play-lists and generic reports are paired with political commentary by HardRight icon Rush Limbaugh, this conglomediate’s top-syndicated talk-show host. Its ownership of 775,000 billboards and its programming to more than 7,800 radio stations nationwide means that Clear Channel’s worldview (fully consistent with law and economics ideology) dominates drive-time attention-spans like nothing with which American democracy has ever been forced to contend.
In the Spring of 2003, Clear Channel catalyzed pro-war rallies nationwide -- which its affiliates then dutifully reported as news. Serving notice of its intent to wield political power by stifling dissent, it also purged its play-lists of the Dixie Chicks, popular musical artists known to hold anti-war views. As the nation’s largest manager and promoter of concert venues, that purge served its intended chilling effect on all those dependent on this dominant force in the entertainment sector. As this media monolith steadily grew in size and influence, by 2003 its reach included 54 percent of those nationwide between the ages of 18 and 49 as, nationwide, the number of station owners declined 30 percent since 1996. Pension funds provided much of the financing, enticed by its attractive returns.
Ten companies now own more than 90 percent of media outlets nationwide, totally contrary to ownership rules enacted after the U.S. saw how totalitarian governments use media-domination to goad their nations into war. If former GOP President Dwight Eisenhower were alive, he would warn us not about the perils of the “military-industrial complex” but about the dangers to democracy of today’s “military-media complex” (e.g., defense contractor General Electric owns NBC, MSNBC and CNBC). Federal Communications Commission chair Michael Powell, son of General Colin Powell and an outspoken fan of law and economics, announced his intention to repeal the few remaining rules that stand in the way of further media consolidation. Even without further consolidation, according to Reporters Without Borders, the U.S. has fallen to 17th, just below Slovenia, on the worldwide index of media freedom.
Consistent with their support for a worldview that led to the current record-breaking concentration of wealth and income, “Chicago” theorists are happy to support record-breaking media concentration. That result, in turn, ensures that the dysfunctional effects of their theory receive little media attention as they achieve a uniformity of opinion normally achievable only in a totalitarian society. With the mental mono-culturing that’s long been known to accompany media consolidation, their flawed theory more easily finds its way into law as 92 percent of registered voters listen to political talk radio at least once every two days according to a 2003 poll published in Indicators magazine.
Despite its political dangers and its economic dysfunctions, law and economics theory continues to spread its tentacles worldwide. World Bank research confirms that its Chicago-inspired, capital markets-led “emerging markets” development model remains on track to replicate U.S. wealth patterns worldwide. For instance, 61.7 percent of Indonesia’s stock market value is held by that nation’s 15 richest families. The comparable figure for the Philippines is 55.1 percent and 53.3 percent for Thailand.[xxxiii] The world’s 200 wealthiest people doubled their net worth in the four years to 1999, to $1,000 billion.[xxxiv] Their combined wealth now equals the combined annual income of the world’s poorest 2.5 billion people.[xxxv] World Bank research discloses that the combined income of the topmost one percent worldwide equals the total income received by the poorest 57 percent (2.7 billion people).[xxxvi] Since 1985, economic decline or stagnation has affected 100 countries, reducing the incomes of 1.6 billion people. For 70 of those countries average incomes are less in the mid-1990s than in 1980, and in 43, less than in 1970.[xxxvii]
Domestically, the political and the financial implications of this law and economics-facilitated heist are staggering as boomers’ retirement needs are certain to emerge on the fiscal horizon just as available budget resources are either receding or exhausted. In large part, that’s because a policy of ‘fiscal crowding-out’ lies at the heart of the long-term strategy of the law and economics-attuned GOP. That agenda was forced into the open in the early-80s when Reagan-Bush Budget Director Dave Stockman, now a Citigroup investment banker, confessed that his “rosy scenario” budget projections were “absolutely doctored” to gain support for Reagan-era supply-side tax policies by understating their fiscal impact. That way, the GOP could shrink the size of government by eroding its financial capacity instead of facing the political pain of cutting programs that enjoy widespread voter support.
