Tuesday, October 1, 2013
Go To Original
The US government on Thursday continued on its course toward a possible shutdown next week, as House Republicans reiterated their refusal to pass a government funding resolution that does not include the defunding of the Obama administration’s health care overhaul.
Judging by the acrimony and mutual recrimination between the Democrats and Republicans, it would seem that there were great issues of contention in the budget debate between the two parties. But behind the largely stage-managed facade of “partisan gridlock,” both parties are united in attacking the social conditions and living standards of working people.
What are the supposedly vast ideological differences? Both the Democrats and Republicans favor cutting social spending, including cuts to Social Security and Medicare, the bedrock social programs previously considered the “third rail” of American politics.
There is no liberal reform wing of the political establishment. No Democratic officeholders are proposing serious measures to rein in the banks, provide decent-paying jobs for the unemployed, or rebuild the schools.
Both the Democratic-controlled Senate and the Republican-controlled House of Representatives recently voted to slash food stamp spending in the midst of the worst economic crisis since the Great Depression. Both support aggressive war as an instrument of policy, both are complicit in the government’s domestic spying and assassination programs. Both exclude from consideration significant cuts in the hundreds of billions spent every year on the military and intelligence apparatus and interest payments to the banks on the US debt.
What is the budget crisis really about? The threat to shut down the government is, in the first instance, yet another attempt to impose massively unpopular spending cuts by whipping up a crisis atmosphere.
This is only the latest in a series of manufactured crises, including the 2011 debt ceiling crisis that led to over $2 trillion in spending cuts and the 2012 “fiscal cliff” that preceded the imposition of “sequester” across-the-board budget cuts beginning last March. The sequester cuts total over $85 billion this year and $1.1 trillion over the next eight years.
These crises have been used to set the stage for attacks that previously would have been considered politically impossible. With each debt crisis, the script is largely identical. The Republicans stake out an extreme position, demanding deeper cuts than had ever been proposed before. The Democrats then work out a compromise that accepts the bulk of the Republicans’ demands and seek to disguise their own support for right-wing austerity policies with complaints about Republican “intransigence.”
This time around, the budget crisis revolves around Republican opposition to Obama’s Affordable Care Act, which is unpopular among large sections of the population who rightfully see it as an attempt to slash their health care benefits. Under conditions where the entire supposedly “liberal” and “left” wing of the political establishment is lined up behind Obama and his reactionary health care “reform,” the Republicans are seeking to tap into popular discontent by demagogically denouncing the bill, albeit from a right-wing perspective.
The Affordable Care Act lays the groundwork for corporations and local governments to shed their insurance coverage for employees, offloading their workers onto the newly established health care exchanges, where they will be required to purchase private insurance. Today, Obama administration officials are meeting with Detroit’s emergency manager, Kevyn Orr. Along with the gutting of city workers’ pensions, Orr is proposing to eliminate health care benefits for retirees and shift them onto the exchanges or, if they are over 65, onto Medicare.
The Affordable Care Act is essentially a Democratic Party appropriation of health care “vouchers,” which Republicans have championed for decades as a means of undermining employer-provided health coverage and privatizing Medicare, the government-run program for seniors. Under Obama and the Democrats, this reactionary policy is presented as a “progressive” social reform in an attempt to fool the people and provide political cover for the trade unions and liberal and pseudo-left organizations that orbit around the Democratic Party to back it.
The entire budget “debate” takes place amid record corporate profits, soaring inequality, and a booming stock market fueled by $85 billion per month pumped into the financial system by the Federal Reserve.
The fact that under conditions of mass unemployment, growing poverty and falling wages the conflict between various sections of the political establishment is over how quickly to implement measures that will throw millions more into poverty says a great deal about the character of the US political system.
The American population as a whole is moving to the left, as evidenced by mass opposition to the Obama administration’s war plans against Syria and the police state spying operations of the National Security Agency. There is a vast and unbridgeable gulf between these sentiments and the entire political establishment, which, in turn, is the political expression of the immense social divide in America.
It is impossible to oppose the offensive against the working class within the framework of two right-wing parties and the capitalist system they defend.
What is required is an independent political movement of the working class fighting to reorganize economic life on the basis of social needs, rather than private profit. The claim that there is no money to pay for social programs is a brazen lie. The money exists, but it is being hoarded by the multimillionaires and billionaires who plunder the country and the world for their own enrichment.
Go To Original
I know you're already mad about various injustices, but when you read Sarah Stillman’s recent New Yorker article, “Taken,” your blood will boil. It’s about the laws and practices – developed over the last 15-20 years as part of the "war on drugs" and the general encroachment of police-state tactics – regarding what is called “civil forfeiture.” And it’s about a lot more than that.
Forfeiture laws are touted as effective tools for destroying the empires of crime lords by seizing all the ill-gotten gains of their criminal activity. Criminal forfeiture laws – which are applied following conviction of a crime beyond a reasonable doubt, before a judge, with legal representation and such – can, used reasonably (the problems here are another issue), provide for just that. Civil forfeiture, on the other hand, is based on the legal theory that property does not have the rights of a person, and that therefore actions against property can be taken on the basis of mere suspicion or “probable cause,” with no need to prove a crime. So the cases will have goofy names like, “United States v. One Pearl Necklace.” Another feature of the pre-crime police-state paradigm, civil forfeiture laws make suspicious (property) presumptively criminal (activity), without having to prove any actual, you know, crime. They authorize the police to steal your cash, car, jewelry, home, whatever, without even asserting that a crime has been committed.
[Do you hear the echoes in how suspicion of terrorism becomes terrorism itself? In how I don’t have to prove American citizens Awlaki, father and son, are “terrorists” (whatever that is) before drone-killing them, because my suspicion that they might be is good enough? (We won’t even get into how suspicion=guilt regarding other little stuff, like, oh, chemical weapons.) Do you see how years of putting up with pre-crime tactics for the “war on drugs” has been training in compliance for the more radical presumptive-guilt tactics of the “war on terror”? Constantly selling “war”-inflected frameworks of legal exceptionalism, the state has used various opportunistic bogeymen – “communists,” “drug dealers,” “pedophiles,” terrorists” (Who cares about them?) – to lure citizens into accepting a creeping radical authoritarianism. Preemptive forfeiture today, preemptive detention
The insidious wrinkle in all this, which makes civil forfeiture not only creepily authoritarian but also painfully, infuriatingly, predatory, is that state and federal civil-forfeiture laws have allowed the police forces and prosecutors who seize “suspicious” property to keep all of it, and, in many cases, to use it any way they see fit, including personal perks and bonuses. As Stillman points out, we’re talking everything from “Halloween costumes, Doo Dah Parade decorations,…credit-card late fees, [and] poultry-festival supplies,” to “a thousand-dollar donation to a Baptist congregation…. important to [the District Attorney’s] reelection,“ to “a twenty-one-thousand-dollar drug-prevention beach party,” to “a city marshal’s ten-thousand-dollar personal bonus” and another officer’s “total of forty thousand dollars in bonuses.” Stillman reports: “In Hunt County, Texas, I found officers scoring personal bonuses of up to twenty-six thousand dollars a year, straight from the forfeiture fund. In Titus County, forfeiture pays the assistant district attorney’s entire salary.” In other words, the real practice of civil forfeiture has become a lucrative system of “policing for profit,” a system that has literally legalized highway robbery and turned police into pirates.
