 |
| Stephen A. Schwarzman sees himself on one side of a class war, where when it come to protecting the preferential tax breaks he receives the rest of us are like Hitler. |
Stephen A. Schwarzman, head of the Blackstone Group, has already been prominently cited in two columns by Paul Krugman, the Nobel prizewinning economist and New York Times opinion page columnist, as an example of a plutocratic class warrior who believes that the 1% must retain their supremacy over the rest of society, winning at any cost. (See:
Plutocrats Feeling Persecuted, September 26, 2013 and
Paranoia of the Plutocrats, January 26, 2014.)
Similarly, a recent short piece in the The New Yorker,
Moaning Moguls, by James Surowiecki, July 7, 2014, focused in on the way a complaining and financially aloof Schwarzman aligns himself, class-wise, according to a we/they perception of the world:
You wouldn't think [Schwarzman would] have much to complain about. But, to hear him tell it, he's beset by a meddlesome, tax-happy government and a whiny, envious populace. He recently grumbled that the U.S. middle class has taken to "blaming wealthy people" for its problems. Previously, he has said that it might be good to raise income taxes on the poor so they had "skin in the game," and that proposals to repeal the carried-interest tax loophole-from which he personally benefits-were akin to the German invasion of Poland.
Is the bottom line that the wealthiest in society like Schwarzman should be living in fear that the political upper hand will be seized by those who will tax the rich (or simply eliminate the loopholes by which Schwarzman pays his income taxes at a preferential lower rate) to dispense
“largess to the poor” or other strata of our society?
Au contraire! While class warfare is real, is not a matter of what the wealthy might fear from the rest of us, but what the rest of us have to fear in the way of predation from the likes of Schwarzman: What do individuals such as Schwarzman do when they have the political and the economic upper hand?
Schwarzman,
who has focused on profiting from buying homes of owners defaulting in the face of economic downturn, has in his role as New York Public Library trustee pushed for the selling and shrinkage of New York City's libraries, he has enthusiastically promoted investment in the environmentally costly practice of hydro-fracking with all its global-warming implications, he has invested in
privatizing prisons and now, as is getting attention, we find that he has in a major, very nontransparent way been taking advantage of pension funds, including those of public employees. Some of the pension fund handed over to Schwarzman's Blackstone were set up for the benefit of New York City and New York State employees.
Raiding Pension Funds
In
“Wall Street,” the 1987 film famous for its
“Greed is good” Gordan Gekko character played by Michael Douglas, a key part of the plot is the disclosure of the unscrupulous lengths to which Gekko will go in dismantling an airline company, putting its employees out of work, in order to raid its pension fund. The mindset epitomized thereby: An economic framework that works for and benefits a larger segment of society is up for grabs to be destroyed by monied interests playing an insider game to pile up ever greater wealth. That was the 1980s.
Stealing from pension funds? Is it worse when the pension funds that get hit are those of
public employees? And if you are a New Yorker paying New York taxes, what if those pension funds are for New York public employees? The politically connected Stephen Schwarzman who
keeps photographs of George W. and Laura Bush and Michael Bloomberg on his office desk has, Gordan Gekko style, been accused of robbing public pension funds, to build up his own personal wealth. The accusations are worthy of consideration for all they imply. See Zero Hedge’s
Leaked Documents Show How Blackstone Fleeces, Taxpayers Via Public Pension Funds, by Tyler Durden, May 5, 2014 passing along an article by David Sirota at Pandodaily,
LEAKED: Docs obtained by Pando show how a Wall Street giant is guaranteed huge fees from taxpayers on risky pension investments, May 5, 2014
Here’s some of the Zero Hedge summing up of the situation:
The following story by David Sirota at PandoDaily is simply excellent. It zeros in on the secretive and rapidly expanding relationship between private equity firms and the public pensions that invest in them. It shows a crony capitalist love affair greased by lobbyist influence peddlers known as "placement agents", as well as non-public agreements between PE firms and public pensions chock full of conflicts of interest, extremely high fees and underperformance. Unbelievably, in many instances the trustees of the public pensions are not allowed to know what funds the "fund of funds" invest in. This makes due diligence impossible, and in one particularly egregious example it led the Kentucky Retirement Systems to unknowingly invest in SAC Capital despite the fact it was under SEC investigation at the time.
Furthermore, with the Wall Street Journal reporting back in 2011 that $37 of every $100 dollars invested in Blackstone's investment pool comes from state and local pension plans, it appears that taxpayers are once again being fleeced by the financial oligarch class.
* * *
The chief villain in this article will be no stranger to readers of this site. It is Blackstone . .