When I joined Finance Committee staff in 1980, total federal debt was $909 billion. During my first year as counsel, with GOP stalwart Bob Dole presiding, the Committee approved Reagan’s $872 billion supply-side tax package, every cent of it deficit-financed. By the time Reagan and Bush I vacated the White House, the federal debt topped $4200 billion. Crowding-out slowed only slightly as Clinton and Gore – both law and economics stalwarts -- added to the debt another $1.7 trillion, including a mid-90’s supply-side tax subsidy with a $268 billion fiscal tab. As with Reagan-Bush, this Clinton-Gore investment subsidy was 100 percent deficit-financed, ensuring that the annual crowding-out expense of interest payments on the federal debt would grow from $58.5 billion in 1980 to $247.5 billion by 2000.[xxxviii] Total federal debt will top $6752 billion during FY 2003 enroute to a projected $7321 billion for FY 2004.[xxxix] Americans not only missed out on the long-promised post-Cold War peace dividend, they also found their future mortgaged as “both” major parties (i.e., identical in their enthusiasm for law and economics) borrowed freely to subsidize private-sector investments that, from 1982 to 1999, saw the nation’s 30 largest fortunes grow more than ten times larger.
The impact of the GOP’s crowding-out strategy remains all-encompassing, its perverse success boosted by a recent $5.3 trillion budget swing in just 20 months. In January 2001, the Congressional Budget Office projected a surplus of $5.6 trillion for the ten-year period 2002 through 2011, a key fiscal rationale offered by “both” parties for the 2001 tax cut. On August 27, 2002, CBO predicted a net surplus over the same period of just $336 billion, a projection that omits the cost of the war on Iraq, post-9/11 security costs and a variety of other inevitable expenses. That 20-month budget swing, the largest in U.S. history, heralds a fiscal future certain to further cripple Washington’s capacity to provide oversight, public services or financial assistance, a key long-term goal of the GOP. For example, citing fiscal pressure, IRS audits of high-income taxpayers declined by two-thirds since 1995, reaching in 2001 a record-low one in 142 tax returns for those making $100,000 or more. Instead, the audit rate was raised on the working poor because, with today’s fast-widening economic divide, the earned income tax credit is now so widely claimed that the five-year fiscal cost is expected to top $178 billion.[xl] Fearing that the poor may abuse their subsidy, the IRS shifted its oversight budget so that more than half its tax audits in 2001 targeted those who claim the low-income credit.
As regulatory oversight was starved of funds or politically intimidated, the SEC became so understaffed that in 2001 it played financial watchdog to a record-low 16 percent of corporate filings. After appointing an accounting industry advocate to lead the SEC, the GOP failed in its attempt to eliminate 57 corporate oversight positions at a time when stock exchange trading volume had ballooned nearly six-fold since 1993, up 100-fold since 1972. State pension systems lost $3 billion in Enron alone, a cost of crowding-out that states are forced to recoup from their fast-shrinking tax revenues as 48 of the 50 states reported budget shortfalls in 2002, the largest budget crunch since WWII, with 42 states facing deficits totaling $60 billion to $85 billion for fiscal year 2004, at least twice as large as states faced during the recession of the early 1990s.[xli] The unfunded liabilities of public-sector pension plans leapt from $50 billion in 2000 to $94 billion for 2001.[xlii]
Happily, it’s impossible for supporters of this dysfunctional policy-mix to hide. Pension trustees (including state trustees and state comptrollers) have long been powerful political players, typically wielding their clout behind the scenes, their views conveyed instead by those who thrive on their fees, a key reason that money managers and stock brokers now account for 71 of the nation’s top 400 political contributors.[xliii] Of the ten top zip codes of campaign contributors for “both” major parties, five run up the posh East Side of Manhattan, home to the nation’s money-management and media elite. One fifth of the 275,000 households worth more than $10 million live in the New York area, center of the campaign-finance universe.
