Cities and States Across the Country Are Paying Massive Secret Fees to Wall Street

Massive payouts to Wall Street are happening at the very moment politicians are demanding big cuts to retirees’ pension benefits.

David Sirota April 23, 2015

(Magnus Manske / Wikimedia Commons)

California’s report said $440 mil­lion. New Jersey’s said $600 mil­lion. In Penn­syl­va­nia, the tal­ly is $700 mil­lion. Those Wall Street fees paid by pub­lic work­ers’ pen­sion sys­tems have kicked off an inten­si­fy­ing debate over whether such expens­es are nec­es­sary. Now, a report from an indus­try-friend­ly source says those huge levies rep­re­sent only a frac­tion of the true amounts being raked in by Wall Street firms from state and local governments.

With so much money at issue—and with pensioners' retirement income on the line—scrutiny is long overdue.

Less than one‐​half of the very sub­stan­tial [pri­vate equi­ty] costs incurred by U.S. pen­sion funds are cur­rent­ly being dis­closed,” says the report from CEM, whose web­site says the finan­cial analy­sis firm serve(s) over 350 blue-chip cor­po­rate and gov­ern­ment clients worldwide.”

Cur­rent­ly, about 9 per­cent — or $270 bil­lion — of America’s $3 tril­lion pub­lic pen­sion fund assets are invest­ed in pri­vate equi­ty firms. With the finan­cial industry’s stan­dard 2 per­cent man­age­ment fee, that quar­ter-tril­lion dol­lars gen­er­ates rough­ly $5.4 bil­lion in annu­al man­age­ment fees for the pri­vate equi­ty indus­try – and that’s not includ­ing addi­tion­al per­for­mance” fees paid on invest­ment returns. If CEM’s cal­cu­la­tions are applied uni­form­ly, it could mean tax­pay­ers and retirees may actu­al­ly be pay­ing dou­ble — more than $10 bil­lion a year. 

Pub­lic offi­cials are over­see­ing this mas­sive pay­out to Wall Street at the very moment many of those same offi­cials are demand­ing big cuts to retirees’ promised pen­sion benefits. 

With bil­lions of pub­lic work­er and tax­pay­er dol­lars put at risk in the high­est-cost, most opaque invest­ment schemes ever devised by Wall Street for a decade now, inves­ti­ga­tions that hold Wall Street prof­i­teers account­able are long, long over­due,” said for­mer Secu­ri­ties and Exchange Com­mis­sion attor­ney Ted Siedle.

Pri­vate equi­ty firms have argued that their fees are worth the expense, because they sup­pos­ed­ly deliv­er returns for investors that beat low-fee index funds which track the broad­er stock mar­ket. But those pri­vate equi­ty returns are typ­i­cal­ly self-report­ed by the firms over the life of those longer-term invest­ments, mean­ing there are few ways to ver­i­fy whether the returns are real. Indeed, a recent study from George Wash­ing­ton Uni­ver­si­ty argued that pri­vate equi­ty firms are using their self-report­ing author­i­ty to mis­lead investors into believ­ing their returns are smoother and more con­sis­tent than they actu­al­ly are.

In a 2014 speech, the SEC’s top exam­in­er, Andrew Bow­den, sound­ed the alarm about undis­closed fees in the pri­vate equi­ty indus­try, say­ing the agency had dis­cov­ered vio­la­tions of law or mate­r­i­al weak­ness­es in con­trols over 50 per­cent of the time” at firms it had evaluated. 

To date, how­ev­er, the SEC has tak­en few actions to crack down on the prac­tices, but some states are start­ing to step up their oversight. 

In New Jer­sey, for instance, pen­sion trustees announced a for­mal inves­ti­ga­tion of Gov. Chris Christie’s admin­is­tra­tion after evi­dence sur­faced sug­gest­ing that the Repub­li­can admin­is­tra­tion has not been dis­clos­ing all state pen­sion fees paid to finan­cial firms. 

In Rhode Island, the new state trea­sur­er, Seth Mag­a­zin­er, a Demo­c­rat, recent­ly pub­lished a review of all the fees that state’s belea­guered pen­sion fund has paid. The analy­sis revealed that the for­mer finan­cial firm of Demo­c­ra­t­ic Gov. Gina Rai­mon­do is charg­ing the state’s pen­sion fund the high­est fee rate of any firm in its asset class.

In Penn­syl­va­nia, the new Demo­c­ra­t­ic Gov. Tom Wolf used his first bud­get address to call for the state to stop exces­sive fees to Wall Street managers.” 

These moves are shin­ing a spot­light on one of the most lucra­tive yet lit­tle-noticed Wall Street schemes. With so much mon­ey at issue — and with pen­sion­ers’ retire­ment income on the line — that scruti­ny is long overdue.

David Siro­ta is an award­win­ning inves­tiga­tive jour­nal­ist and an In These Times senior edi­tor. He served as speech writer for Bernie Sanders’ 2020 cam­paign. Fol­low him on Twit­ter @davidsirota.
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