The Lawsuit That Could Legalize Pay-To-Play For Pension Funds

Lambert here: The horror that is Citizens United continues to reverberate. This ties into Yves’ investigations of the opaque world of private equity, too; CalPERS, the California pension fund, has substantial private equity holdings. Far be it from me to say that CalPERS is corrupt, even if their CEO, Federico Buenrostro, did plead just guilty to bribery conspiracy for, you guessed it, placement (see below). Too bad Freddy didn’t exercise a little more self-control; if only he had waited, and if the bad guys win their case on the grounds that money is free speech, what would have been a bribe would turn into an exercise of First Amendment rights, and he could grab as many cookies out of the jar as he’d like. It’s a funny old world, as Maggie Thatcher used to say.

Yves here. I am uncharacteristically adding to a Lambert intro. I had wanted to write a short post on this issue. I think the plot may be stealthier than it appears on the surface.

Recall that there is a long-term campaign by conservatives and much of Wall Street to get government out of the pension/social safety net for the aged business. The most visible element is the long-standing effort to privatize Social Security. But public pensions have also been under attack. Even though financial firms make very nice living off their backs, the fees retail pays as a percent of invested assets is higher on smaller accounts.

So how does the pay-to-play litigation factor in? As David Sirota has been dutifully chronicling, first at Pando, now at International Business Times, there are lots of suspect, and in some cases, obviously corrupt, dealings between elected officials (who sometimes are also public pension fund trustees) and these retirement funds. As Lambert points out, we’ve written about one spectacular example at CalPERS, that of over $50 million of placement agent fees paid in connection with fundraising for a handful of private equity firms, that led to the indictment of and guilty plea from CalPERS’ former CEO. The criminal case against the placement agent is underway.

What do you think happens if this suit prevails? In a very short time, the political graft will be off the charts.

And what happens next? Vastly louder calls, with far more facts on their side, demanding that public pension funds be disbanded as political pork machines.

Nicely played.

By Ted Ballantine, Pension360.

Here’s a scenario to chew on: An investment firm makes a campaign contribution to a city mayor. Later, the mayor appoints members to the city’s pension board. The pension board decides to hire the aforementioned investment firm to handle the pension fund’s investments.

Does something seem fishy about that situation?

The SEC says yes, and they have rules in place to prevent those “pay-to-play” scenarios.

But a recent lawsuit says no: investment managers should be able to donate money to whichever politicians they choose, even if those donations could present a conflict of interest down the line. The lawsuit, filed last week by Republican committees from New York and Tennessee against the SEC, wants the court to affirm that political donations are free speech—and, by extension, current SEC pay-to-play rules are unconstitutional.

Under the SEC’s current rules (summary of pay-to-play regulation), investment advisors can’t make donations to politicians that have any influence—direct or indirect—over the hiring of investment firms. In many states, it’s the job of the governor or mayor to appoint members to the state or city’s pension board—the entity that controls pension funds’ investment decisions.

The lawsuit claims that it’s not fair to make investment firm employees choose between their career and their First Amendment rights.

But does the lawsuit have a shot? If past court decisions are any indication, it certainly has a fighting chance. David Frum writes:

It’s a good guess that the federal courts will listen sympathetically to the challenge to the SEC rule. The Supreme Court has made clear that campaign contributions are protected free speech, both for individuals and for corporations. While protecting against corruption remains a valid basis for restricting contributions, the Court has defined corruption narrowly: In the words of the majority opinion in McCutcheon v. FEC, the most recent major campaign-finance case, corruption is “an effort to control the exercise of an officeholder’s official duties.” And as Justice John Roberts wrote in FEC v. Wisconsin Right to Life, the courts “must err on the side of protecting political speech rather than suppressing it.” It seems very conceivable that the courts will find the SEC rule overly broad.

The SEC didn’t put these rules in place for no reason.

Over the course of a few years in the mid-2000’s, then-New York State Comptroller Alan Hevesi accepted over $1 million in campaign donations and gifts from investment firm Markstone Capital. Hevesi, who at the time was the sole trustee of the New York State Common Retirement Fund, subsequently decided that the Fund should make a $250 million investment with Markstone. Hevesi eventually pled guilty to corruption charges and served a little less than two years in prison. He is banned from holding public office again. The case was the catalyst for the pay-to-play rules the SEC currently has in place.

But Frum, in a piece written for the Atlantic today, wonders aloud whether the SEC rule targets the right people. Frum writes:

It’s a valid question whether the SEC rule is actually achieving anything.

The people with the most sway over state pension-funds decisions are not always—nor even often—elected officials. And those who exert the most effective influence over them are not always—nor even often—campaign contributors.