It’s important to understand where this money is coming from. The cops and media like to promote the idea that civil forfeiture is primarily a weapon against drug “kingpins,” that most of the property seized is along the lines of Pablo Escobar’s millions or the Ferraris that Crockett and Tubbs drove around Miami. That idea is, well, a crock. Sure, there has been some of that, and those glamor seizures are the ones most likely to be publicized by prosecutors and police. But, like all predators, the forfeiture cops target the easiest and the weakest prey. There are a number of factors that encourage this. First of all, as the list of perks imply, the juiciest catch is cash. Second, because there are legal procedures – very long and very complicated legal procedures, to be sure – by which confiscated but legal property and funds can be recuperated, the best targets are those who seem least likely to be able to afford the lawyers and the time needed to challenge a seizure. So it’s people who don’t have bank accounts or credit cards or Amazon Prime, who have to tuck the cash they have saved – the few hundred to buy those Christmas presents, or the couple of thousand to buy that used car – into their purses or the consoles of their car, who offer the most opportune targets.
Stillman quotes Lee McGrath, of the Institute for Justice: “There’s this myth that they’re cracking down on drug cartels and kingpins…In reality, it’s small amounts, where people aren’t entitled to a public defender, and can’t afford a lawyer, and the only rational response is to walk away from your property, because of the infeasibility of getting your money back.” McGrath did a study of $2.76 million in forfeitures taken by local, county, and state police forces in Georgia, showing that “more than half the items taken were worth less than six hundred and fifty dollars.” These stories don’t often make the news.
Let’s get down to cases for a moment. A lot of this robbery does take place along the highway, and we’ll get to that. But to get a sense of how thoroughly pernicious and predatory is the practice of civil forfeiture (and the “war on drugs” in which it is so tightly implicated), let’s look Stillman’s report of what happened to the Adams family in Philadelphia. Sixty-eight-year-old grandmother Mary Adams, and her seventy-year-old husband Leon, a pancreatic cancer patient, had built their lives and raised their only son in the same West Philadelphia home since 1966, working various unglamorous jobs like steel-worker, janitor, Woolworth’s saleswoman, and patient care assistant. Mary was a volunteer block captain who thought that seizing homes “was reserved for crack houses and abandoned eyesores.” You know, honest, hard-working makers not takers, and all that. Until one day, without any prior notice, a heavily-armed SWAT team invaded their home, and announced: “We’ll give you ten minutes to get your things and vacate the property.” This seventy-year-old man and sixty-eight-year-old woman were to be thrown out on the street, and their home of 46 years was to be sold at a city auction – with, as Stillman details, “the proceeds split between the district attorney’s office and the police department.”
All of this occurred because the Adams’s thirty-one year old son, Leon, Jr., had allegedly sold twenty dollars’ worth of marijuana to a confidential informant on the porch of their home. Because of this twenty-dollar crime, the Adams’s home could be seized and sold, even if Leon, Jr., was acquitted, and, in fact, even before he stood trial. (In this case, the Adams’s caught a break – a deferral, not a reprieve – when an eviction officer, on his own prerogative, struck by Leon’s frail condition, allowed them to stay in the house until the forfeiture proceedings were completed.)
It turns out that “homes in Philadelphia are routinely seized (about a hundred a year) for unproved minor drug crimes, often involving children or grandchildren who don’t own the home.” Predictably, as Louis Rulli, the head of a free University of Pennsylvania Law School clinic which works for indigent homeowners, told Stillman, “For real-estate forfeitures, it’s overwhelmingly African-Americans and Hispanics….It has a very disparate race and class impact.” To illustrate, Rulli recounted how the son of the former Philadelphia Eagles’ coach had been convicted of running what a judge and the press called an “emporium of drugs” while living at the family’s suburban mansion in 2007. Rulli asks, with appropriate agitation: “An emporium of drugs!...And here’s the question: Do you think they seized it?” It’s a rhetorical question.
So if you don't know about piracy, and don't know anyone it's happened to, it may be because its victims, I’m sure you’ll be shocked to learn, are largely poor people who can't afford to fight it, and, more surprise, disproportionately black and Hispanic. Relatively well-to-do white people don’t know any people this has happened to for the same reason they don’t know any kids who are stopped-and-frisked.
Pirates of the Median
Speaking of stopping and frisking, it’s on the highways that many police departments, often in rural areas, have developed the fine art of civil forfeiture – stopping, searching, and seizing vehicles and their contents in a finely coordinated and highly lucrative routine. Here, again, it’s people who don’t have bank accounts and have to carry cash to make their purchases who are the prime prey. It’s also the small business owners rushing to grab that great cash-only deal on used restaurant equipment they saw in the Pennysaver.
Take the case, recounted by Chole Cockburn of the ACLU, of Shukree Simmons, an African-American businessman, who was driving home with his partner and the $3,700 he had just got from selling his Silverado for desperately-needed funds for their business. They were stopped in Lamar County, Georgia, their vehicle was searched and dog-sniffed, they were questioned separately, and, after finding no evidence of any illegal activity, the cops confiscated his $3,700 “on the suspicion that the funds were derived from illegal activity,” as authorized under Georgia’s civil-forfeiture law.
Stillman’s New Yorker article (like this earlier article by Howard Witt in the Chicago Tribune and this by Janell Ross at the Huffington Post) focuses on the tiny (pop. 1160) town of Tenaha, Texas, where, as the ACLU’s successful lawsuit described, local police and prosecutors "developed an illegal 'stop and seize' practice of targeting, stopping, detaining, searching and often seizing property from apparently non-white citizens and those traveling with non-white citizens." From 2006 to 2008, the “Tenaha operation,” as it was known, on pretexts like “driving too close to the white line,” stopped, searched and seized the cash and valuables of as many as 1,000 black and Latino drivers.
One of the incidents that precipitated the ACLU lawsuit was the stop of Jennifer Boatright, a waitress and self-described “Texas redneck from Lubbock,” who was driving with her Latino boyfriend, Ron Henderson, and her two young sons, along with the $6,000 they were going to use to buy a used car. The district attorney, Lynda K. Russell, told them they faced felony charges of “money laundering” and “child endangerment,” and “threatened to turn their children, ages 10 and 1, over to Child Protective Services if the couple didn't agree to sign over their right to their cash.” The policy was: “If a driver opted for an arrest and a chance to see a judge, any children in the car would be turned over to child protective services. Jennifer’s Freedom of Choice. As Boatright put it to Stillman: “Where are we?…Is this some kind of foreign country, where they’re selling people’s kids off?” (It was State of Texas v. $6,037.” Boatright made the choice any parent would have, but ultimately did, as a result of the class-action suit, get her money back.)