The main point of the PandoDaily article:
An increasing number of those pension funds are being stealthily diverted into high-fee, high-risk "alternative investments" that deliver spectacular rewards for the Wall Street firms paid to manage them - but not such great returns for pensioners and taxpayers.
According to the analysis of the leaked documents obtained:
Taken together, the documents raise serious questions about whether the government employees, trustees and politicians overseeing major public pension funds are shirking their fiduciary responsibilities under the law when they are cementing "alternative" investment deals.
Fees Sapping Fund's Prospects of Investment Growth
These pension fund investments were not performing well because of the debilitating effect of high fees. Around the beginning of 2008 Blackstone
launched its hedge funds; with a
“fund of funds” approach where it steered clients’ money into other hedge funds in return for an additional fee.
When the Kentucky Retirement System was looking to invest about $400 million in Blackstone's Alternative Asset Management Fund (BAAM), which is a so-called
“fund of hedge funds” the PandoDaily article says the leaked documents showed:
Blackstone was guaranteed whopping fees of 50 basis points plus 10 percent of any overall profits on retirees' money. In addition, the memo estimates 1.62 percent management fees and 19.78% incentive fees to be paid on top of the Blackstone fees to the underlying (and undisclosed) individual hedge fund managers in the "fund of funds."
And:
Pension officials made the decision to invest in the fund despite Blackstone then reportedly being under SEC investigation.
The Sunday’s New York Times Business Section of a week ago featured, front page, above-the-fold, a comprehensive article that, in just slightly more tempered New York Timesian business lingo, covered much of the same ground, with a few additions, as the Pando and Zero Hedge articles from last May. See:
Behind Private Equity’s Curtain, by Gretchen Morgenson, October 18, 2014.
We’ll come back to ways in which that article, illustrated with a photo of New York City Comptroller Scott Stringer and featuring a quote from him, brings the question of these investments closer to home for New York taxpayers.
First, it would be worthwhile to note the way the compounding effect of `fees,’especially any accumulating proliferation of them, work to seriously gut an intended building up of retirement investments. To say that “fees” are being charged might imply that valuable services are delivered in exchange, but, bottom line, one ought to suspect and fear the opposite. PBS’s Frontline covered this point well in “The Retirement Gamble” (
transcript is available).
 |
| If you Google images for “retirement three legged stool” |
U.S. citizens have frequently been described as relying on a
“three-legged stool” for their retirement, 1.) social security, 2.) presumably secure pensions, and 3.) invested personal savings that can also include 401(k) and IRAs. Frontline covered how there has been a shift away from pensions (that covered 42% of Americans in 1972) largely to 401(k)s, originally
“a corporate tax dodge” for high earners that
“Nobody ever thought that this was going to apply to the rest of us.”
 |
| From Frontline's “The Retirement Gamble” |
Frontline explained the effect of fees in the context of the third category, invested personal savings that can also include 401(k) and IRAs. One expert asserts that Americans don't know the price, quality or risk of what they are paying for when buying 401(k) retirement investments. To lay it all out, Frontline correspondent Martin Smith talked with Jack Bogle, the founder of Vanguard, a company that offers some of the lowest-fee products on the market. Bogle succintly offers the advice
“that if you want to improve your retirement outcome, make sure to minimize Wall Street's take.” * (Starting at 23:40 on the video- ignore the investment company promo ironically inserted at the very beginning of the PBS video.):
(* If social security is ever privatized as has been proposed all these considerations will come into play with respect to social security too.)
MARTIN SMITH: Bogle gave me an example. Assume you're invested in a fund that is earning a gross annual return of 7 percent. They charge you a 2 percent annual fee. Over 50 years, the difference between your net of 5 percent - the red line - and what you would have made without fees - the green line - is staggering.
Bogle says you've lost almost two thirds of what you would have had.
JOHN BOGLE: What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding costs. It's a mathematical fact. There's no getting around it. The fact that we don't look at it- too bad for us.
MARTIN SMITH: [on camera] What I have a hard time understanding is that 2 percent fee that I might pay to an actively managed mutual fund is going to really have a great impact on my future retirement savings.
JOHN BOGLE: Well, you have to rely on somebody to get out a compound interest table and look at the impact over an investment lifetime. Do you really want to invest in a system where you put up 100 percent of the capital, you the mutual fund shareholder, you take 100 percent of the risk and you get 30 percent of the return?
 |
| Again, from Frontline's “The Retirement Gamble”- Results of a 7% return vs. a 5% return |
These same mathematical investment facts also apply to pensions of private companies and public employees although the risks and responsibilities for management of them and the costs have not been shifted over from the employers to the employers in the same way. These mathematical investment facts apply to Blackstone and in the case of public employee pension funds, it's our elected officials like our state and city comptrollers who are responsible for making the decisions about what fees like this are to be paid to companies like Blackstone.
