A Blog of Current Events and Ancient Issues.
Funds worth trillions of dollars start to plummet in value. Political pressure to be “socially responsible” distorts the market decisions of government-related enterprises, leading to risky investments. Investors who once considered their retirements safely protectedwake up to a sinking feeling of uncertainty and gloom.
State, local, and private pension plans covering millions of government employees and union workers with “defined benefit” accounts are teetering on the brink of implosion, victims of both a sinking stock market and investment strategies influenced by political considerations.
Many of these funds prospered in the 1990s, when the basic material stocks that they frowned upon swooned, while the favored sectors—mostly technology and financial stocks, which were considered “clean investments”—did great. But the technology and communications bust of 2000–02 knocked out one of SRI’s pillars, and now the crash in financial stocks has destroyed the other. Despite much hype to the contrary, socially responsible stocks, as measured by major broad-based SRI stock funds, have significantly underperformed the market this decade, and some of the most aggressive pension funds that use “responsible” screens—such as the California Public Employees’ Retirement System—have taken some of the largest hits.
As recently as mid-2008, three of the top eight holdings by the leading social investing organizations in the country were financial stocks: AIG, Bank of America, and Citigroup. AIG was praised for its retirement benefits and sexual diversity policies; Bank of America strove to reduce greenhouse gas emissions and promote diversity; and Citigroup donated money to schools and tied some of its loans to environmental guidelines. The stock prices of all three companies tanked in 2008.
The state’s pension fund meddling went into high gear in 1998 with the election of Phil Angelides as California treasurer. If there is a face to pension fund activism, it’s Angelides’. As political issues go, treasury and pension fund investments are not the sort of hot-button topics that ambitious California politicians usually ride to glory. But Angelides had a vision: to use retirement dollars as a way to change the world, and the state treasurer position became his tool.
Supported by labor unions and minority groups, Angelides argued that the state had too many billions stashed away in so-called emerging markets—Third World nations where democracy is weak and wages are low—and not enough invested at home creating jobs and housing. So in March 2000, he rolled out an ambitious social investing program, dubbed the Double Bottom Line, which included dumping $800 million in tobacco stocks and persuading fund managers to shed investments in countries that Angelides thought had questionable environmental or governance practices. He claimed the initiatives would not sacrifice investment returns, saying at the time: “I feel strongly that we wouldn’t be living up to our fiduciary responsibility if we didn’t look at these broader social issues. I think shareholders need to start stepping up and asserting their rights as owners of corporations. And this includes states and their pension funds.”
How has this social engineering worked out? Angelides left his job as state treasurer in 2006 for an unsuccessful run for governor, but his legacy of politicizing pension fund investing remains. In 2003 CalPERS rejected a recommendation from its financial adviser, Wilshire Associates, to invest in the equity markets of four Asian nations—Thailand, Malaysia, India, and Sri Lanka—based on their alleged misdeeds. That was a costly decision, as their stock markets roared in the ensuing years. Another decision to shun investment in China, India, and Russia cost the fund some $400 million in forsaken gains, according to the fund’s own 2007 internal report.
Some of the most steadily performing sectors, through both good and bad times, have been the very “vice” stocks that are no-nos for most social investors. When times get tough, the sinners get sinning. “Demand for drinking, smoking, and gambling remains pretty steady and actually increases during volatile times,” says Tom Glavin, chief investment officer at Credit Suisse First Boston. Alcohol, tobacco, and gambling stocks rallied solidly during two of the last three major recessions, in 1990 and 1982. “Many of these industry groups tend to be beneficiaries of the flaws of human character,” Glavin says.
So what stocks did the California funds buy instead? High on the list were financial stocks, which have been given a green bill of health by social investors. CalSTRS recently acknowledged it had lost hundreds of millions of dollars on Lehman Brothers, AIG, and other fallen icons that were recent favorites of social investors.
But those losses may pale when the tab comes due for misplaced bets on the boom-to-bust California real estate market. According to a report released last April, CalPERS had 25 percent of its $20 billion real estate assets in the California market, which has declined faster than the real estate markets in most of the rest of the country.
Large public pension funds have a selfish notion of risk: heads they win, tails you lose. If they gamble on risky investments that pay off, they are heroes, although the predetermined benefits don’t increase. But if those investments go south, tax dollars will have to bridge the gap. “This is adding insult to injury,” says Jon Coupal of the Howard Jarvis Taxpayers Association. “At the same time we’re seeing our own 401(k)s get hit, we’re on the hook to make up the shortfalls for public employees who are guaranteed their full pensions without any risk.”
When public funds slide in value, taxpayers get hit from all sides. The municipalities and school districts that hire firefighters, police, teachers, and other workers have to cut their staffs to recapitalize funds. Last October the Los Angeles County Board of Supervisors learned that the county would have to come up with an extra $500 million to keep its pension fund whole. That means the county may have to raise local taxes and cut services to deliver on overextravagant promises it failed to safeguard.
You have two cows.
John Paulson borrows one cow so he can sell it for $100. He gives you $10 as collateral.
You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the bank and use John's $10 to make up the rest.
You brag to everyone about your financial health. You have assets--two cows you own, plus one Paulson owes you--worth $300, and liabilities of just $100.
A third of the country goes vegetarian.
You thought your two cows were worth $200 and now they are worth $140.
You express confidence in your financial health. Your assets are now worth only $200--your two cows plus the one John owes you--but your liabilities are still only $100. If necessary, you could sell the assets at this distressed price and pay off all your loans.
You hold onto your cows because you are sure the market is "dislocated." Some day someone will want to eat beef again.
The rest of the country goes vegetarian. Your two cows are now worth $2 each to guys who want to make dog food.