Of course, we can believe Tenaha’s mayor George Bowers’s insistence that "We're not doing this to raise money.” Nooo, they’re just so concerned about evil drugs and children’s welfare that they’ll let the suspected child-endangering money launderers drive off with the kids for six grand. The fact that tiny Tenaha made $1.3 million in six months, with a “profit-sharing agreement…to split the proceeds among the district attorney’s office, the Tenaha marshal’s office, and the county constable,” was, cross his heart, not the reason they were doing this.
And Shelby County judge Rick Campbell is credible as well as sincere in insisting, “In my heart of hearts, I really do not believe that there was any kind of profiling going on.” After all it was, yes it was, a black former state trooper (“among the most decorated officers in state history”), Barry Washington, who came to Tenaha in 2006, and sold the mayor and city marshal on the idea that “his drug-interdiction skills could be put to good use along its section of Highway 59.” Because there are no black cops opportunistic enough to play the profiling game for their own benefit. (It was Washington who received $40,000 in bonuses.) Really, it wasn’t that he figured out a way to use the law to his own profit; it was a mission from God: “His explanation was simple. He’d been lying in bed one night in Carthage, soon after leaving his old job, when he looked up to see a light burst through his bedroom ceiling. ‘And it’s like I’m in a trance,’ he later recalled. ‘And God tells me, ‘Go to Tenaha, Texas.’ And I get up the next day, and I laugh about it, until I find out that God may be serious, so I end up in Tenaha.’” So it just can’t be racial profiling.
As a result of the ACLU lawsuit, Tenaha city and county officials paid $600,000 in legal fees, agreed to record all traffic stops, and accepted court-appointed monitoring of seizures, but they also denied any wrongdoing. Even Texas state Sen. John Whitmire had to acknowledge, however, that "[I]n this instance, where people are being pulled over and their property is taken with no charges filed and no convictions, I think that's theft." And Tenaha was only one example of a lager pattern of civil-forfeiture piracy throughout the county.
Seeing is believing, and all, so please take a look at this eight-minute excerpt (my rough edit) from a multi-part report on a local Tennessee TV station a couple of years ago, detailing how a big-business version of this practice, involving large-sum seizures, plays out. In it, we see how little interest the cops and prosecutors have in actually catching drug dealers rather than collecting cash, and how the war on drugs has become a thin excuse for highway robbery (not a rhetorical characterization):
The Social Sea
Similar incidents occurred in the Tenaha case, where, for example, a local councilwoman noticed that a woman who appeared to be a major money launderer – she had $620,000 hidden in Christmas-wrapped “children’s toys” – was quickly released with no criminal charges after she signed away the cash.
[Watch the original 3-part series at: part 1, part 2, part 3. You’ll see the turf wars, where the cops/gangs from different agencies blocking each other off to protect their stretch of highway, and you’ll see another businessman who had $22,000 confiscated (“If somebody told me this happened to them, I wouldn’t believe it.”). The best part is watching the cops and the D.A. sputtering to explain and justify all this as concern for stopping the horrible scourge of drugs. It would be funny if it weren’t infuriating.]
Here’s another brief example (1:40. my rough edit, again), from last year in Union City, Georgia, of less the lucrative, but all the more devastating, seizure of a woman’s life savings, during a traffic stop in town. It’s remarkable how, although this happens all over the country, all the time, the local newscasters, and even the lawyer, are amazed and “appalled” that the police are able to seize people’s money without charging them with a crime:
The Social Sea
The “I can’t believe this can happen here!” response is a sign of how this practice is selectively targeted by race, class, and area, to keep it off the radar of the media and “middle class.” While the underlying legal theory that property does not have the rights of a person not is not unreasonable, the effects of seizing the little property that those off-the-radar millions depend on to survive is devastating. It amounts to a kind of preemptive immiseration, another way to take from the poor, and drive them further into social hardship. The police and prosecutors here are not taking drug kingpins’ Ferraris, they’re taking the cars people need to get to work, and their life savings. Adding insult to the injury, the assets seized can only go to the police, contributing nothing to society except further strengthening the primary institution of repression and social control.
It’s important to note that this practice is not some aberration of greedy policemen. It’s an inevitable and integral aspect of the encroaching neo-liberal – i.e., nakedly capitalist – social economy. The new piratic highwaymen are the effect, not the cause, of that social economy. These practices and these people are more products of the widespread defunding of the public sphere; the new mandate to replace consistent and adequate public funding of public services with discrete, sporadic, private and private-ish entrepreneurial projects. Public institutions are being reconfigured as isolated interests, and being told to grab what you can from wherever deep or shallow pockets you can figure out how to access. Sarah Stillman points out just how this civil forfeiture practice fits in with the thirty-year drive to defund public services: “The strategy helped reconcile President Reagan’s call for government action in fighting crime with his call to reduce public spending.”
Somehow, Reagan’s Attorney General, Richard Thornburgh, didn’t notice (Do we?) the daisy chain of corruption he was describing, when he exclaimed, with near-orgasmic glee: “It’s now possible for a drug dealer to serve time in a forfeiture-financed prison after being arrested by agents driving a forfeiture-provided automobile while working in a forfeiture-funded sting operation.” Gee, what would we do without that drug dealer?
This whole civil forfeiture scam, then, is a version of – particularly perverse, perhaps, but profoundly of a piece with – teachers and parents holding a bake sale to buy school supplies. In other words, as the officer acknowledges in the video above, this is now the way salaries and equipment purchases –the fundaments of public institutions – are funded. He’s seconded by Steve Westbrook, executive director of the Texas Sheriffs’ Association, who told Sarah Stillman: “We all know the way things are right now—budgets are tight...It’s definitely a valuable asset to law enforcement, for purchasing equipment and getting things you normally wouldn’t be able to get.” And Howard Witt cites “a prominent state legislator” to the effect that “police agencies across Texas are wielding the asset-forfeiture law more aggressively to supplement their shrinking operating budgets.” According to Stillman, “Many officers contend that their departments would collapse if the practice were too heavily regulated.”
There’s no question that the revenue from this practice has become significant. According to Stillman, the Justice Department calculates that proceeds from forfeiture went from twenty-seven million dollars in 1985 to $4.2 billion in 2012, an increase she aptly characterizes as “staggering.” There’s a heavy dose of self-interested exaggeration in these pleadings by the police. A lot of the loot goes into unnecessary equipment, and, as we’ve seen, extraordinary personal perks and bonuses. As Stillman notes, this is especially the case in states like Texas, Georgia, and Virginia, which do not much regulate how police can use confiscated assets, whereas “states that place seized funds in a neutral account, like Maine, Missouri (where proceeds go to a public education fund), North Dakota, and Vermont, have generally avoided major forfeiture-abuse scandals.” A public education fund! Bravo, Missouri. I do suspect that if seized assets were put in a monitored and regulated public fund, to be used for social purposes beyond the enrichment of local police forces, there would be less of the aggressively predatory behavior we see now.