As TomPaine.com columnist Mike Ryan points out, New York police and firefighters died in Manhattan’s World Trade Center while drawing annual salaries less than Manhattan investment bankers pay to rent a house in the Hamptons for the flag-waving Fourth of July weekend. We don’t yet know the full extent of the losses suffered by public-employee pension plans. However, this much we do know: today’s rich-get-richer pension fund investment model (i.e., law and economics) grew steadily more prevalent as tax-subsidized money-management fees found their way from Washington to Wall Street before wending their way back into Washington’s campaign-finance coffers.
On the one hand, a steady increase in the nation’s debt from $909 billion in 1980 enroute to (at least) $7500 billion during FY 2004 appears irrational, particularly when “both” parties now market themselves as fiscal conservatives interested in protecting their political “brand.” On the other hand, that increased debt becomes fully rational if the debt is owed not just by those few who received the most financial benefit but also by the many who received the least benefit, the bulk of whom have become too disillusioned to vote. Moreover, much of that increased debt financed increases in personal wealth for the benefit of the topmost one percent, the same few people who receive the bulk of the interest payments on that increased debt. Politically, “Chicago” economics facilitates control fraud by diffusing the pain and concentrating the gain
That achievement of that goal became less inexpensive (i.e., on a cost-benefit basis) as a rapidly consolidated media became evermore a reliable purveyor of the “Chicago” worldview. Re-election also became more “efficient” as the disillusioned many became progressively less informed (i.e., except in that worldview) and politically more dormant. Rather than fund retirement security by fostering a genuinely shared prosperity, funds meant for that purpose were redirected into a massive (now systemic) fraud and into the re-election of those required to perpetuate both the fraud and the worldview essential to its perpetuation.
The extent of the Chicago-inspired control fraud worked on the nation during the Reagan-Bush Administration (continued by the Clinton-Gore Administration) served as a signaling device to support the formation and “election” of the Bush II Administration with its far more ambitious control fraud agenda. Thus, over an 8-week period in 2000, a well-to-do cabal of HardRight members of the GOP readily raised ~$50 million to ensure that another control-fraud perpetrator (Bush II) would be positioned to preempt the Republican presidential primaries, ensuring the appearance of a brand-name GOP candidate on the 2000 ballot. At the time, G.W. Bush’s sole qualification for office was his name recognition though he had by then held for two years a statewide elective office (i.e., governor of Texas) which has long had only a ceremonial function. [xliv]
By this ploy, the perpetrators placed in office a political blank slate who could be relied on to advance the fundraisers’ financial and political goals. Those goals included a Pax Americana agenda (not revealed to the electorate) to take over the Middle East as the first step in an agenda meant to apply the nation’s military dominance to the goal of worldwide financial and political dominance.[xlv] From a control-fraud perspective, this ambitious strategy required not an openly elected presidency but a pre-selected regency, a plan facilitated by an antiquated electoral system that lent itself to easy election fraud, particularly in key “swing states” such as Florida.
The fully self-financing nature of these serial control frauds (AKA presidential elections) ensured that the political funds available to secure the White House continue to rise at a correspondingly rapid rate. During his first 19 months in office, Bill Clinton raised a record-breaking $39 million while during his first 19 months, George W. Bush raised $100 million despite the fact that he suspended fundraising for four months following the September 11, 2001 terrorist attack.[xlvi] Clinton reportedly raised more than $1 billion during his political career as a state governor and then president. Politically sophisticated control-fraud specialists routinely spend ten times as much on lobbying as on direct campaign contributions, plus tens of millions more bankrolling think tanks and issue-specific advocacy groups,[xlvii] much of that cost tax-deductible by those who reap the associated financial benefits.
The political ascendancy of the law and economics model is directly attributable to the rise of think tanks in which the well-heeled were eager to invest, confidently and accurately predicting that well-funded and well-placed intellectual influence could be converted into political influence that would repay their investment many times over. Political outlays remain one of the most cost-effective investments, with particularly high returns available for those able to secure the executive branch. In my experience, the success of that investment theory was apparent in the successful marketing of supply-side economics to “both” major parties – as evidenced by the fact that neither party mentioned who would be supplied (though the result was fully foreseeable), and “both” parties accepted massive campaign contributions from those few who were supplied, a self-financing control-fraud success for the well-to-do as well as for those re-elected.
