Public Pension Funds Became Money Pots for the Biggest Risk-takers on Wall Street

Pension Fund Capitalism or Wall Street Bonanza?

A Critique of the Claim That Pension Funds Can Influence Corporations

First posted August 2009; most recently updated April 2013

G. William Domhoff - "Pension fund socialism" in the 1970s. "Investor capitalism" driven by pension fund activists in the 1990s. Such are the large claims that have been made for the potential importance of public pension funds, working in tandem with union-controlled pension funds, in shaping the decision-making of corporate boards.

This document examines these claims and casts a cold eye on them by tracing the history of the "institutional investors' movement" since the 1980s. It suggests that there always has been far less to this movement than the media attention it receives. At the outset, it was an effort by moderate Republicans and centrists, speaking in the name of stockholders in criticizing allegedly self-serving corporate executives, who supposedly do not look out for stockholder interests in a vigorous enough fashion. This emphasis on "shareholder value" led to common cause with liberal elected officials and union leaders, but the movement as a whole has had no lasting successes, just temporary and symbolic ones, as best seen by the rapacious and often illegal actions of a good number of corporate boards between 1998 and 2008 despite 25 years of effort by those who thought they could use public pension funds as a way to make corporations better for employees.

Not only did the movement fail, but many of the public pension funds themselves became money pots for the biggest risk-takers on Wall Street, who carried out hostile corporate takeovers and corporate buy-outs in the 1980s with their help, then bundled mortgages -- including subprime mortgages -- into new kinds of "securities" in the late 1990s and early 2000s, which they sold to naive pension fund managers caught up in the excitement of the housing bubble. Indeed, several public pension funds ended up among the many financial organizations that received government bailouts via the billions of dollars that the Department of Treasury gave to AIG (American International Group, an insurance company) in early 2009.

Meanwhile, an April 2010 study for the New York Times, discussed more fully in the next section, showed that "private equity funds" (e.g., hedge funds, venture capital funds, real estate investment trusts) made tens of billions of dollars between 2000 and 2010 by (1) charging public pension funds a "management fee" of 2% on every dollar they managed; and (2) taking 20% of the profits they made through investing the pension funds' money. The 10 largest public pension funds alone paid $17 billion to private equity firms in that time period (Anderson, 2010).

To top it all off, the biggest financiers on Wall Street tried to make money by working insider deals to invest some of the funds held by the same federal government agency -- the Pension Fund Guaranty Corporation -- that manages $50 billion in retirement funds for the unlucky souls who worked for corporations that went bankrupt. They grabbed this business by cultivating relationships with Charles E. F. Millard, the former Wall Street investment banker that the Bush Administration had appointed to head the fund. You can read the story, and excerpts from some of the very revealing e-mails, on the New York Times' Web site. (In July of 2009, under scrutiny from Congress and others, the PFGC revoked the sweetheart deals with Goldman Sachs, BlackRock, and JPMorgan Chase.)

(There are also plenty of scams being uncovered at the state level that are a total embarrassment to those who once claimed that pension funds could have any influence on corporations or be a force for the general good. Instead, they became another source of money for Wall Street to invest in risky deals, and also a way for politicians to help out businesses in exchange for campaign donations. And of course, they lost some of the people's money in the process, which has been the story of Wall Street for well over 100 years: use other people's money to pay for the riskiest gambles. This is an unfolding story, so we will add new links to this document from time to time. For example, an article in the New York Times discusses the scandal surrounding the state of New York's pension fund, where one of the scammers pleaded guilty in March of 2010.)

Then, just at 2010 ended, one of the most respected Wall Street financiers of the past 25 years, Steven Rattner -- a one-time New York Times reporter who went to work for a fabled investment firm, Lazard Freres, and then opened his own firm, Quadrangle -- sort of and indirectly admitted guilt to bribing a pension fund official via a kickback scheme. He did so by reaching an agreement with the attorney general of New York to pay a $10 million fine and accept a five-year ban on his involvement with any work involving state pension funds. Earlier, he had reached an agreement with the Securities and Exchange Commission to pay a $6.2 million fine and agree to a two-year ban on working in certain Wall Street businesses for the same alleged kickback scheme.

But, since Rattner did not have to admit to any wrongdoing, he can still say his record is without blemish. (He can say he paid the unfair fines and accepted the bans because the government is so powerful.) However, his net worth was down to the $188 to $608 million range, according to a 2009 filing with the Securities and Exchange Commission, and his chances of becoming Secretary of the Treasury, a goal made plausible by his role as a major Democratic fundraiser on Wall Street, have probably ended -- at least for the next few years.

Something even bigger popped up in March 2013, when the former chief executive of the California Public Employees Retirement System (CalPERS) was indicted for stealing $14 million from one of the private firms (Apollo Global Management) that invested money for CalPERS. Apollo had been paying one of the CalPERS chief's buddies to steer at least $48 million in CalPERS business its way, which gave Apollo the opportunity to make hundreds of millions from investing some of the pension fund's billions. But that was apparently not enough for the chief and his partner in crime, so they perpetrated the $14 million fraud. When the chief exec left CalPERS in 2008, he too became a "placement officer" for investment firms, but the law finally caught up with him five years later.

The New York Times called the March 2013 indictment the latest in "a nationwide pay-to-play scandal that erupted several years ago. Regulators from numerous states, including California and New Mexico, have cracked down on widespread influence peddling in how their state pension funds were invested."