Simon Porter, a former East Texas narcotics cop hit it exactly, when he told Stillman: “When you allow the profit incentive, that’s when you start getting problems…It’s like the difference between serving in the Army and working for Blackwater.”
It is just like that. It’s astounding how virtually every public service job has become, if you’re smart, nothing but a prelude, a purgatory really, that one passes through to get to the real heaven of private enrichment. Grunt soldiers spend a few years in the public army as training for the Blackwater job that will pay them ten times as much. High-level officers are preparing for the lucrative defense contractors’ Boards. Intelligence officers use the CIA and NSA for springboards to Stratfor and such. Congressmen prepare for the seven-figure lobbying jobs they know they await them if they vote the right way for a few years. Presidents get their seven-figure book deals, and know that six-figure speaking fees and eight-figure wealth await them if they listen to the right people. Public service for the sake of, you know, serving the public, actually living through a career remunerated by a public wage and pension – that’s for suckers, a relic of the days (even before Crockett and Tubbs) when airbases around the world were built and maintained by actual soldiers and sailors, the Seabees, not Halliburton.
This is the privatized neo-liberal world in which cops, too, are suckers if they don’t take the opportunity to become privateers.
I know a number of people who work in film and TV production. I hear the stories. There was the time a small crew was filming, with a permit, in the central square of a Mexican city, and the local police showed up, demanding a handout. Or, in Africa, where bribes were demanded to enter buildings and monuments that were ostensibly open to the public. In such places, people will give up what are, in the context, well-paying legitimate jobs to take a “public-sector” job that carries a significantly lower wage, but allows them to milk the public for ten times as much in bribes.
I think of these scenarios in contrast to the following story: One night, when my wife and I were exiting a garage in Manhattan, both carrying packages, a ring was dislodged from her finger, and we watched, in one of those slo-mo trances, as it rolled into the storm drain. Its value was certainly more sentimental than monetary, but she loved it. The next day, we tried to see if we could fetch it ourselves, but storm drains, it turns out, are very deep and murky. So, not hoping for much, we called the New York City Sanitation Department to see if anything could be done. We found, to our surprise, that they had guys in trucks whose job it was to help with our problem. The following day, the guy showed up, oh time, dug out the storm drain grating, and, with this huge vacuum hose, started pulling out the muck from the bottom of the storm drain, a few buckets’ worth at a time. He spent at least a half-hour, patiently going through sludge with us, in what – as we feared, and he surely expected – would be a vain endeavor. I was assuming that his patience and helpfulness was in expectation of a tip. I imagined the gratitude of someone for whom he had retrieved some enormously valuable jewelry, and thought that, surely, this guy was working a job that was coveted for that kind of potential reward. And he had worked hard for us, and we were very grateful. But, when we offered a tip, he adamantly refused. I mean repeatedly and adamantly (to our surprise, and to the astonishment of the garage attendant, who was looking on throughout). This is my job, he said, I cannot take a tip for doing it.
My point: If you want to guarantee that there will be endemic civic corruption, give public workers, from sanitation workers to cops to judges, crappy pay, lousy working conditions and no benefits, and they will inevitably use whatever modicum of power given to them by their badge or position in a bureaucracy to shakedown the public in any way they can get away with. (And that will be a lot of ways. When you’re got an indigent public-sphere at a third-world level, the corruption won’t stop at the police, and will include the judges.) That’s the culture of baksheesh.
Now you’re not going to eliminate corruption entirely, and I’m under no illusion that all NYC employees always act like the aforementioned sanitation worker. But, if you want to minimize the corruption of public employees – especially the ubiquitous, constant holdups that plague everyday life in many places – then provide them with good, secure jobs that come with real benefits and decent pensions they can count on. See that public employees have the kinds of jobs that will not require them to live on tips and bribes, the kind of jobs they will be loath to put at risk for the odd Benjamin.
The latter are the kinds of jobs that, over thirty-five post-WWII years in this country, were fought for, won, and protected by public-sector unions just like Local 831 of the Teamsters (the Uniformed Sanitationmen's Association). These jobs were based on a worker- and union-friendly politics and ideology on the local and national levels, which at least some important sectors of the political caste and, more importantly, the mass of workers themselves, were committed to keeping strong. This is the social framework in which you don’t always have to pay someone off to look for your lost property, or get a passport. Unfortunately, for the past thirty years, that social, ideological, and political paradigm has been relentlessly attacked and deeply degraded, not least of all by workers’ ostensible political representatives. Which is, guaranteed, going to mean an increase in public corruption, from the traffic stop to the courtroom. Welcome to the third world.
Of course, under any circumstances, the propensity for public, especially police and judicial, corruption will be exacerbated when you attempt wholesale prohibitions that are impossible really to enforce and engender widespread black markets awash with huge piles of cash, making for irresistible temptations. As in my third story, of the NYPD detective I knew, who once served as a leader of a large interagency drug task force. He told me how, after they had taken down a real “kingpin” operation, he watched the faces of the cops who had been working under his command when they saw the confidential informant, who had helped them in the case, walk out of his office with a bag stuffed with $70,000 or so in cash – the CI’s cut (yes, that happens), which was (at the time) more than most of those cops were making in a year. The detective was telling me this two years after, as he was preparing to testify to a corruption inquiry against those same cops, who had decided it was time to get theirs, and had taken to jacking drugs from dealers and forcing their CI to sell the drugs for them.
What we see in civil forfeiture practices is essentially the legalization and normalization of such corruption. We see the potent combination of the defunding of the public sphere with the maintenance of an inevitably criminogenic, corrupting prohibition. We see a trafficking in banned substances that is at once demonized, and at the same time carefully maintained, through its prohibition, as a substitute funding source for public institutions. Should we be surprised? The Tennessee highway patrol is using the cocaine trade to finance their salaries and SUVs in the same way the CIA used it to finance the contras and other off-the-shelf operations.1 When you have such profitable entrepreneurial schemes, who needs taxes?
Welcome to the third world, American-style.
All across America, Wall Street is grabbing money meant for public workers
Go To Original
Go To Original
In the final months of 2011, almost two years before the city of Detroit would shock America by declaring bankruptcy in the face of what it claimed were insurmountable pension costs, the state of Rhode Island took bold action to avert what it called its own looming pension crisis. Led by its newly elected treasurer, Gina Raimondo – an ostentatiously ambitious 42-year-old Rhodes scholar and former venture capitalist – the state declared war on public pensions, ramming through an ingenious new law slashing benefits of state employees with a speed and ferocity seldom before seen by any local government.
Detroit's Debt Crisis: Everything Must Go
Called the Rhode Island Retirement Security Act of 2011, her plan would later be hailed as the most comprehensive pension reform ever implemented. The rap was so convincing at first that the overwhelmed local burghers of her little petri-dish state didn't even know how to react. "She's Yale, Harvard, Oxford – she worked on Wall Street," says Paul Doughty, the current president of the Providence firefighters union. "Nobody wanted to be the first to raise his hand and admit he didn't know what the fuck she was talking about."
