In more than a dozen states, legislators have quietly changed key rules, shifting $660 billion dollars of taxpayer money out of sight.
Desperate times call for desperate measures. Unfortunately, when the people in charge have no clue what they’re getting into, desperate measures are disastrous.
So where did all of this money come from and go?
The $660 billion came from public pensions across the U.S.A. $17 trillion is controlled by these pensions, and huge chunks of them are simply being handed over to extremely expensive and under-performing funds run by the Wall Street elite.
Hedge funds and other “alternative investment” managers have found the perfect cash cow. You, me, and every other taxpayer.
Tapping Taxpayers
For a perfect example of what is going on, just look at tiny Rhode Island, population one million.
At the end of 2011, the state government took a bold step to avert a looming pension crisis, the likes of which Detroit, Chicago, and many other cities and states are facing as well.
Rhode Island politicians thought they had the perfect person to lead the effort. The state’s newly elected treasurer, Gina Raimondo, was a Rhodes scholar and a former venture capitalist.
Politicians and public officials had little to no experience with large, complex portfolios. Raimondo did, and she had a plan.
“She’s Yale, Harvard, Oxford — she worked on Wall Street,” said Paul Doughty, the current president of the Providence firefighters union, to Rolling Stone.
“Nobody wanted to be the first to raise his hand and admit he didn’t know what the f*** she was talking about.”
And so the Rhode Island Retirement Security Act of 2011 went on to be hailed as the most comprehensive pension reform ever implemented. Then it went on to become a national model.
No one noticed — or seemed to ask — who the architects of the plan were. Only after it became law did the cost become apparent.
New York-based hedge funds were piling money into a gubernatorial campaign for Raimondo and she hadn’t even announced her candidacy. By 2013, she had raised more than $2 million, an astronomical sum for such a small state.
Donors from Wall Street firms like Goldman Sachs, Bain Capital, and JPMorgan Chase showered her with money. A 501(c)4 public-advocacy group whose donors were shielded spent $740,000 promoting Raimondo’s ideas.
She was essentially creating a vehicle to pass Rhode Island public funds to hedge funds to manage. In the process, they’d collect the massive fees from taxpayers.
After the act was ratified, Raimondo disclosed that there would be at least $70 million in fees in 2014 alone. That is a $70 bill for every person in the state.
Former Securities and Exchange Commission lawyer Ted Siedle estimated that the reforms will take the roughly $2.3 billion cut to workers’ cost-of-living adjustments over the next 20 years and use it to pay $2.1 billion in new hedge fund fees.
Out of Sight
To make matters worse — and the situation even more absurd — Raimondo later told the Providence Journal she was contractually obliged to defer to hedge funds on the release of “proprietary” information.
The pension fund has a fiduciary relationship with the state. It is required to disclose what it is doing with public funds to make sure they are subject to public oversight. Raimondo essentially signed that obligation away, and she is far from alone.
In more than a dozen states, legislators have enacted exemptions for hedge funds and other alternative investments to laws such as the Freedom of Information Act.
This couldn’t be better for the hedge funds and private equity firms poised to collect a multi-decade windfall. Governments and pensions are horribly ill-equipped to understand fees, and these funds and firms are capitalizing on the weakness.
The U.S. Securities and Exchange Commission just released a report detailing how more than half of about 400 private equity firms it examined have charged unwarranted and exorbitant fees and expenses without notifying investors.
The city of Los Angeles admitted that it spent more than $204 million in fees to Wall Street last year alone. Now that figure is being revised to around $300 million after more hidden fees were uncovered.
That is more than the $163 million budget of the Bureau of Street Services. That says quite a bit considering LA has about 17,000 miles of roads, not including freeways with 92 million vehicles on them on an average day.
Then there was the 123-count grand jury indictment of two top advisors to the former New York state comptroller. The scheme netted them and other associates of the comptroller tens of millions of dollars in kickbacks from firms investing the fund’s money.
The two former advisers directed half of the $10 billion that the pension fund invested in so-called alternative investments, like hedge funds and private equity firms, that used Mr. Morris or his associates as paid intermediaries.
Kickbacks, bribery, self-dealing, fraud, tax evasion, and outright theft have been protected as confidential “trade secrets” or “proprietary business information” exempt from disclosure to the public under various state freedom of information laws.
All of these are calculated and coordinated efforts to capture as much of the $17 trillion dollars of tax dollars in national pension funds as humanly possible.
Headwinds
This is yet another stark reminder that you aren’t just on your own. Investors are facing headwinds that are designed to constantly erode wealth.
Even the honest hedge fund and private equity managers out there still rake in absurd profits through these schemes.
Thanks to the “2 and 20” pricing scheme that gives these funds 2% of the total invested amount and 20% of all gains, taxpayer money is being siphoned from the public ledger with no benefit to us.
Social Security and pensions are going to fail or pay out severely reduced benefits. Actively managed funds in 401(k)s, hedge funds, and private equity all take a share of your money while vastly under-performing the market.
When these public retirement programs and pitiful retirement plans implode, the bill is going to be passed straight to taxpayers, right alongside the bill for the exorbitant fees of Wall Street “star traders.”
The manipulation doesn’t even end at trying to capture public funds or siphon tax dollars. Wall Street is just as active while trying to suppress information investors could use to steer away from its giant cash grab.
Unfortunately, the financial elite have been wildly successful at burying stock programs offered by some of the best dividend paying stocks out there. However, there are great programs out there that are cheap, easy to use, and can vastly increase retirement funds over time.
We are on our own. All we can do is try to keep as much of our wealth away from the underhanded money grabs that are bleeding workers and taxpayers dry.