On the Political Inside- "Pay to Play"
That’s why it’s a problem when Blackstone and firms like it are making campaign contributions to the very same officials making those decisions. You have heard of
"pay-to-play"? See:
Do campaign contributions help win pension fund deals?, 8/28/2009. Here from that article:
More than two dozen firms that have surfaced in a broad corruption investigation of public pension funds gave at least $1.97 million in campaign contributions to officials with potential influence over the funds' investments, a USA TODAY analysis shows.
The givers included private-equity giants such as the Blackstone Group, the Carlyle Group and the Quadrangle Group, the firm founded by Steven Rattner, who in July resigned as the White House point man for the auto industry rescue. The contributions are legal, and the firms haven't been accused of wrongdoing related to the giving.
* * *
Officials of the Blackstone Group have similarly contributed to pension fund incumbents and candidates. The firm's chairman is co-founder Stephen Schwarzman, a former Lehman Bros. executive. Co-founder Peter Peterson retired as Blackstone's senior chairman in 2008.
Campaign finance records show Schwarzman; his wife, Christine; and Peterson gave a combined $30,000 to three candidates who ran in 2002 to succeed H. Carl McCall as state comptroller. Hevesi, the winner, got the most, $21,000. Separately, McCall received $25,000 from Christine Schwarzman for his unsuccessful bid for governor.
Blackstone has received about $1.74 billion in private equity- and real estate-related investments from the New York pension fund since 1993 and has been paid about $20 million in fees, said Whalen, the state comptroller's spokesman.
The firm has not been accused in the New York investigation.
See also Crains New York Business:
Private equity donations to politicians uncovered- Staffers of firms gave money to officials with power to steer pension funds to range of investment advisors, by Hilary Potkewitz, August 28, 2009.
New York Attorney General Andrew Cuomo has been investigating pay-to-play accusations involving the state's pension plan and various investment funds, including Carlyle, for the past year. In June, the Carlyle Group agreed to pay a $20 million settlement, and change company policy to limit employee political contributions to $300.
Blackstone has not been accused of anything as a result of Mr. Cuomo's investigations. A Blackstone spokeswoman said that since at least 2006, the company has had a policy prohibiting employees from donating to campaigns for offices with direct oversight of public pension funds. That policy also requires approval from its general counsel for any campaign contributions.
And see,
Final Alternatives Hedge Fund and Private Equity News: Ex-Blackstone Employee Pleads Guilty In N.Y. Kickback Scandal, May 13 2009.
A former employee of a placement agent now owned by the Blackstone Group has pleaded guilty to securities fraud as part of the widening kickback scandal at a New York State pension fund.
Putting this again in the context of the debilitating fees already discussed, we come across this article from the New York Post that ran four years ago during the last election for state comptroller. Harry Wilson, the Republican candidate running for office against Democrat Thomas DiNapoli (who won and is now running again) likely knew what he was talking about
because he was a former Blackstone principal. See:
A pension to slash, by Josh Kosman, August 1, 2010.
The former Blackstone Group principal who is the Republican candidate for New York State Comptroller believes the state should consider decreasing its allocation to private equity in its pension funds.
Most PE firms, he said, do not outperform the S&P 500 after fees.
"I'm not a big believer in alternatives," Wilson told The Post. "I don't own a lot of alternatives in my portfolio."
"To outperform the markets is hard and then when you charge large fees on top of that it is really hard."
The article points out that:
The state as of March 31 had 9.3 percent of its $133 billion invested in private-equity funds, and another 9 percent in other "alternative investments" like real estate and hedge funds.
Idea That Pension Benefits Are Too Generous Anyway Finds Home at Schwarzman's Blackstone
Maybe candidate Wilson had a change of heart after leaving Blackstone but indications are that for those at Blackstone their heart is not in benefitting the pensioners; the job they are being paid enormous fees to do.
Blackstone’s Byron Wien, vice chairman of New York-based Blackstone's advisory group, said retiree benefits were
"too generous."
"The retirement benefits for state workers, really not only in New York, California and New Jersey but throughout the country, are very generous, too generous," Wien said in response to a question about U.S. state budget deficits during a Jan. 5 presentation of his forecast, according to a transcript. "We literally can't afford the benefits we have given our retirees in state and local governments and we have to change that."
(See:
Blackstone Seeks to Appease New York City Pensions After Wien's Comments, by Cristina Alesci and Jason Kelly, May 26, 2010.)