Soon she was being talked about as a probable candidate for Rhode Island's 2014 gubernatorial race. By 2013, Raimondo had raised more than $2 million, a staggering sum for a still-undeclared candidate in a thimble-size state. Donors from Wall Street firms like Goldman Sachs, Bain Capital and JPMorgan Chase showered her with money, with more than $247,000 coming from New York contributors alone. A shadowy organization called EngageRI, a public-advocacy group of the 501(c)4 type whose donors were shielded from public scrutiny by the infamous Citizens United decision, spent $740,000 promoting Raimondo's ideas. Within Rhode Island, there began to be whispers that Raimondo had her sights on the presidency. Even former Obama right hand and Chicago mayor Rahm Emanuel pointed to Rhode Island as an example to be followed in curing pension woes.
What few people knew at the time was that Raimondo's "tool kit" wasn't just meant for local consumption. The dynamic young Rhodes scholar was allowing her state to be used as a test case for the rest of the country, at the behest of powerful out-of-state financiers with dreams of pushing pension reform down the throats of taxpayers and public workers from coast to coast. One of her key supporters was billionaire former Enron executive John Arnold – a dickishly ubiquitous young right-wing kingmaker with clear designs on becoming the next generation's Koch brothers, and who for years had been funding a nationwide campaign to slash benefits for public workers.
Nor did anyone know that part of Raimondo's strategy for saving money involved handing more than $1 billion – 14 percent of the state fund – to hedge funds, including a trio of well-known New York-based funds: Dan Loeb's Third Point Capital was given $66 million, Ken Garschina's Mason Capital got $64 million and $70 million went to Paul Singer's Elliott Management. The funds now stood collectively to be paid tens of millions in fees every single year by the already overburdened taxpayers of her ostensibly flat-broke state. Felicitously, Loeb, Garschina and Singer serve on the board of the Manhattan Institute, a prominent conservative think tank with a history of supporting benefit-slashing reforms. The institute named Raimondo its 2011 "Urban Innovator" of the year.
The state's workers, in other words, were being forced to subsidize their own political disenfranchisement, coughing up at least $200 million to members of a group that had supported anti-labor laws. Later, when Edward Siedle, a former SEC lawyer, asked Raimondo in a column for Forbes.com how much the state was paying in fees to these hedge funds, she first claimed she didn't know. Raimondo later told the Providence Journal she was contractually obliged to defer to hedge funds on the release of "proprietary" information, which immediately prompted a letter in protest from a series of freaked-out interest groups. Under pressure, the state later released some fee information, but the information was originally kept hidden, even from the workers themselves. "When I asked, I was basically hammered," says Marcia Reback, a former sixth-grade schoolteacher and retired Providence Teachers Union president who serves as the lone union rep on Rhode Island's nine-member State Investment Commission. "I couldn't get any information about the actual costs."
This is the third act in an improbable triple-fucking of ordinary people that Wall Street is seeking to pull off as a shocker epilogue to the crisis era. Five years ago this fall, an epidemic of fraud and thievery in the financial-services industry triggered the collapse of our economy. The resultant loss of tax revenue plunged states everywhere into spiraling fiscal crises, and local governments suffered huge losses in their retirement portfolios – remember, these public pension funds were some of the most frequently targeted suckers upon whom Wall Street dumped its fraud-riddled mortgage-backed securities in the pre-crash years.
Today, the same Wall Street crowd that caused the crash is not merely rolling in money again but aggressively counterattacking on the public-relations front. The battle increasingly centers around public funds like state and municipal pensions. This war isn't just about money. Crucially, in ways invisible to most Americans, it's also about blame. In state after state, politicians are following the Rhode Island playbook, using scare tactics and lavishly funded PR campaigns to cast teachers, firefighters and cops – not bankers – as the budget-devouring boogeymen responsible for the mounting fiscal problems of America's states and cities.
Secrets and Lies of the Bailout
Not only did these middle-class workers already lose huge chunks of retirement money to huckster financiers in the crash, and not only are they now being asked to take the long-term hit for those years of greed and speculative excess, but in many cases they're also being forced to sit by and watch helplessly as Gordon Gekko wanna-be's like Loeb or scorched-earth takeover artists like Bain Capital are put in charge of their retirement savings.
It's a scam of almost unmatchable balls and cruelty, accomplished with the aid of some singularly spineless politicians. And it hasn't happened overnight. This has been in the works for decades, and the fighting has been dirty all the way.
How Wall Street Killed Financial Reform
There's $2.6 trillion in state pension money under management in America, and there are a lot of fingers in that pie. Any attempt to make a neat Aesop narrative about what's wrong with the system would inevitably be an oversimplification. But in this hugely contentious, often overheated national controversy – which at times has pitted private-sector workers who've mostly lost their benefits already against public-sector workers who are merely about to lose them – two key angles have gone largely unreported. Namely: who got us into this mess, and who's now being paid to get us out of it.
The siege of America's public-fund money really began nearly 40 years ago, in 1974, when Congress passed the Employee Retirement Income Security Act, or ERISA. In theory, this sweeping regulatory legislation was designed to protect the retirement money of workers with pension plans. ERISA forces employers to provide information about where pension money is being invested, gives employees the right to sue for breaches of fiduciary duty, and imposes a conservative "prudent man" rule on the managers of retiree funds, dictating that they must make sensible investments and seek to minimize loss. But this landmark worker-protection law left open a major loophole: It didn't cover public pensions. Some states were balking at federal oversight, and lawmakers, naively perhaps, simply never contemplated the possibility of local governments robbing their own workers.
Politicians quickly learned to take liberties. One common tactic involved illegally borrowing cash from public retirement funds to finance other budget needs. For many state pension funds, a significant percentage of the kitty is built up by the workers themselves, who pitch in as little as one and as much as 10 percent of their income every year. The rest of the fund is made up by contributions from the taxpayer. In many states, the amount that the state has to kick in every year, the Annual Required Contribution (ARC), is mandated by state law.
Chris Tobe, a former trustee of the Kentucky Retirement Systems who blew the whistle to the SEC on public-fund improprieties in his state and wrote a book called Kentucky Fried Pensions, did a careful study of states and their ARCs. While some states pay 100 percent (or even more) of their required bills, Tobe concluded that in just the past decade, at least 14 states have regularly failed to make their Annual Required Contributions. In 2011, an industry website called 24/7 Wall St. compiled a list of the 10 brokest, most busted public pensions in America. "Eight of those 10 were on my list," says Tobe.
Among the worst of these offenders are Massachusetts (made just 27 percent of its payments), New Jersey (33 percent, with the teachers' pension getting just 10 percent of required payments) and Illinois (68 percent). In Kentucky, the state pension fund, the Kentucky Employee Retirement System (KERS), has paid less than 50 percent of its ARCs over the past 10 years, and is now basically butt-broke – the fund is 27 percent funded, which makes bankrupt Detroit, whose city pension is 77 percent full, look like the sultanate of Brunei by comparison.
