Many transgressions, attacking pension funds, gifts from taxpayers

Not only mortgages (Stub)


The banks do not only target home owners. They get gifts from the taxpayers, loot from pension funds, transgressions of many kinds.


Not only mortgage abuse
Besides provoking the subprime crisis, banks are involved in many shady dealings. JPMorgan got an impressive list of transgressions of the law, to name but a few: Money laundering for drug cartels, violations related to the Vatican Bank scandal, violations of the Commodities Exchange Act, knowingly executing fictitious trades where the customer was on both sides of the deal, various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities, assorted settlements, fraudulent sale of unregistered securities, auto-finance rip-offs, illegal increases of overdraft penalties, violations of New York state and federal ERISA laws, municipal bond market manipulations and acts of bid-rigging, filing of unverified affidavits for credit card debt collections, energy market manipulation, shifting trading losses on a currency trade to a customer account, fraudulent sales of derivatives to the city of Milan (Italy), obstruction of justice.

Government giving away money
Direct taxpayer subsidies to the banks did not end with TARP. With the government's low interest policy, banks could make big money just by getting federal next to zero interest loans and then buy government notes; a ten year note could give 3.70%, quite possibly even more. It's just giving taxpayer money away.

Public pension funds
People like policemen, sanitation workers and teachers, have public pension funds. These funds are financed partly by the workers, partly by the taxpayers. There are big differences between the states, some are paying even more than requested. Others are severely underfunded.
To make up for missing funding, pension funds are put in high-risk, high fee alternate investments. Expensive hedge funds have become popular, with disclosed and undisclosed fees and with strict secrecy stipulations. Many states pay enormous sums to middlemen, just to "introduce" hedge funds to politicians holding the checkbook. The Apollo private-equity firm paid a former CalPERS (California Public Employees' Retirement System) board member $48 million for help in securing investments from state pensions and Apollo received $3 billion of CalPERS money. Not that hedge fund performance is impressive. In 2008, Warren Buffet placed a bet that the S&P 500 index fund would beat a portfolio of five hedge funds hand-picked by the geniuses of New York hedge fund Protégé Partners. Five years later, the index fund is up 8.69 percent as compared to Protégé's 0.13 percent.

Private pension funds
Financial advisers are fiduciary or not fiduciary, they have a duty to act in the interest of their customers or they have no such duty. Currently, less than 20 percent are fiduciary. So maybe it is no wonder that a median-income, two-earner household will on average pay $155,000 during their lifetime to financial advisers. At least according to the think tank Demos. With a lifetime gain of around $230,000, nearly two-thirds will go to the industry.
Already in the early 1980s, a short paper expressed some puzzlement over the fact that asset management industry delivered negative value, that it was extractive. Hedge funds have been touting complex strategies and slick private equity fund professionals with cherry-picked success stories. Still, they have been underperforming since 2008. From 1980 to 2008, hedge funds have given the same returns as Treasuries, clearly below stocks. And it is not only rich people who suffer. Public pension funds is the biggest group of private equity limited partners, they are also significant hedge fund players. In Canada, seven pension funds are doing private equity directly, beating industry averages after fees.
Milton Friedman, free trade guru, thinks that the only good thing with American pensions is private alternatives. To him, a private pension fund is just as natural as a private car insurance. But they are not the same. Should your car insurance company fail, you lose at the most your premium for the last year. Should your pension fund fail, you could lose your life savings. Friedman did not expect the banks to put the worst securities they could find into their pension funds.

Private equity
Top bankers make a lot of money, no matter if their banks are profitable or not. Some people make even more. In 2006, Goldman's Lloyd Blankfein was Wall Street's highest paid investment banker with $44 million. Steve Schwarzman of private equity firm Blackstone made $398 million.
Financial institutions can be constructive, facilitating production and consumption. They can also be destructive. A private equity firm can take control of a profitable company, make a lot of money taking over its assets and finally let the company go bankrupt.
Private equity owners are not responsible for a company's debts. They can force a company to take big loans, take over the money as dividends and "fees", and then let the company bankrupt. A company's retirement plans can be forced to invest in the company. When the company bankrupts, either the workers lose their money or the taxpayers have to contribute.

© Anders Floderus