Wein’s remarks sound very much like Goldman Sachs CEO Lloyd Blankfein when
he said that the public was going to have to lower its expectations about
“entitlements and what people think that they're going to get. Because they're not going to get it.” It has been suggested that Mr. Blankfein should, like Mr. Schwarzman, be made one of the trustees to whom we entrust the care of our
New York City libraries.
What did Stephen Schwarzman say in response to Mr. Byron’s remarks and the objections that consequently arose?
"Byron will play a central and invaluable role in providing direction and guidance,"
While Mr. Wien's heart doesn’t seem to be in helping pensioners, he may also lack the talent that would entitle him to take fees to do so. See:
Byron Wien's Atrocious "Forecasting" May Have Cost Blackstone Hundreds Of Millions, by Tyler Durden on 01/06/2011.
Another Level of Asset Stripping: Pension Funded Job Losses Through Blackstone
While politically luring public pension funds into underperforming high-fee investments is one form of public asset stripping, New York’s pensioners may also be chagrined to learn that the funds they had invested with Blackstone entailed another layer of public loss, one that U.S. Senator Charles Schumer was duty bound to complain about when it came to light. During the Democratic Convention in the 2012 presidential race
Bain Capital was excoriated for jobs it was
said to have destroyed in corporate takeovers.
Blackstone engages in the same sort of dismantling of jobs and companies so, by investing in Blackstone, New York’ pension funds (two New York State public employee pension funds and four New York City pension funds) were causing jobs to be lost in Fulton, New York. A Birds Eye Foods factory was ultimately closed by Blackstone's subsidiary after the union’s and Senator Schumer’s fruitless protests. See
Bloomberg’s: Pensions Find Private Equity Bites as Blackstone Cuts Job, by William Selway and Martin Z. Braun, February 23, 2012 and the very similar, slightly truncated
Pension and Investments: NY pension funds find private equity controversy as Blackstone cuts jobs, by Bloomberg, February 23, 2012.
The new owners, Pinnacle Foods Group LLC, a company held by the private equity firm Blackstone Group LP (BX), [“the world's largest buyout firm”] closed the factory and fired 270 workers. Kimber, 64, got eight weeks severance for her 12 years on the job and lives with her 37-year-old unemployed daughter in the rust-belt town of about 12,000, northwest of Syracuse.
“They just used us. That’s exactly what they did,” Kimber said. “And then they kicked us to the curb.”
* * *
Private equity executives, including Blackstone managing director and Pinnacle Foods director Prakash Melwani, have helped stock Romney's campaign war chests.
* * *
New York Comptroller Thomas DiNapoli, the sole trustee of New York's $140 billion retirement fund, declined to comment. New York City Comptroller John Liu declined to comment. John Cardillo, a spokesman for New York state's Teachers' Retirement System, declined to comment.
* * *
In January 2010, U.S. Senator Charles Schumer, the New York Democrat, held a press conference with workers in Fulton, saying he would keep pressuring the company until all the jobs were safe. Schumer said he called Stephen Schwarzman, Blackstone's chairman and co-founder, and asked him to spare the factory.
Ironically, Charles Schumer’s wife, Iris Weinshall, has now taken the position of Chief Operating Officer at the New York Public Library, where, because Schwarzman is a trustee there, she, in a sense works for him as one of her bosses. She replaced Chief Operating Officer David Offensend who came to that position from Evercore, LLP another private equity and hedge fund firm that was spun off from Blackstone. The universe of those exercising influence and power is remarkably small. (So small, in fact, that Offensend's wife, Janet, wound up as a key trustee at the Brooklyn Public Library
while it implemented plans tracking the NYPL's similarly selling and shrinking Brooklyn's libraries.)
As the articles note, while New York City Comptroller John Liu did not comment on this factory closing, in another situation where another private equity firm was involved in closing a factory in Cleveland over the objections of investing pension funds whose monies were being used, Liu wrote:
New York's pension funds do not wish to be investing in job loss or in a global `race to the bottom.
Fulton’s Republican Mayor Ronald Woodward, gets the concluding word in the article, putting it terms of class:
"What you're doing by doing that -- you are systematically eliminating the middle class," he said. "You're going to be rich or you're going to be poor. There's no in between."
Placement Agent Fees
Blackstone, and especially Schwarzman, was also openly going after and championing yet another level of fees that would sap pension fund investments,
“placement agent fees.” When I was in government with the state finance agencies we were confronted by firms that, with political introductions, proposed that they should be inserted as a new level of intermediary between the finance agencies and the investments they made, getting yet another set of fee for its
`advice’ or
`guidance.' Unable to discern any value to the proposal or actual expertise being offered we turned them away.
“Placement Agent Fees,” paid by pension funds generated considerable controversy and a challenge from the SEC.