Here's what this game comes down to. Politicians run for office, promising to deliver law and order, safe and clean streets, and good schools. Then they get elected, and instead of paying for the cops, garbagemen, teachers and firefighters they only just 10 minutes ago promised voters, they intercept taxpayer money allocated for those workers and blow it on other stuff. It's the governmental equivalent of stealing from your kids' college fund to buy lap dances. In Rhode Island, some cities have underfunded pensions for decades. In certain years zero required dollars were contributed to the municipal pension fund. "We'd be fine if they had made all of their contributions," says Stephen T. Day, retired president of the Providence firefighters union. "Instead, after they took all that money, they're saying we're broke. Are you fucking kidding me?"
There's an arcane but highly disturbing twist to the practice of not paying required contributions into pension funds: The states that engage in this activity may also be committing securities fraud. Why? Because if a city or state hasn't been making its required contributions, and this hasn't been made plain to the ratings agencies, then that same city or state is actually concealing what in effect are massive secret loans and is actually far more broke than it is representing to investors when it goes out into the world and borrows money by issuing bonds.
Some states have been caught in the act of doing this, but the penalties have been so meager that the practice can be considered quasi-sanctioned. For example, in August 2010, the SEC reprimanded the state of New Jersey for serially lying about its failure to make pension contributions throughout the 2000s. "New Jersey failed to provide certain present and historical financial information regarding its pension funding in bond-disclosure documents," the SEC wrote, in seemingly grave language. "The state was aware of?.?.?.?the potential effects of the underfunding." Illinois was similarly reprimanded by the SEC for lying about its failure to make its required pension contributions. But in neither of these cases were the consequences really severe. So far, states get off with no monetary fines at all. "The SEC was mistaken if they think they sent a message to other states," Tobe says.
But for all of this, state pension funds were more or less in decent shape prior to the financial crisis of 2008. The country, after all, had been in a historic bull market for most of the 1990s and 2000s and politicians who underpaid the ARCs during that time often did so assuming that the good times would never end. In fact, prior to the crash, state pension funds nationwide were cumulatively running a surplus. But then the crash came, and suddenly states everywhere were in a real, no-joke fiscal crisis. Tax revenues went in the crapper, and someone had to take the hit. But who? Cuts to corporate welfare and a rolled-up-newspaper whack of new taxes on the guilty finance sector seemed a good place to start, but it didn't work out that way. Instead, it was then that the legend of pension unsustainability was born, with the help of a pair of unlikely allies.
Most people think of Pew Charitable Trusts as a centrist, nonpartisan organization committed to sanguine policy analysis and agnostic number crunching. It's an odd reputation for an organization that was the legacy of J. Howard Pew, president of Sun Oil (the future Sunoco) during its early 20th-century petro-powerhouse days and a kind of australopithecine precursor to a Tea Party leader. Pew had all the symptoms: an obsession with the New Deal as a threat to free society, a keen appreciation for unreadable Austrian economist F.A. Hayek and a hoggish overuse of the word "freedom." Pew and his family left nearly $1 billion to a series of trusts, one of which was naturally called the "Freedom Trust," whose mission was, in part, to combat "the false promises of socialism and a planned economy."
The Great American Bubble Machine
Still, for decades Pew trusts engaged in all sorts of worthy endeavors, including everything from polling to press criticism. In 2007, Pew began publishing an annual study called "The Widening Gap," which aimed to use states' own data to show the "gap" between present pension-fund levels and future obligations. The study quickly became a leading analysis of the "unfunded liability" question.
In 2011, Pew began to align itself with a figure who was decidedly neither centrist nor nonpartisan: 39-year-old John Arnold, whom CNN/Money described (erroneously) as the "second-youngest self-made billionaire in America," after Mark Zuckerberg. Though similar in wealth and youth, Arnold presented the stylistic opposite of Zuckerberg's signature nerd chic: He's a lipless, eager little jerk with the jug-eared face of a Division III women's basketball coach, exactly what you'd expect a former Enron commodities trader to look like. Anyone who has seen the Oscar-winning documentary The Smartest Guys in the Room and remembers those tapes of Enron traders cackling about rigging energy prices on "Grandma Millie" and jamming electricity rates "right up her ass for fucking $250 a megawatt hour" will have a sense of exactly what Arnold's work environment was like.
The People vs. Goldman Sachs
In fact, in the book that the movie was based on, the authors portray Arnold bragging about his minions manipulating energy prices, praising them for "learning how to use the Enron bat to push around the market." Those comments later earned Arnold visits from federal investigators, who let him get away with claiming he didn't mean what he said.
As Enron was imploding, Arnold played a footnote role, helping himself to an $8 million bonus while the company's pension fund was vaporizing. He and other executives were later rebuked by a bankruptcy judge for looting their own company along with other executives. Public pension funds nationwide, reportedly, lost more than $1.5 billion thanks to their investments in Enron.
In 2002, Arnold started a hedge fund and over the course of the next few years made roughly a $3 billion fortune as the world's most successful natural-gas trader. But after suffering losses in 2010, Arnold bowed out of hedge-funding to pursue "other interests." He had created the Arnold Foundation, an organization dedicated, among other things, to reforming the pension system, hiring a Republican lobbyist and former chief of staff to Dick Armey named Denis Calabrese, as well as Dan Liljenquist, a Utah state senator and future Tea Party challenger to Orrin Hatch.
Soon enough, the Arnold Foundation released a curious study on pensions. On the one hand, it admitted that many states had been undercontributing to their pension funds for years. But instead of proposing that states correct the practice, the report concluded that "the way to create a sound, sustainable and fair retirement-savings program is to stop promising a [defined] benefit."
In 2011, Arnold and Pew found each other. As detailed in a new study by progressive think tank Institute for America's Future, Arnold and Pew struck up a relationship – and both have since been proselytizing pension reform all over America, including California, Florida, Kansas, Arizona, Kentucky and Montana. Few knew that Pew had a relationship with a right-wing, anti-pension zealot like Arnold. "The centrist reputation of Pew was a key in selling a lot of these ideas," says Jordan Marks of the National Public Pension Coalition. Later, a Pew report claimed that the national "gap" between pension assets and future liabilities added up to some $757 billion and dryly insisted the shortfall was unbridgeable, minus some combination of "higher contributions from taxpayers and employees, deep benefit cuts and, in some cases, changes in how retirement plans are structured and benefits are distributed."
What the study didn't say was that this supposedly massive gap could all be chalked up to the financial crisis, which, of course, had been caused almost entirely by the greed and wide-scale fraud of the financial-services industry – particularly with regard to state pension funds.
A study by noted economist Dean Baker at the Center for Economic Policy and Research bore this out. In February 2011, Baker reported that, had public pension funds not been invested in the stock market and exposed to mortgage-backed securities, there would be no shortfall at all. He said state pension managers were of course somewhat to blame, but only "insofar as they exercised poor judgment in buying the [finance] industry's services."
