Who's to blame for pension budget shortfalls? Wall Street.
Imagine getting $1,000 stolen from you. With the help of the authorities, you catch the thief, but instead of giving you back that thousand dollars, the thief just has to pay a fine — of a whopping $100, making off with the other $900 he took from you. Now, with $1,000 less in your pocket and unable to make rent, your landlord blames you for being irresponsible, and illegally garnishes your wages. You sue to stop him, and win, but everyone says it was your fault for getting robbed to begin with.
This makes zero sense! But it perfectly sums up the relationship among big Wall Street banks, PERS, and our state budget.
PERS is back in the news because the Supreme Court rejected an illegal scheme to break a contract with Oregon’s retirees. And while it’s true that today the PERS fund can’t cover all projected obligations, we’re coming up short because Wall Street firms mismanaged our money. What’s more, they lied about it, paid a pittance in fines, and got away with keeping most of what they stole from us, like the thief who stole $1,000 in our imaginary scenario.
Because of widespread fraud and outlandish abuses in the financial sector, the U.S. economy crashed, and state pension plans like PERS absorbed big losses — all while big bank CEOs saw multi-million dollar paydays.
Case in point: At the end of 2007, the PERS fund was worth $65 billion, $6 billion more than was needed to meet pension obligations. One year later, after the economy crashed, the value of the PERS fund declined by $19 billion. PERS went from being 111% funded to only 80% funded.
The 2008 crash was no accident: It was caused by the illegal acts of financial companies. While taking billions of dollars in fees to manage the investments of public sector pension funds, major financial and accounting firms defrauded investors by concealing risks about mortgage-backed securities, making intentionally misleading statements about financial products, and hiding conflicts of interest.
For those of us at the other end of these crimes, the consequences have been extreme. These schemes, and widespread abuse of the mortgage market, led to the recession of 2008, which Oregon is still recovering from.
Wall Street chicanery blew a hole in our healthy retirement accounts because our money – public sector pension funds, like PERS – is managed by a number of financial companies. We pay them hundreds of millions of dollars in management fees every year. In 2014 alone, PERS paid $504 million in investment service and manager’s fees. Some of the companies that earned the most from managing PERS funds and brokering sales are the ones that have also paid billions of dollars in fines for their criminal activity.
A sample of the firms we paid that are now paying big fines for illegal activity:
- Goldman Sachs: PERS paid over $50 million in fees to Goldman Sachs. The Securities and Exchange Commission (SEC) charged Goldman Sachs with fraud for selling mortgage-related securities to investors without telling them those securities were expected to lose value. Institutional investors like pension funds lost over $1 billion, and Goldman paid $550 million in fines to settle the charges for their illegal activity. While all of this was going on, CEO Lloyd Blankfein was paid over $240 million (from 2006 to 2014).
- Barclays: PERS paid over $54 million in fees to Barclays. Barclays, along with JP Morgan Chase, Citigroup, and the Royal Bank of Scotland, recently pled guilty to a scheme to manipulate the value of the world’s currencies and agreed to pay $5.6 billion in penalties.
- JP Morgan: PERS paid $11 million to Bear Stearns and $15 million to JP Morgan, which purchased Bear Stearns in the wake of the crash. In 2013 JP Morgan agreed to a $13 billion settlement, acknowledging it made serious misrepresentations to investors and the public about residential mortgage-backed securities. Just last week, JP Morgan agreed to another $500 million settlement with four pension funds, including PERS, for Bear Stearns selling billions in faulty mortgage-backed securities. Oh, and by the way, over the past five years, CEO Jamie Dimon received more than $85 million in compensation; today he’s a billionaire.
- UBS: PERS paid $20 million to UBS, a Swiss bank. In addition to fines for misleading investors about financial products and manipulating interest rates, UBS bankers were sentenced to prison for rigging bids for municipal bonds, and ripping off cities, counties, and other local government agencies for untold millions of dollars.
To make a grim situation even worse, for all the billions of dollars in fees paid to Wall Street, Oregon hasn’t been getting a better return on our investments. PERS reports paying $4.5 billion in management fees over the last 12 years (2003-2014, in 2014 dollars). And according to the Oregon Treasury, after accounting for fees, Oregon’s investment returns over the past five years were actually 0.3% lower than returns on equivalent investments that were passively managed (e.g., index funds). In other words, we paid billions of dollars just to lose money.
If all the fees paid since 2003 had instead been invested in the S&P 500 index fund, the PERS fund would have another $8 billion in it today — more than enough to meet all of PERS’ unfunded pension obligations.
It seems like every week there’s a new announcement about a legal case ending with millions or billions in fines paid to settle charges of misconduct. Reuters just reported that 20 of the world’s biggest banks have paid more than $235 billion in fines and compensation in the last seven years. That sounds like a lot of money (and of course, it is), but compared to the profits those banks have been making, it’s chump change! From 2003 to 2014, JP Morgan reported $148 billion in after-tax profits and Citigroup racked up $101 billion. Goldman Sachs claimed up $87 billion in profits, and…you get the idea. These banks pay these fines because it’s the cost of doing business, and in their business model, you make more money when you break the law. And who pays the real price for these crimes? We do.
Let’s stop blaming public employees for Wall Street’s crimes, and instead look at who the real perpetrators are. Rather than chip away at the modest retirements earned by hard-working public servants, we should shore up the pension fund with some common-sense solutions:
- Stop letting Wall Street bleed PERS. The State Treasurer can manage PERS funds just as effectively and for a lot less money. Treasurer Wheeler has proposals in the Legislature now that would cut payments to Wall Street firms. Let’s find a plan that works to reduce these Wall Street fees.
- Stop doing business with the companies that defrauded us and stole our money.
- Continue to aggressively seek damages from the financial companies that defrauded PERS and caused the loss of billions of dollars. The amounts recovered so far, while positive news, are only a small fraction of the money lost to fraud and an out-of-control financial sector.