The New York Times stepped into the fray with a business section editorial criticizing New York City Comptroller John Liu for wanting to ease a ban on placement agents. See:
Editorial: Bringing Back the Fixers, by Dealbook, February 22, 2010. The editorial observed:
For years, the easiest way companies could get contracts to manage billions of dollars for the pension funds for either New York City or New York State was to go through the local influence peddler. It was a recipe for big corruption, especially in Albany.
Both the city and state stopped using placement agents last April after two top advisers to Alan Hevesi, the former state comptroller, were charged with corruption and violation of federal securities law relating to their "private" work as placement agents. The two pleaded not guilty and are expected to go on trial soon.
Another four fixers from the Hevesi era have pleaded guilty to securities fraud. And a California manager of a venture capital fund pleaded guilty in December to giving out nearly $1 million in illegal gifts to New York State officials to get contracts with the state pension fund.
State Comptroller Thomas DiNapoli said Thursday that the ban on placement agents is working well in Albany. He said it had made the investment process more transparent and helped new and smaller firms compete.
So, The Times asks, why is Mr. Liu going in the opposite direction?
Not quite two weeks later, Schwarzman was granted space in the Times to personally respond to the editorial. He was arguing to support the position that Comptroller Liu has taken, that placement agents should be regulated, not banned, a position that would permit Blackstone to continue to ply its trade with New York pension funds as one of the four largest placement agents. See:
Another View: In Defense of Placement Agents, By Stephen A. Schwarzman, March 4, 2010.
The four largest placement agents are part of major financial institutions in New York - Credit Suisse, UBS, Lazard and the Blackstone Group - and the professionals are federally registered and the firms themselves are heavily regulated. We do extensive due diligence on any manager we seek to represent (Blackstone's Park Hill Group takes as clients about 5 percent of the managers who come to it). We also prepare marketing materials and then take them before the major sources of investment capital - private, state and local pension plans; university and foundation endowments; sovereign wealth funds; etc. - to make the case as to why these managers warrant an investment. Most of these managers could not get a start in business without placement agents.
It is probably not to Comptroller Liu’s credit that he aligned with Schwarzman on this issue. The alignment may have also put Liu in an interesting position when, three years later in the spring of 2013, Liu stepped up to oppose the sale and shrinkage of libraries with their attendant questionable real estate deals that Schwarzman was pushing for as a trustee of the NYPL.
When he wrote his Times rebuttal Schwarzman was already on record fighting against any bans on placement agents:
The SEC in May 2009 proposed the outright banning of placement agents , which in New York, California, New Mexico and Kentucky, were the conduit for corruption in those states' public pensions. However, the Private Equity industry was able to kill this SEC proposal, I believe by getting the Obama administration to pressure the SEC to water down this ban.
Blackstone's billionaire founder, Stephen Schwarzman, personally sent a letter to the SEC opposing a placement agent ban.
(See:
Feds indict public pension placement agent, By Chris Tobe, March 20, 2013.)
A Hidden World, Where With a Lack of Transparency Pension Investors Take Hit for Fund Manager Wrongdoing
 |
| Photo used by the Times to emphasize Comptroller Scott Stringer's quote objecting to pension investors being saddled with the legal loss incurred from the settlement of the charges of improper conduct on the part of the fund managers |
The recent article in the Sunday New York Times business section about the inappropriateness of pension funds investing in private equity funds focused mostly on the lack of transparency with respect to those funds and how that lack of transparency can conceal conflicts of interest that benefit the fund managers at the expense of the public investors. Case in point, the quote featured from Comptroller Stringer was his objection to the fact that there had been a legal settlement respecting alleged misconduct of fund managers where the losses incurred with the settlement were passed along to be paid by the public pensioner investors, not the managers. Given the lack of transparency of the private equity funds the public pensioners were probably in the dark that they are responsible for these costs, because according to the Times:
Their legal obligations are detailed in private equity documents that are confidential and off limits to pensioners and others interested in seeing them.
Notwithstanding, Comptroller Stringer said that forcing the pensioners to take the loss:
"violates the spirit of the indemnification clause of our contract.”
The comptroller was speaking of a settlement of a lawsuit against Carlyle Group and a number of other equity firms, (Bain, etc.), the Blackstone Group included, accused of colluding and market manipulations to drive down the prices of corporate takeover targets. Blackstone, K.K.R. and TPG agreed to pay a combined
$325 million to settle the accusations, the amount to be divided up between them in a manner unspecified t the public (
K.K.R., Blackstone and TPG Private Equity Firms Agree to Settle Lawsuit on Collusion, by William Alden, August 7, 2014) and the Carlyle Group subsequently agreed to pay another
$115 million in its own settlement. Total, all of the firm settlements reportedly tallied
$590.5 million (
Carlyle Deal Concludes a Lawsuit Against Private Equity, by William Alden, September 8, 2014.)
