Pension-Fund Looters Get Tax Breaks, Too
A response to some head-scratching criticisms of my last RS feature
A few weeks ago, I wrote a feature on pension reform in states like Rhode Island for Rolling Stone. Since the piece was sharply critical of alternative investments like hedge funds, I expected a heated response, and got one right away. In fact, a series of raving/chest-thumping emails from one Manhattan Institute hedge fund billionaire appeared in my email inbox about four and a half seconds after the piece went live on the Rolling Stone website.
This colorful personage calmed down eventually, though, and I figured a more sophisticated, for-public-consumption response would come from those quarters later on.
It finally showed up this week in GoLocalProv, when Aaron Henn, an "opinion-leading urban affairs analyst" who appears in striking tie-and-folded-arms pose in his column photo, wrote a piece in defense of the Rhode Island Treasurer profiled in the piece called "Matt Taibbi's Deceptive Hatchet Job on Gina Raimondo."
Henn discloses up top that he's written in the past for the Manhattan Institute (again, a think-tank created by hedge funds to further industry objectives), so there's that. I'm not going to go through his article line-by-line, because this dispute is surely already becoming tiresome to many, but there are one or two points in it worth responding to.
For one, Henn complained that I didn't mention in my article that Raimondo is a Democrat. Through this omission, he says, I was trying to "obscure the severity of America's municipal pension crisis by portraying reform efforts as driven by right-wing ideology."
Well, it is right-wing ideology, for sure. Ayn Rand herself would have loved the idea of unilaterally imposing cuts to the "unsustainable" benefits of parasitic workers. But that doesn't mean it hasn't been advanced by Democratic Party politicians. That's something I have no problem admitting.
Anyone who covers the finance sector knows Democrats over the years have been in bed with Wall Street every bit as much as Republicans. In some ways, the finance industry is actually closer, especially on a cultural level, to the Democrats (many prominent financiers, former Goldman chief Bob Rubin being a great example, are social liberals).
This dates back to the Nineties, when two of the signature deregulatory moves that led to the financial crisis – the final repeal of the Glass-Steagall Act and the Commodity Futures Modernization Act deregulating derivatives – were pushed by the Clinton administration and its ballyhooed Rubin/Summers economic advisory team, famously lauded on the cover of Time as the "Committee to Save the World." (Even back then, politicians were casting Wall-Street friendly reforms as technocratic decisions designed to save regular people from financial ruin.)
More recently, I've written many times about the failure of Democratic Party politicians like Barack Obama to do anything about the outrageous carried interest tax break, under which hedge fund billionaires like the ones manning the board of the Manhattan Institute and making millions managing the pensions of states like Rhode Island pay a maximum personal tax rate of 15 percent.
In fact, not only have Democrats not done anything about that outrage, there have been many prominent ones – like for instance Cory Booker and Bill Clinton, two politicians who both benefitted from finance-sector largesse in their respective careers – who stood up and defiantly took bullets for the industry when Obama offered highly muted criticisms of Mitt Romney's finance-sector past last summer.
In a way, I should probably thank Henn, because had he not written his piece, I wouldn't have remembered this key point. Not only are states like Rhode Island paying millions in fees to outrageously expensive money managers, but those millions will be taxed at a rate far below what the teachers and police and sanitation workers who are being forced to swallow cuts in those states pay on their dwindling incomes. This is thanks in large part to a tax loophole preserved for years by cowardly Wall Street-supplicating politicians hailing, as Henn correctly notes, from both parties, Republican and Democrat.
There's another section of Henn's piece that coincides with another industry-friendly online criticism of the Rolling Stone piece, an article written by Andrew Biggs for the American Enterprise Institute. I've actually also seen the following argument in a few letters sent to me from pro-industry types in just the last few days, so it feels like a collectively-agreed-upon talking point of very recent vintage. And it's really, really weird stuff.
Both writers essentially say that the central thesis of the RS piece – that hedge funds are pushing reform because it's in their own financial self-interest – is "illogical" or a "non-sequitur," despite the undeniable fact of the hundreds of millions in fees paid out to money managers who have gone to great lengths to keep the details of their compensation secret.
Henn's argument went like this:
I agree with Taibbi that having pensions invest in hedge funds is a dubious practice, though I could quibble with his method of using simply fees paid as reason why it's bad. But that misses the much bigger issue, which is that cutting pension liabilities actually reduces, not increases, the justification for investing in hedge funds.
Taibbi rightly shows how governments systematically underfunded pensions for years and then attempted to deal with the resulting deficits through high risk investment strategies like hedge funds. But if you reduce the liability, you reduce the incentive to gamble with the funds. So it's absolutely anti-sensical to suggest anyone acting at the behest of peddlers of such risky plans would take action to reduce the very liability that gives any sort of a fig leaf to investing in them. His central thesis is a complete non-sequitur.
You can get a contact high just from staring at those paragraphs for too long. I think Henn here is saying the following:
States are turning to hedge funds because they have an unfunded liability problem and need to address it by earning higher returns. But if those high returns go on to actually reduce the liability, this will therefore reduce the justification for hiring hedge funds in the first place.
Therefore, nobody acting at the behest of hedge funds would actually hire a hedge fund.
Right? Or something like that. Incidentally, I didn't point to fees "simply" as the only argument against hedge funds. I also noted that they are underperforming blind bets on the market at two or three hundred times the cost, that many of the funds being chosen to manage union money have anti-union histories, and a few other things. In any case, Biggs, from the American Enterprise Institute, echoed Henn:
What strikes me is [the Rolling Stone article's] basic illogic. Taibbi's thesis is apparently a) the high fees charged by hedge funds are ripping off public pensions; and b) think tanks and other groups are pushing to shut down DB pensions.
I'm not sure whether either of these claims is true, but the problem is that – as Taibbi goes to lengths to argue – these shadowy groups are themselves supported by current or former hedge fund managers. In other words, the very people Taibbi claims are profiting the most from the public pension gravy train – and profiting they are, as public plans are the largest single investors in hedge funds and private equity in the country – are the ones trying to stop it. My spider-sense tells me the story might be a little more complicated than Taibbi lets on.
Biggs leaves out the fact that pension-reform advocates are not trying to "stop" pensions, they're mainly trying to convert them from a defined-benefit model to a defined-contribution model. The gravy train they're trying to "stop" is for workers, not money managers, who will actually earn more under reform, as states move more toward alternative investments. In no way is the financial services sector campaigning for an end to its pension gravy train. This is a pretty big thing to forget in this particular argument. It's actually the whole argument, isn't it? Readers, if I'm missing something, please let me know.
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