In fact, Baker said, had public funds during the crash years simply earned modest returns equal to 30-year Treasury bonds, then public-pension assets would be $850 billion richer than they were two years after the crash. Baker reported that states were short an additional $80 billion over the same period thanks to the fact that post-crash, cash-strapped states had been paying out that much less of their mandatory ARC payments.
So even if Pew's numbers were right, the "unfunded liability" crisis had nothing to do with the systemic unsustainability of public pensions. Thanks to a deadly combination of unscrupulous states illegally borrowing from their pensioners, and unscrupulous banks whose mass sales of fraudulent toxic subprime products crashed the market, these funds were out some $930 billion. Yet the public was being told that the problem was state workers' benefits were simply too expensive.
In a way, this was a repeat of a shell game with retirement finance that had been going on at the federal level since the Reagan years. The supposed impending collapse of Social Security, which actually should be running a surplus of trillions of dollars, is now repeated as a simple truth. But Social Security wouldn't be "collapsing" at all had not three decades of presidents continually burgled the cash in the Social Security trust fund to pay for tax cuts, wars and God knows what else. Same with the alleged insolvencies of state pension programs. The money may not be there, but that's not because the program is unsustainable: It's because bankers and politicians stole the money.
Still, the public mostly bought the line being sold by Arnold, Pew and other anti-pension figures like the Koch brothers. To most, it didn't matter who was to blame: What mattered is that the money was gone, and there seemed to be only two possible paths forward. One led to bankruptcy, a real-enough threat that had already ravaged places like Vallejo, California; Jefferson County, Alabama; and, this summer, Detroit. In Rhode Island, the tiny town of Central Falls went bust in 2011, and even after a court-ordered plan lifted the town out of bankruptcy in 2012, the "rescue" left pensions slashed as much as 55 percent. "You had guys who were living off $24,000, and now they're getting $12,000," says Day. Though Day and his fellow retirees are still fighting reform, he says other union workers might rather settle than file bankruptcy. Holding up an infamous local-newspaper picture of a retired Central Falls policeman in a praying posture, as though begging not to have his whole pension taken away, Day sighs. "Guys take one look at this picture and that's it. They're terrified."
Such images chilled many public workers into accepting the second path – the kind of pension reform meagerly touted by one-percent-friendly politicians like Gina Raimondo. Anyone could see that "reform" meant giving up cash. But the other parts of these schemes were murkier. Most pension-reform proposals required that states must go after higher returns by seeking out "alternative investments," which sounds harmless enough. But we are now finding out what that term actually means – and it's a little north of harmless.
Looting Main Street: How the Nation's Biggest Banks Are Ripping Us Off
One of the most garish early experiments in "alternative investments" came in Ohio in the late 1990s, after the Republican-controlled state assembly passed a law loosening restrictions on what kinds of things state funds could invest in. Sometime later, an investigation by the Toledo Blade revealed that the Ohio Bureau of Workers' Compensation had bought into rare-coin funds run by a GOP fundraiser named Thomas Noe. Through Noe, Ohio put $50 million into coins and "other collectibles" – including Beanie Babies.
The scandal had repercussions all over the country, but not what you'd expect. James Drew, one of the reporters who broke the story, notes that a consequence of "Coingate" was that states stopped giving out information about where public money is invested. "If they learned anything, it's not to stop doing it, but to keep it secret," says Drew.
Invasion of the Home Snatchers
In fact, in recent years more than a dozen states have carved out exemptions for hedge funds to traditional Freedom of Information Act requests, making it impossible in some cases, if not illegal, for workers to find out where their own money has been invested.
The way this works, typically, is simple: A hedge fund will refuse to take a state's business unless it first provides legal guarantees that information about its investments won't be disclosed to the public. The ostensible justifications for these outrageous laws are usually that disclosing commercial information about hedge funds would place them at a "competitive disadvantage."
In 2010, the University of California reinvested its pension fund with a venture-capital group called Sequoia Capital, which in turn is a backer of a firm called Think Finance, whose business is payday lending – a form of short-term, extremely high-interest rate lending that's basically loan-sharking without the leg-breaking, and is banned in 15 states and D.C. According to American Banker, Think Finance partnered with a Native American tribe to get around state interest-rate caps; someone borrowing $250 in its "plain green loans" program would owe $440 after 16 weeks, for a tidy annual percentage rate of 379 percent. In a more recent case, the pension fund of L.A. County union workers invested in an Embassy Suites hotel that is trying to prevent janitors and other employees from organizing. California passed a law in 2005 making hedge-fund investments secret.
The American Federation of Teachers this spring released a list of financiers who had been connected with lobbying efforts against defined-benefit plans. Included on that list was hedge-funder Loeb of Third Point Capital, who sits on the board of StudentsFirstNY, a group that advocates for an end to these traditional plans for public workers – that is, pensions that promise a guaranteed payout based on one's salary and years of service. When Rhode Island union rep Reback complained about hiring funds whose managers had anti-labor histories, she was told the state couldn't make decisions based on political leanings of fund managers. That same month, Rhode Island moved to disinvest its workers' money from firearms distributors in the wake of the Sandy Hook shooting.
Hedge funds have good reason to want to keep their fees hidden: They're insanely expensive. The typical fee structure for private hedge-fund management is a formula called "two and twenty," meaning the hedge fund collects a two percent fee just for showing up, then gets 20 percent of any profits it earns with your money. Some hedge funds also charge a mysterious third fee, called "fund expenses," that can run as high as half a percent – Loeb's Third Point, for instance, charged Rhode Island just more than half a percent for "fund expenses" last year, or about $350,000. Hedge funds will also pass on their trading costs to their clients, a huge additional line item that can come to an extra percent or more and is seldom disclosed. There are even fees states pay for withdrawing from certain hedge funds.
In public finance, hedge funds will sometimes give slight discounts, but the numbers are still enormous. In Rhode Island, over the course of 20 years, Siedle projects that the state will pay $2.1 billion in fees to hedge funds, private-equity funds and venture-capital funds. Why is that number interesting? Because it very nearly matches the savings the state will be taking from workers by freezing their Cost of Living Adjustments – $2.3 billion over 20 years.
"That's some 'reform,'" says Siedle.
"They pretty much took the COLA and gave it to a bunch of billionaires," hisses Day, Providence's retired firefighter union chief.
When asked to respond to criticisms that the savings from COLA freezes could be seen as going directly into the pockets of billionaires, treasurer Raimondo replied that it was "very dangerous to look at fees in a vacuum" and that it's worth paying more for a safer and more diverse portfolio. She compared hedge funds – inherently high-risk investments whose prospectuses typically contain front-page disclaimers saying things like, WARNING: YOU MAY LOSE EVERYTHING – to snow tires. "Sure, you pay a little more," she says. "But you're really happy you have them when the roads are slick."