The Sunday Times article makes it clear that Carlyle passed this loss along to New York City pensioners and that Comptroller Stringer's remark applies to them. When I asked whether the Blackstone was, or might be similarly passing its loss along to New York City pensioners I was quickly informed that the investigation is ongoing so that this information could not be furnished. I put this question to the State Comptroller’s office at the same time and have yet to receive a response.
 |
| The Times article was front page and above-the-fold of the Sunday Business section |
The Times article noted more on the absence of transparency:
"Hundreds of billions of public pension dollars have essentially been moved into secrecy accounts," said Edward A.H. Siedle, a former lawyer for the Securities and Exchange Commission who, through his Benchmark Financial Services firm in Ocean Ridge, Fla., investigates money managers. "These documents are basically legal boilerplate, but it's very damning legal boilerplate that sums up the fact that they are the highest-risk, highest-fee products ever devised by Wall Street."
Retirees whose pension funds invest in private equity funds are being harmed by this secrecy, Mr. Siedle said. By keeping these agreements under wraps, pensioners cannot know some important facts - for example, that a private equity firm may not always operate as a fiduciary on their behalf. Also hidden is the full panoply of fees that investors are actually paying as well as the terms dictating how much they are to receive after a fund closes down.
A full airing of private equity agreements and their effects on pensioners is past due, some state officials contend. The urgency increased this year, these officials say, after the S.E.C. began speaking out about improper practices and fees it had uncovered at many private equity firms.
The explanation from Blackstone and companies like it for the lack of transparency?:
Private equity giants like the Blackstone Group, TPG and Carlyle say that divulging the details of their agreements with investors would reveal trade secrets. Pension funds also refuse to disclose these documents, saying that if they were to release them, private equity firms would bar them from future investment opportunities.
Public Officials Don't Bargain?
On the very questionable absence of oversight by the public's elected officials making these investments the article quotes attorney Karl Olson, a partner at Ram Olson Cereghino & Kopczynski, who has sued he California Public Employees' Retirement System, to disclose fees paid to hedge fund, venture capital and private equity managers.
"I think it is unseemly and counterintuitive that these state officials who have billions of dollars to invest don't drive a harder bargain with the private equity folks," he said. "A lot of pension funds have the attitude that they are lucky to be able to give their money to these folks, which strikes me as bizarre and certainly not acting as prudent stewards of the public's money."
Conflicts of Interest?
On the subject of conflicts of interest that hide behind the lack of transparency the Times writes:
Regulations require that registered investment advisers put their clients' interests ahead of their own and that they operate under what is also known as a fiduciary duty. This protects investors from potential conflicts of interest and self-dealing by those managers. This is true of mutual funds, which are also required to make public disclosures detailing their practices.
But, as a lawsuit against Kohlberg Kravis Roberts shows, private equity managers can try to exempt themselves from operating as a fiduciary.
Abuse and the Breaking of Laws
It quotes another attorney in the area as follows:
"On one hand they say they don't owe you the duty," she said, "but everything is so confidential with these investments that without a court order, you don't have any idea what they're doing. It's not open and transparent, and that's the kind of structure to me that's ripe for abuse."
How ripe for abuse? With this total lack of transparency and diligent review and bargaining how quickly would we know, for instance, if there was another Madoff in this thicket? The Times reported that although private equity firms got off to a better start in their initial years, more recently:
. . a simple investment in the broad stock market trounced private equity. For the five years through March, for example, private equity funds returned 14.7 percent, annualized, compared with 21.2 percent for the S.&.P. 500. One-year and three-year returns in private equity have also lagged.
And given the complicated calculations about who gets what monies in transactions, with the managers first in line, the investors always waiting to find out what they finally get, how late in the game after final reckonings would one know how bad, bad news is? You can’t always get out of a hedge fund investment exactly when you’d like and when funds face liquidity problems they sometimes
restrict withdrawals.
Madoff, of course, broke laws and a fairly high proportion of his victims were wealthy. However, as must be noted with increasing frequency in our society, when it comes to the ways that the wealthiest use tilted playing fields to their advantage at the expense of others, the crime is not what activities are against the law, the crime is what is legal. That’s the context in which this nation’s
“plutocracy” is better understood as a
"kleptocracy."
Laws can change. Practices described here are in many ways similar and analogous to the kinds of abuses with respect to credit card and consumer lending,
“tricks and traps” that Elizabeth Warren and new consumer regulations are working to proscribe.