These overlapping sources of taxpayer-subsidized political influence make it all the more unsettling to realize that those paid handsomely to advise pension trustees gave generously to lawmakers – of “both” parties -- who proposed the partial privatization of Social Security.[xlviii] These financially sophisticated advisers knew that the leading GOP proposal would redirect ~$100 billion per year of payroll taxes into a law and economics-inspired, Wall Street-recommended investment model where, from 1983 to 1998, 53 percent of market gains flowed to the top one percent of households.[xlix] In 1997 alone, IRS figures confirm that 54 percent of capital gains were claimed by the richest 90,000 taxpayers, those with incomes of $1 million or more, while the poorest 89 percent of taxpayers received just 11 percent.[l] That diversion of payroll taxes to Wall Street (boosting the brokerage accounts of the nation’s most well-to-do) also means ~$100 billion each year that would be unavailable to pay current Social Security benefits, a fiscal shortfall certain to ensure even more fiscal crowding out, a GOP priority.
Also, as Wall Street’s law-and-economics sophisticates understand far better than the lawmakers they lobby, retirees rely on a future financial market that’s both large enough and liquid enough to absorb the sale of pension assets in order to pay retirees’ expenses. One can easily imagine the market-dampening impact as boomers move from pay-in mode to draw-down mode, dumping their retirement portfolios onto the stock market just when a privatized Social Security system anticipates liquidating its holdings, depressing prices for both. Add to that potential glut the certainty that many boomers will need to sell their homes and this model becomes even more clearly dysfunctional.
That foreseeable scenario makes it all the more troublesome to find that Wall Street’s highly paid pension advisers used their tax-subsidized fees to pursue the enactment of a privatization scheme, particularly knowing that scheme is certain to raise short-term stock prices for the few (largely their high net worth clients) while the long-term effect may magnify the fall in stock prices for the many as both private and state-sponsored pension plans compete with Social Security in selling securities to meet retirees’ needs.
Many of those trustee-paid advisers backed the $1.35 trillion Bush II tax cut in 2001 and now back a new Bush II tax cut. The fiscal tab for this latest crowding-out tactic, if extended beyond 2010, is projected to reduce fiscal resources by $4.1 trillion through 2013, more than twice the projected shortfall in long-term Social Security funding[li] and a strategy certain to put untold pressure on the nation’s financial health, further endangering the value of all pension benefits. As the nation’s best and brightest in financial affairs, these Wall Street advisers understand better than anyone that the topmost one percent of taxpayers (i.e., their clients), will eventually pocket roughly half those tax cuts. The latest round in this ongoing GOP crowding-out strategy is scheduled to commence precisely when the costs of Social Security, Medicare and Medicaid are actuarially certain to soar.
As the campaign-contribution record confirms, many of these pension fund advisers also pushed for repeal of the estate tax. Repeal is projected to reduce future tax receipts by an additional $740 billion from 2012 through 2021, another crowding-out component endorsed in June 2002 by a majority vote in the GOP-controlled House. If enacted, the fiscal impact would zip-up the fiscal straitjacket just as the first baby-boomers turn age 66. The bulk of the tax relief would be pocketed by the most well-off one-hundredth of one percent.[lii] Despite political talk-radio claims bemoaning the devastation wrought by the ‘death tax’ – particularly evident on Clear Channel affiliates – research confirms that repeal has nothing to do with saving family farms or rescuing small business owners. In 1999, half of all estate taxes were paid by 3300 estates, 0.16 percent of the total, while a quarter of estate taxes were paid by 467 estates worth more than $20 million each.
Estate tax repeal would also transfer at least $1,540 billion (and, by then, far more) to the children of the nation’s 400 most well-to-do families, creating a fiscally induced hereditary elite just when boomers are certain to require fiscal assistance. As these finance-sophisticate-advisers fully understand, repeal would also gut a key incentive for charitable giving, ensuring a dramatic drop in estate bequests for foundations, hospitals, universities, the Red Cross and such, helping de-capitalize the nonprofit sector while halting growth in the sole remaining pool of capital dedicated to the general welfare.