Raimondo recently criticized the high-fee structure of hedge funds in the Wall Street Journal and told Rolling Stone that "'two and twenty'?doesn't make sense anymore," although she hired several funds at precisely those fee levels back before she faced public criticism on the issue. She did add that she was monitoring the funds' performance. "If they underperform, they're out," she says.
And underperforming is likely. Even though hedge funds can and sometimes do post incredible numbers in the short-term – Loeb's Third Point notched a 41 percent gain for Rhode Island in 2010; the following year, it earned -0.54 percent. On Wall Street, people are beginning to clue in to the fact – spikes notwithstanding – that over time, hedge funds basically suck. In 2008, Warren Buffett famously placed a million-dollar bet with the heads of a New York hedge fund called Protégé Partners that the S&P 500 index fund – a neutral bet on the entire stock market, in other words – would outperform a portfolio of five hedge funds hand-picked by the geniuses at Protégé.
Five years later, Buffett's zero-effort, pin-the-tail-on-the-stock-market portfolio is up 8.69 percent total. Protégé's numbers are comical in comparison; all those superminds came up with a 0.13 percent increase over five long years, meaning Buffett is beating the hedgies by nearly nine points without lifting a finger.
Union leaders all over the country have started to figure out the perils of hiring a bunch of overpriced Wall Street wizards to manage the public's money. Among other things, investing with hedge funds is infinitely more expensive than investing with simple index funds. On Wall Street and in the investment world, the management price is measured in something called basis points, a basis point equaling one hundredth of one percent. So a state like Rhode Island, which is paying a two percent fee to hedge funds, is said to be paying an upfront fee of 200 basis points.
How much does it cost to invest public money in a simple index fund? "We've paid as little as .875 of a basis point," says William Atwood, executive director of the Illinois State Board of Investment. "At most, five basis points."
So at the low end, Atwood is paying 200 times less than the standard two percent hedge-fund fee. As an example, Atwood says, the state of Illinois paid a fee of just $57,000 last year on $550 million of public money they put into an S&P 500 index fund, which, again, is exactly the sort of plain-vanilla investment that Warren Buffett used to publicly kick the ass of Wall Street's cockiest hedge fund.
The fees aren't even the only costs of "alternative investments." Many states have engaged middlemen called "placement agents" to hire hedge funds, and those placement agents – typically people with ties to state investment boards – are themselves paid enormous sums, often in the millions, just to "introduce" hedge funds to politicians holding the checkbook.
Bank of America: Too Crooked to Fail
In Kentucky, Tobe and Siedle found that KRS, the state pension funds, had paid a whopping $14 million to placement agents between 2004 and 2009. In Atlanta, a member of the city pension board complained to the SEC that the city had hired a consultant, Larry Gray, who convinced the city pension fund to invest $28 million in a hedge fund he himself owned. Raimondo says she never hired placement agents, but the state did pay a $450,000 consulting fee to a firm called Cliffwater LLC.
Doughty says the endless system of highly paid middlemen reminds him of old slapstick comedies. "It's like the Three Stooges," he says. "When you ask them what happened, they're all pointing in different directions, like, 'He did it!'"
How Wall Street Is Using the Bailout to Stage a Revolution
Even worse, placement agents are also often paid by the alternative investors. In California, the Apollo private-equity firm paid a former CalPERS board member named Alfred Villalobos a staggering $48 million for help in securing investments from state pensions, and Villalobos delivered, helping Apollo receive $3 billion of CalPERS money. Villalobos got indicted in that affair, but only because he'd lied to Apollo about disclosing his fees to CalPERS. Otherwise, despite the fact that this is in every way basically a crude kickback scheme, there's no law at all against a placement agent taking money from a finance firm. The Government Accountability Office has condemned the practice, but it goes on.
"It's a huge conflict of interest," says Siedle.
So when you invest your pension money in hedge funds, you might be paying a hundred times the cost or more, you might be underperforming the market, you may be supporting political movements against you, and you often have to pay what effectively is a bribe just for the privilege of hiring your crappy overpaid money manager in the first place. What's not to like about that? Who could complain?
Once upon a time, local corruption was easy. "It was votes for jobs," Doughty says with a sigh. A ward would turn out for a councilman, the councilman would come back with jobs from city-budget contracts – that was the deal. What's going on with public pensions is a more confusing modern version of that local graft. With public budgets carefully scrutinized by everyone from the press to regulators, the black box of pension funds makes it the only public treasure left that's easy to steal. Politicians quietly borrow millions from these funds by not paying their ARCs, and it's that money, plus the savings from cuts made to worker benefits in the name of "emergency" pension reform, that pays for an apparently endless regime of corporate tax breaks and handouts.
A notorious example in Rhode Island is, of course, 38 Studios, the doomed video-game venture of blabbering, Christ-humping ex-Red Sox pitcher Curt Schilling, who received a $75 million loan guarantee from the state at a time when local politicians were pleading poverty. "This whole thing isn't just about cutting payments to retirees," says syndicated columnist David Sirota, who authored the Institute for America's Future study on Arnold and Pew. "It's about preserving money for corporate welfare." Their study estimates states spend up to $120 billion a year on offshore tax loopholes and gifts to dingbats like Schilling and other subsidies – more than two and a half times as much as the $46 billion a year Pew says states are short on pension payments.
The bottom line is that the "unfunded liability" crisis is, if not exactly fictional, certainly exaggerated to an outrageous degree. Yes, we live in a new economy and, yes, it may be time to have a discussion about whether certain kinds of public employees should be receiving sizable benefit checks until death. But the idea that these benefit packages are causing the fiscal crises in our states is almost entirely a fabrication crafted by the very people who actually caused the problem. It's like Voltaire's maxim about noses having evolved to fit spectacles, so therefore we wear spectacles. In this case, we have an unfunded-pension-liability problem because we've been ripping retirees off for decades – but the solution being offered is to rip them off even more.
Everybody following this story should remember what went on in the immediate aftermath of the crash of 2008, when the federal government was so worried about the sanctity of private contracts that it doled out $182 billion in public money to AIG. That bailout guaranteed that firms like Goldman Sachs and Deutsche Bank could be paid off on their bets against a subprime market they themselves helped overheat, and that AIG executives could be paid the huge bonuses they naturally deserved for having run one of the world's largest corporations into the ground. When asked why the state was paying those bonuses, Obama economic adviser Larry Summers said, "We are a country of law.?.?.?.?The government cannot just abrogate contracts."
Is the SEC Covering Up Wall Street Crimes?
Now, though, states all over the country are claiming they not only need to abrogate legally binding contracts with state workers but also should seize retirement money from widows to finance years of illegal loans, giant fees to billionaires like Dan Loeb and billions in tax breaks to the Curt Schillings of the world. It ain't right. If someone has to tighten a belt or two, let's start there. If we've still got a problem after squaring those assholes away, that's something that can be discussed. But asking cops, firefighters and teachers to take the first hit for a crisis caused by reckless pols and thieves on Wall Street is low, even by American standards.