Even by the relatively weak standards of what currently
isn’t outlawed, it seems that legal lines are still crossed far too often. According to the Los Angeles Times:
In a report on the SEC's findings after a preliminary round of examinations, agency official Andrew J. Bowden described what he called a "remarkable" level of lawbreaking and cheating among the 150 private equity advisory firms inspected so far. Bowden delivered his report directly to the lions in their den, speaking at a May 6 private equity conference.
"A private equity adviser is faced with temptations and conflicts with which most other advisers do not contend," Bowden stated. "We have seen that these temptations and conflicts are real and significant."
The most striking statistic: Half of all examinations uncovered "what we believe are violations of law or material weaknesses in controls."
(See:
SEC peeks under private equity rug, finds 'remarkable' corruption, by Michael Hiltzik- May 13, 2013.)
Rebates - Fluid Rules?
The New York Times article about high fees was preceded by several months by a thorough article addressing the subject that appeared in the Financial Times apparently sparked by the SEC investigation:
Private equity: A fee too far- Regulators are probing conflicts of interest and high fees charged by fund managers to the companies they own, by Anne-Sylvaine Chassany and Henny Sender, July 13, 2014.
According to the article, one thing that is happening as investors and their advisors react to fees that
“pump substance out of portfolio companies. . . the sort of greed you would typically see in investment banking" (quote from one advisor) is that investors are demanding, and getting, rebates of fees, on the order of 80%. Such after-the-fact rejiggeing of the rules to fatten up a scrawny and inadequate return sounds faintly Ponzi-ish, though a crossing of that line has not been alleged on the part of any of the funds.*
(* In some fascinating articles however, questions have been raised about how, on the state official side of things, the state of New Jersey did poorly channeling monies into underperforming private equity funds, Blackstone being one of the firms investments were handed off to, tripling fees being paid under Governor Christie while turning New Jersey into one of the nation's largest investors in hedge funds and then, and is now apparently trying to cover up "suddenly reporting higher results" . . "a full 1% higher than previously announced". "as if no one would notice the change." See: New Jersey Funneling Pension Fund Cash to Wall Street Investment Managers, by David Dayen August 26, 2014 and Is New Jersey Fudging Its Pension Fund Results to Defuse a Christie Scandal? by Yves Smith, September 13, 2014.)
From the Financial Times article:
Even though these fees are increasingly refunded to investors, prominent institutions including some top university endowments are reluctant to back the most high-charging fund managers. "They have come up with a formula to enrich themselves more than their investors," says the chief of one leading US endowment.
The Financial Times article also examines ways that tax considerations contort private equity practices and funnel preferential benefits, another reason to close the kinds of loopholes that Schwarzman so watchfully protects.
Things may be coming home to roost, and there is one more sign that institutional investors, as the Times reports, are walking away from these deals more often: At the September 17, 2014 NYPL trustees meeting, home turf for Schwarzman, the trustees were told that the NYPL was implementing a shift in the last couple of years t
o take risk out of the portfolio, simplify and reduce fees. Nevertheless, with 72% of its portfolio in public common stocks it still has 15% invested in alternative investments like hedge funds and 10% in private equity and real estate.
A Designated Villain?
 |
| Stephen A. Schwarzman leaving an NYPL trustees meeting March 12th outside of which demonstrators gathered to oppose the sale, shrinkage and deliberate underfunding of libraries. Photo by Jonathan Barkey. |
Are we being too hard on Mr. Schwarzman? Are we asking too many hard, too many unfair questions? Should we take less of a cue from, put less stock in how ostentatiously Mr. Schwarzman, himself, has declared himself to be antagonistically on one side of a class divide?
Is it just that Mr. Schwarzman sets himself up as too much of a target when he proclaims himself in superlatives, saying that Blackstone is, among other things, the
world's largest real estate investment firm,
the largest owner of houses in the United States, one of the
"four largest placement agents," the
world's largest investor in hedge funds, the
"world's largest manager" (with $88 billion in 2008 and
$200 billion in 2013) of
"so-called alternative assets, such as private-equity, real-estate, and hedge funds-esoteric vehicles" mostly on behalf of
"corporate and public pension funds, endowments of universities and other nonprofit institutions, insurance companies" with investors that included
"Dartmouth College, Indiana University, the University of Texas, the University of Illinois, Memorial Sloan-Kettering Cancer Center, and the Ohio Public Employee Retirement System."?
 |
| This 2008 New Yorker article's title reference's Wall Street Journal coverage of a birthday party Mr. Schwarzman threw for himself that garnered negative attention for its ultra-lavishness |
How much of Mr. Schwarzman's being such a conspicuously large target accounts for a 2008 New Yorker story commencing with an evaluation that, with a sort of Gordon Gekko emblematic emphasis, Mr. Schwarzman:
. . had become the designated villain of an era on Wall Street-an era of rapacious capitalists and heedless self-indulgence that had driven the Dow Jones Industrial Average to new highs, along with the prices of luxury real estate and contemporary art, while the incomes of ordinary Americans stagnated or fell.