As a seasoned legislative craftsman in this specialized area, I search in vain for any semblance of the prudence or foresight, or even the simple decency and common sense, expected of these financial futurists and those they handsomely compensated to advise them. By law, they’re directed to invest as fiduciaries, funding secure retirement futures as trustees of a transgenerational obligation. Instead, after two decades of overseeing the largest pool of capital on the planet - preempting vast fiscal resources that left other public priorities to languish – this is the optimal result they could muster in the field of all possibilities? Yet, relying on analysis provided by law and economics academics, Washington reformers embraced only the most superficial and trifling changes directed solely at smoothing the rough edges of this institutionalized thievery.
By choosing to continue their embrace of Wall Street’s cramped measure of success (“maximize financial returns and trust us….”), these trustees concede their lack of concern even if a handful capture the bulk of the financial value created by an entire new industry. By their dysfunctional, returns-fixated standards, Microsoft is an attractive investment so long as it generates competitive returns, even if the result enables a single person (Bill Gates) to amass what Wired magazine predicts could become $1 trillion by 2005 and a quadrillion (a million billion) by 2020.[liii] While it’s unclear as yet whether that will happen, it’s clear that it could. And it’s clear that law and economics ideologues would have no objection if such plutocratization is the use to which pension funds are put.
As Kevin Phillips points out in Wealth and Democracy, by 1999, Bill Gates’ fortune stood at 1.4 million times the net assets of the median U.S. household, a disparity already well beyond the 1.25 million to 1 ratio achieved by John D. Rockefeller in the early 1900s. While Wired magazine’s projections of Gates’ future wealth predate the 2000 market crash, they also predate Attorney General John Ashcroft’s 2002 announcement that the Department of Justice is winding-down its antitrust proceedings against Microsoft. Until then, those proceedings were advancing based on the findings of a Reagan-appointed federal judge who concluded, based on the evidence presented at trial, that Microsoft is clearly a monopoly. With political help from the Bush II Administration, and with ongoing financial help from pension trustees, Microsoft’s co-founder may be back on track to meet Wired’s plutocratic projections.
[i] Citing Roy Smith in “Will Congress Finish the Job…,” Too Much (New York: Council on International and Public Affairs), Spring 2002, p. 6.
[iii] For example, Citigroup was fined $400 million, 0.56% of it’s 2002 revenues of $71 billion or 2% of its $20 billion in revenues from its global corporate and investment bank.
[iv] In a study of the connectedness of ~7,700 directors at Fortune 1000 firms, researchers found that each director, on average, can reach every other director through 4.6 intermediaries and that each board can contact every other board in 3.7 steps. Research by University of Michigan professors Gerald F. Davis, Wayne E. Baker and Mina Yoo, forthcoming in the journal Strategic Organization.
[v] U.S. Congress Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2002-2006 (U.S. Government Printing Office, January 17, 2002). The IRA estimate includes Keogh plans. ESOP-related tax benefits ($5 billion over the 5-year period) are not included.
[vi] “Executive Pay Special Report,” Business Week, April 16, 2001.
[vii] Matt Murray, “Options Frenzy: What Went Wrong?,” The Wall Street Journal, December 17, 2002, p. B1.
[ix] Forbes, October 8, 2001, p. 134.
[x] Ron Unz, “Taking Stock,” Los Angeles Times, August 25, 2002, p. M6.
[xi] Diana B. Henriques and Geraldine Fabrikant, “Deciding on Executive Pay: Lack of Independence Seen,” The New York Times, December 18 2002, p. 1.
[xii] John Balzar, “CEOs Gorge, and Everyone Else Gets Sick,” Los Angeles Times, August 11, 2002, p. M5.
[xiii] Riva D. Atlas and Patrick McGeehan, “In Two Days, Citigroup Chief Traded Halo for Headaches,” The New York Times, July 27, 2002, p. B1.
[xiv] Prior to becoming counsel to the Senate Finance Committee, I served for two years as in-house counsel to Hewitt Associates in their Lincolnshire, Illinois headquarters.