Frum points that it’s often placement agents who are helping to pull strings from behind the scenes. That’s been the case in California, Dallas, New Mexico and Kentucky, and those are just the high-profile ones.

From Frum:

In our belief that it’s politicians who are always and everywhere to blame for everything that goes wrong in a political system, we consign to the financial pages the abundant evidence that the most fundamental vulnerability of state pension plans to corrupt influence is located less in politicians’ need for campaign funds, and much more in the weak governance of state pension plans themselves.

As the New York Republicans’ case against the SEC winds its way through the courts, and if it begins to succeed, you’ll hear a lot of agitated discussion about what this all means for campaign finance, for Chris Christie, and for American elections. But the most important trouble—and the most disturbing practices—are located quite elsewhere. It will be worth keeping that in mind.

That doesn’t necessarily mean, however, that the SEC rule should be repealed and the floodgates opened. It just means that the stuff happening behind closed doors—the opaque world of placement agents—is what we should be worried about, too. By Ted Ballantine, Pension360

The folks with more than $10,000 in the market, have spoken. Read….. Small Investors Just Proved Why Fed’s ‘Wealth Effect’ Is Bogus

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. ptup

    Since the linked essay’s comment section is closed, I’ll ask this here: Could someone link for me a source when and where the “FED” announced that they wanted to inflate stock prices with ZIRP. I mean, actually coming out and saying it. I know that was obviously the result, but, for the life of me, I can’t remember either chairperson saying that. I always thought the intent was to save the banking system by floating inflated home values first, and whatever came along with it, well, fine, whatever.

    1. JeffC

      My memory has it coming from Chairman Bernanke himself in December 2012, but I’m not able to quickly find a link.

  2. scraping_by

    The word I’ve often heard for pay-to-play in the business/financial/lobbying world is a “relationship.” If an elected official takes your money, you have a ‘relationship’ with them.

    If someone finally strikes down the money-is-speech lie, there will be another battle over freedom of association? A sobering thought, but the black letter of the law allows for all sorts of fantasies.

  3. Don Levit

    The article talks about private corruption in state pension plans.
    Do not we also have public corruption in public pension plans, i. e. Social Security and Medicare?
    Their trust funds are merely accounting mechanisms, with no hard reserves that can be liquidated from pre-funding.
    If the same mechanism held in state pensions, every dollar of their trust funds taken out to pay benefits would increase the state deficits.
    Tat is not happening now.
    Is that what you want?
    Don Levit

    1. lyman alpha blob

      Lets’ see:

      Bad grammar and poor spelling – check.

      Changing the subject to set up a straw man argument and bash social security – check.

      Shows no understanding of how social security actually works – check.

      Sounds like we have a commenter on the conservative payroll trying to confuse people!

      I’d suggest yahoo or one of the other lowest-common-denominator-type sites – you aren’t going to fool many people here.

      1. Don Levit

        Let’s see:
        Yves mentioned Social Security in the article, so that is my reference.
        Talk about a straw man argument.
        You have shown us the ultimate by not addressing my statements, and attacking me personally.
        Leave me out of it.
        let’s get to the truth.
        That is more relevant.
        Don Levit

  4. Lambert Strether Post author

    Yes, if the checks keep coming in the mail, who cares about corruption in placement?

    Well, if there’s enough corruption, the pension fund is going to end up losing money, and that places the size of the checks at risk.

    And a more sophisticated view: The fund are being corrupted to discredit them politically and then privatize them, a classic neo-liberal ploy. And that could mean the whole program goes belly up, so no checks at all.

    It’s only your pensions, guys! (Assuming, yes, that you have them.)

  5. cnchal

    Outrage fatigue? There is so much corruption everywhere you look, it’s at the point that if you don’t join, you lose.

    When pension funds for bureaucrats go to the corrupt sharks (PE), don’t they know they will get eaten? That’s what finance fuckers do. They don’t create any wealth themselves, so how else can they eat?

    Who is David Frum? Among other things, he is the genius speechwriter behind George W Bush’s “axis of evil” speeches, and that Chris Christie is mentioned by him in the context of campaign finance is a bad omen, even though his message regarding where the corruption is in State pensions, is true.

    Small Investors Just Proved Why Fed’s ‘Wealth Effect’ Is Bogus

    Here is the definition of the “wealth effect”, from the article:

    The Fed claimed that by inflating asset prices, it would make Americans feel wealthier, and thus induce them to spend more money, which would crank up the Main Street economy and solve all problems. OK, sales of luxury goods, expensive cars, corporate jets, yachts, and the like responded very well. Sales of other goods not so much.

    Calling something the “wealth effect” when it is trickle down, or crumbs falling off the plutocrat’s table is even more bogus.

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