(See:
The Birthday Party- How Stephen Schwarzman became private equity’s designated villain, By James B. Stewart, February 11, 2008.)
Are there lines that just shouldn't be crossed when making making money? For instance, even if we believe that virtually, by definition, prisons should never be privatized and subjected to the profit-making motivations of incarcerating more people longer and for lesser infractions,* if prisons are privatized should it be off limits to invest in them?
(* Michael Moore had some ghastly fun with this in his "Capitalism: A Love Story" documentary
segment running through unfortunately true facts about private prison
operators kicking back money to judges to keep children in prison, the "kids for cash scandal".)
Are we too quick to hold NYPL trustee Schwarzman accountable for the debacle that was the
sale of the Donnell Library or for
the push for even more library sell-offs and shrinkage with the NYPL's Central Library Plan that, although the NYPL did not publicize it, would have involved public expenditures of
over half a billion dollars? Mid-Manhattan and the 34th Street Science, Industry and Business libraries were to be sold while the research stacks of the Central Reference Library holding three million books were to be destroyed.
Is it within bounds to observe that pulling back on resources like libraries helps send more people to prison? According to Neil Gaiman:
I was once in New York, and I listened to a talk about the building of private prisons - a huge growth industry in America. The prison industry needs to plan its future growth - how many cells are they going to need? How many prisoners are there going to be, 15 years from now? And they found they could predict it very easily, using a pretty simple algorithm, based on asking what percentage of 10 and 11-year-olds couldn't read. And certainly couldn't read for pleasure.
(See: The Guardian-
Why our future depends on libraries, reading and daydreaming, October 15, 2013.)
Mr. Schwarzman is not the only plutocrat who invests in such anti-social, currently money-making activities as hydro-fracking, with
all its myriad long-term pollutions, toxins, water usurpation, radioactivity, earthquakes . . When it comes to the ravaging the entire planet for the benefit of a few with the promotion of more fossil fuel use that will significantly bump up the effects of global warming, Schwarzman isn't likely to catch with the Kochs brothers, or even just David. Brother David lives in the same building as Schwarzman, 740 Park Avenue, now an infamous symbol of wealth, income and political inequality with assists from Alex Gibney's documentary “
Park Avenue: Money, Power & the American Dream”* and the book that preceded it,
"740 Park: The Story of the World's Richest Apartment Building," by Michael Gross.
(* The film targets New York Senator Charles E. Schumer as "a chief culprit" in protecting the "tax break benefiting hedge-fund moguls" including Schwarzman.)
David Koch who, with his brother Charles have also been attacking
universal national healthcare, seems to has his name ubiquitously on everything these days despite such other anti-social activities as financing climate science denial. Why should we then care or consider it inappropriate that Mr. Schwarzman's name should have appeared on the NYPL's 42nd Street Central Reference Library that would have been so ruined by the real estate deal oriented shrinkage plans he supported?
I think the answer is that it isn't just Mr. Schwarzman and his activities we should be objecting to and even though we are not, per se, talking the 1%, (actually
the top tenth of 1%, .01% of all Americans) where
an increasing imbalance of wealth is piling up, there are multiple other individuals we should be concerned about in that elite and exclusive group. . .
. . . Maybe it can be argued that putting David H. Koch's name on
ballet theaters,
NOVA Science episodes,
hospital centers, or new
oil-black public fountains outside the Metropolitan Museum of Art (weren't we better off with the old fountains and plaza?) somehow ameliorates the fact that we are trading in our environment, probably together with the planet's future, by letting Charles and David pursue ever greater wealth in whatever manner they choose. Maybe it can also be argued that, in this besieged world where the middle class is already being squeezed out of existence with the spoils divided up, pension funds are best off partaking in dismantling the jobs of other workers in their state to curtail losses. (That argument is suspect, however, if these equity funds don't even keep pace with the broader stock market). . . .
. . . Nevertheless, does it make sense for us as a society to be signing on to losing propositions that shuffle wealth upwards and then content ourselves with these booby prizes as consolation? Unless we are all in abject surrender mode, isn't it time to remove David H. Koch's name from all those public properties to which he has affixed it and remove Stephen A. Schwarzman's name from the NYPL's 42nd Street Central Reference Library? Thereafter shouldn't we put a halt to the anti-social activities that have financed such ill-advised public honorings whether they be Mr. Koch's, Mr. Schwarzman's or anyone else setting such lamentable examples?
.JPG)