[xv] Personal correspondence with the author.
[xvi] Based on research by Pearl Meyer & Partners, New York.
[xvii] Mary Williams Walsh, “A Study of Corporate Pension Funds Shows Many Assumed Outsize Gains,” The New York Times, April 17, 2003, p. C1.
[xviii] Mary Williams Walsh, “Plan to Alter The Yardstick for Pensions,” New York Times, April 11, 2003, p. C1.
[xix] 1997 research by David Yermack at NYU’s Stern School of Business, as reported in Journal of Finance.
[xx] On April 16, 2003, California Treasurer Phil Angelides sent letters to the investment committees of the state’s two largest retirement systems (which control roughly $220 billion) asking that they vote against any company compensation plan that would give the top five managers more than five percent of total options granted.
[xxi] Edmund Sanders, “AOL Posts Record $99-Billion Loss,” Los Angeles Times, January 30, 2003, p. C1.
[xxii] Patrick McGeehan, “Citigroup Chairman Named As N.Y.S.E. Board Member,” The New York Times, March 22, 2003, p. C2.
[xxv] Jerry Useem, “One Nation Under Wal-Mart,” Fortune, February 18, 2003.
[xxvi] Juliet S. Schor, The Overworked American (New York: Basic Books, 1992) indicating that the annual work year increased by 139 hours from 1969-1989. The Washington, D.C.-based Economic Policy Institute found that the annual hours worked expanded by 45 hours from 1989-1994.
[xxvii] See Andrew Kimbrell, Cold Evil: Technology and Modern Ethics, E.F. Schumacher Lecture, October 2000 (Great Barrington, Mass.: E.F. Schumacher Society).
[xxviii] Ibid. at p. 25.
[xxix] Several high net worth individuals and well-funded foundations (Bradley, Joyce, Olin, Smith Richardson) provided generous financial support, including funding the publication of hundreds of books by the movement’s theorists, along with generous payments to journalists to attend their seminars, gradually branding op-ed pages worldwide with their theory. After the Bank of Sweden licensed the Nobel name, the bank thereafter (beginning in 1969) further enhanced the image of the “Chicago” brand by annually awarding the “Nobel Prize for Economic Science” to one of their own.
[xxx] See Jeff Gates, “Globalization’s Challenge: Attuning the Global to the Local,” Reflections: SoL Journal, Summer 2002 (Cambridge: MIT Society of Organizational Learning).
[xxxi] Jeff Gates, The Ownership Solution (Cambridge, Massachusetts: Perseus Books, 2000), p. 53. Updated to contemporary times, Long’s Share Our Wealth Plan would require that personal wealth in excess of $62.5 million (in 2000 dollars) be transferred to a National Share Our Wealth Corporation. Akin to Berkshire Hathaway, he envisioned that this holding company would invest long term in a broad base of U.S. corporations, with every U.S. citizen a shareholder in the holding company. Long anticipated that corporate governance would remain in the hands of current management.
[xxxii] Jeff Gates, Democracy at Risk (Cambridge, Massachusetts: Perseus Books, 2000).
[xxxiii] Stijn Claessens, Simeon Djankov and Larry H.P. Lang, “Who Controls East Asian Corporations?” (Washington, D.C.: The World Bank, 1999).
[xxxv] United Nations Human Development Report 1998 (New York: Oxford University Press, 1998).
[xxxvi] Branko Milanovic, “True World Income Distribution, 1988 and 1993: First Calculations Based on Household Surveys Alone,” Economic Journal, January 2002, No. 476, pp. 51-92.
[xxxvii] Speth, J.G., “The Plight of the Poor,” Foreign Affairs (May/June 1999). The author is former administrator of the UN Development Program.
[xxxviii] Economic Report of the President, 2003, Table B-84.
[xxxix] Economic Report of the President, 2003, Table B-78. These figures fail to take into account a variety of fiscally significant costs since the estimates were made, including the war on Iraq, the costs of the new Department of Homeland Security and various pending tax-cut proposals.