John Paulson buys a cow in the market for $2 and he gives it to you as repayment of the loan. You now have three cows worth six bucks.
John wants his $10 back.
The bank calls. It wants its $90 back.
You call the Federal Reserve and ask for a bailout.
For some unknown reason, tradition states that the first movie must consist largely of something no one in the audience paid to see: The superhero as he lived before he could do any cool superhero stuff.
Other genres don't feel the need to do this; Die Hard didn't spend the first half of the movie with John McClane taking target practice, Rambo didn't spend an hour showing Rambo in basic training. Why can't we just jump in?
Instead we have to watch Peter Parker struggling as a photographer, and Bruce Banner quietly working as a scientist, as if we must first appreciate the tedium of their regular lives before we get to see them jump off an exploding building.
And to double the problem, they usually throw in an origin story for one or more of the villains, too. Behold! Here is the awesome badass supervillain, back when he was just a disgruntled dude in a lab coat!
As I begin my second week here as a guest blogger, I'm going to risk venturing into a couple of contentious political areas. My aim is not to provoke dissent; I simply feel that some stories are not being told.
It started when I read Nickel and Dimed, in which Atlantic contributor Barbara Ehrenreich denounces the exploitation of minimum-wage workers in America. Somehow her book didn’t ring true to me, and I wondered to what extent a preconceived agenda might have biased her reporting. Hence my application for a job at the nearest Wal-Mart.
The job was as dull as I expected, but I was stunned to discover how benign the workplace turned out to be. My supervisor was friendly, decent, and treated me as an equal. Wal-Mart allowed a liberal dress code. The company explained precisely what it expected from its employees, and adhered to this policy in every detail. I was unfailingly reminded to take paid rest breaks, and was also encouraged to take fully paid time, whenever I felt like it, to study topics such as job safety and customer relations via a series of well-produced interactive courses on computers in a room at the back of the store. Each successfully completed course added an increment to my hourly wage, a policy which Barbara Ehrenreich somehow forgot to mention in her book.
My standard equipment included a handheld bar-code scanner which revealed the in-store stock and nearest warehouse stock of every item on the shelves, and its profit margin. At the branch where I worked, all the lowest-level employees were allowed this information and were encouraged to make individual decisions about inventory. One of the secrets to Wal-Mart’s success is that it delegates many judgment calls to the sales-floor level, where employees know first-hand what sells, what doesn’t, and (most important) what customers are asking for.
Several of my co-workers had relocated from other areas, where they had worked at other Wal-Marts. They wanted more of the same. Everyone agreed that Wal-Mart was preferable to the local Target, where the hourly pay was lower and workers were said to be treated with less respect (an opinion which I was unable to verify). Most of all, my coworkers wanted to avoid those “mom-and-pop” stores beloved by social commentators where, I was told, employees had to deal with quixotic management policies, while lacking the opportunities for promotion that exist in a large corporation.
Of course, I was not well paid, but Wal-Mart is hardly unique in paying a low hourly rate to entry-level retail staff. The answer to this problem seems elusive to Barbara Ehrenreich, yet is obvious to any teenager who enrolls in a vocational institute. In a labor market, employees are valued partly according to their abilities. To earn a higher hourly rate, you need to acquire some relevant skills.
As for all those Wal-Mart horror stories—when I went home and checked the web sites that attack the company, I found that many of them are subsidized with union money. walmartwatch.com, for instance, is partnered with the Service Employees International Union; wakeupwalmart.com is copyright by United Food and Commercial Workers International Union. Why are unions so obsessed with Wal-Mart? I'm guessing that if the more-than-a-million Wal-Mart employees could be unionized, they would be compelled to contribute at least half a billion dollars per year in union dues.
“Like Chris Dodd and Barney Frank, he rails about corporate greed and Wall Street perks while he too is deep at the trough. If an administration is going to make a moral case against the pernicious role of D.C. lobbyists and insiders, for the moral need for taxes on the upper incomes, and for suspicion of perks and freebies—then why pick Daschle, whose free limo and tax evasion make all that look ridiculous?
“Make no mistake, tax cheaters cheat us all, and the IRS should enforce our laws to the letter.” Sen. Tom Daschle, Congressional Record, May 7, 1998, p. S4507.
Every Republican in America knows that if Mr. Daschle were a Reagan or Bush nominee he'd now be headed back to private life faster than you can say John Tower. That's the way Democrats have treated GOP nominees who were accused of far lesser transgressions than Mr. Daschle's tax, er, avoidance. The question is whether Democrats are going to treat Mr. Daschle according to the standard that Mr. Daschle set when he was running the Senate.
As a legal tax matter, this isn't even a close call. Mr. Daschle says he used the car service about 80% for personal use, and 20% for business. But his spokeswoman says it only dawned on the Senator last June that this might be taxable income. Mr. Daschle's excuse? According to a Journal report Friday, "he told committee staff he had grown used to having a car and driver as majority leader and did not think to report the perk on his taxes, according to staff members." How's that for a Leona Helmsley moment: Doesn't everyone have a car and chauffeur, dear?
Daschle has earned more than $5 million over the past two years, including $220,000 from the health-care industry he's been nominated to regulate. Capitalism is wonderful, but at the very least Mr. Daschle's record strips the veneer from President Obama's moralizing that lobbying and special interest pleading are the root of all evil in Washington. In appointing Mr. Daschle, Mr. Obama is showing that lobbying is fine as long as it is done by people who agree with him.
If a certain sort of conservative tends to be moralistic about sex, liberals tend to be moralistic about money. That makes Tom Daschle the equivalent of a televangelist caught in a sex scandal.