[xl] U.S. Congress Joint Committee on Taxation, Estimates of Federal Tax Expenditures for Fiscal Years 2002-2006 (U.S. Government Printing Office, January 17, 2002).
[xli] Center on Budget and Policy Priorities, December 23, 2002, http://www.cbpp.org/12-23-02sfp-health-pr.htm.
[xlii] Kara Scannell, “Public Pension Plans Come Up Short,” The Wall Street Journal, August 16, 2002, p. C1.
[xliii] See www.motherjones.com/about_US/pressroom/030501_2.html
[xliv] See interview with Ronald Reagan, Jr. dated April 14, 2003 posted at www.salon.com/news/features/2003/04/14ron_reagan/print.html
[xlv] See online literature (and website) re the Project for a New American Century, founded by Dick Cheney, Donald Rumsfeld, Paul Wolfowitz, Richard Perle and other senior members of the Bush II Administration.
[xlvi] Mike Allen, “Who’s Been Sleeping At 1600 Pennsylvania Ave.?,” The Washington Post National Weekly Edition, August 26-September 1, 2002, p. 16.
[xlvii] Alan Krueger, “Economic Scene,” The New York Times, July 14, 2002, p. C2.
[xlviii] Note that Harvard University professor Martin Feldstein, an economist at the National Bureau for Economic Research and a key architect of supply side economics, is also the key architect of a leading privatization proposal meant to transfer to Wall Street ~$100 billion per year in Social Security tax receipts.
[xlix] Edward N. Wolff, “Where has all the Money Gone?,” The Milken Institute Review, Third Quarter 2001, p. 34.
[l] Statistics of Income Bulletin, September 2001 (Washington, D.C.: Internal Revenue Service).
[li] The $4.1 trillion figure combines the cost of the 2001 tax cuts, the proposed new tax cuts, the cost of extending the 2001 tax cuts, the cost of providing modest tax relief from the individual alternative minimum tax, and the cost of interest. Center for Budget and Policy Priorities, http.//www.cbpp.org/1-22-03bud.htm
[lii] Shailagh Murray, “House Backs Permanent Repeal of Estate Tax; Senate Fight Looms,” The Wall Street Journal, June 7, 2002, p. A7.
[liii] Evan L. Marcus, “The World’s First Trillionaire,” Wired, September 1999, p. 163.
[liv] Congressional Budget Office Memorandum, Estimates of Federal Tax Liabilities for Individuals and Families by Income Category and Family Type for 1995 and 1999, May 1998.
[lv] Reported in The Economist, June 16-22, 2001.
[lvi] Edward Wolff, Top Heavy: The Increasing Inequality of Wealth in America and What Can Be Done About It, (New York: The New Press, 2002).
[lvii] The IRS 2002 data are available at http://www.house.gov/jec/press/2002/10-24-02.htm.
[lviii] Thomas Piketty and Emmanuel Saez. “Income equality in the United States, 1918-1998,” NBER Working Paper 8467, September 2001, Tables A1 and A3.
[lix] See Center on Budget and Policy Priorities: http://www.cbpp.org/12-16-02tax.htm
[lx] The IRS 2002 data are available at http://www.house.gov/jec/press/2002/10-24-02.htm.
[lxii] Sandra Fleishman, “When the Mortgage Goes Unpaid,” The Washington Post National Weekly Edition, September 23-29, 2002, p. 34.
[lxiii] Center on Budget and Policy Priorities, http://www.cbpp.org/1-22-03bud.htm. This figure is actually far higher because of interest payments on a higher public debt, plus the increase in states’ borrowing costs as this deduction draws funds away from the bond market with its tax-free interest income.
[lxiv] “The richest 1 percent of families holds 53.2 percent of all shares held directly by individuals outside of retirement accounts, while the top 10 percent hold more than 90 percent….” Dean Baker, “The Dividend Tax Break: Taxing Logic,” Center for Economic Policy Research, January 3, 2003.
[lxv] Business Week, January 20, 2003, p. 36.
[lxvi] The IRS 2002 data are available at http://www.house.gov/jec/press/2002/10-24-02.htm.