Greed Bites Back (Dec 2, 2002)

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TiM GW Bulletin 2002/12-1

Dec 2, 2002

From Boom to Bust: Gambling with Employee Pensions Funds Backfires

Greed Bites Back

New Jersey to Sue Four Companies over Its Pension Fund Losses; “From a Nation of Producers to a Nation of Gamblers” - Part II

PHOENIX, Nov 29 - New Jersey Gov. James E. McGreevey, Attorney General David Samson and State Treasurer John McCormac announced at a news conference on Monday (Nov 25) that they would bring a lawsuit against four public companies that the NJ officials claimed were responsible for more than $150 million in state pension system losses.

The four targeted defendants are Qwest Communications Inc., Electronic Data Systems Corp., Sears Roebuck & Co. and Tyco International Ltd. The state will "seek to recoup enormous losses that allegedly resulted from misconduct by the defendants and certain of their corporate officers," the officials said in a prepared statement.

New Jersey's pension fund has lost $20 billion over the past three years, and more than $6 billion in the last quarter. Steven Kornrumpf, the state's top pension official, resigned Nov. 15. Kornrumpf was director of the Division of Investment, which manages the state's investment portfolio and pension fund.

In the case against EDS, New Jersey will file papers seeking to be named lead plaintiff in two actions against the company pending in federal courts in New York and Texas. The action alleges that the EDS’ earnings shortfall may have resulted from revenue recognition practices in violation of generally accepted accounting practices (also see “Wall Street Legal Vultures Descend upon EDS,” Sep. 27, 2002).

That’s the news (for more details, see Dow Jones Newswire, Nov 25, 2002). And now our commentary followed by the news behind the news…

New Jersey’s legal action is preposterous. It is equivalent of a sore loser at an Atlantic City or a Las Vegas casino suing the establishment for his losses. Since Atlantic City is in NJ, maybe some sore losers should give this state’s officials a taste of their own medicine?

For, he who gambles should be prepared to lose. New Jersey had no business betting its employees’ pension funds on the stockmarket. The enormous losses that ensued are a good example of what happens when Greed is allowed to overwhelm Prudence. And when the Wall Street Hoover goes to work on Main Street (see “Great American Hoover,” Washington Times, Nov 23, 1997).

Nor is New Jersey unique. Many private pension funds are in the red, too. Only one in five corporate pension plans will have enough funds to fully cover their liabilities next year, according to a Nov. 28 Reuters news story. U.S. companies will have to pump billions of dollars into pension funds weakened by the stockmarket declines, the story concludes.

Federal law requires companies to protect the solvency of their pensions plans. But what if the company goes bust? One should only check with the Enron, WorldCom or Arthur Andersen employees to see how frail such federal “protection” can be. And how ominously timely our 1997 warning had been:

Can't you hear that great sucking sound of the Wall Street Hoover which was revved up in the aftermath of the crash of Oct. 27, 1997?

It's a giant vacuum cleaner. Its one end is attached to Wall Street institutions' bank accounts; the other to Main Street's mattresses, piggy banks, retirement accounts and mutual funds. The Hoover's function is to methodically vacuum out the latter suckers' savings.

Just as the combustion engine runs on a mixture of gasoline and oxygen, the Wall Street Hoover runs on a mixture of hogwash and Main Street's greed.

What happened with the New Jersey and other state and corporate pension plans is only a symptom of a much larger malaise that has afflicted this nation. The U.S. has gone “From a Nation of Producers, to a Nation of Gamblers”, as we noted in that June 23, 1999 report.

Back in 1950, for example, state and federal pension funds weren’t even allowed to play the stockmarket. And private pension funds accounted for only $1.1 billion, or 1% of the total U.S. equities.

As of the latest data available at the New York Stock Exchange (3Q01), pension funds accounted for $2.7 trillion, or 20% of the total U.S. equities (12% private; 8% government - see the table and the charts). And those amounts are DOWN from 1997, when the pension funds’ share of U.S. equities peaked at 24%.

So if the New Jersey officials are looking for someone to blame for their stockmarket losses, they should start with themselves and their predecessors. Employees’ retirement funds are not something that responsible custodians should have entrusted the Wall Street vultures. As everybody knows, and many have experienced lately on their own skin, there are no guarantees on Wall Street; only promises of a brighter future. Maybe.

The current gullibility of the American public and many corporations can also be illustrated by comparing the U.S. equities to the GDP. Back in 1950, Main Street wagged Wall Street’s tail, so to speak, at least in terms of total market investments. Households accounted for 90% of the total U.S. equities; Wall Street institutions for only 7%.

Now (as of 3Q01), the households’ share of the U.S. equities is only 40%, while the institutions control 47% of U.S. equities market.

Even more significant, however, has been the trend toward gambling when expressed in terms of GDP share. Back in 1950, the institutions’ share of the GDP was only 4%. The U.S. households’ stockmarket investments, on the other hand, accounted for over 44% - for a total of 49% of GDP.

At its peak in late 1999, on the other hand, equity investments accounted for 2.1 times the U.S. GDP! And even at the end of the third quarter 2001, after the market contraction caused by the 9/11 events, the equities still represented 1.35 times the U.S. GDP.

“He who plays by fire gets burned by fire,” goes an old saw. The corporations, states and individuals that risked their hard-earned money during the 1990s, driven by greed and a booming stockmarket, got burned. They suffered the misfortune of most gamblers who play against the “house.” They lost.

Are we supposed to feel sorry for them? Not this writer. Not when they had been “forewarned - forearmed,” as another saying goes. Ever since the Asian financial crisis in October 1997, we have been sending numerous signals to those willing to heed a voice of Prudence and discard the temptation of Greed. We said the stockmarket was over-inflated and that the bubble would burst, sooner or later (see the links at the end of this report). And now it has.

This is why the lawsuits being filed by the state of New Jersey are Don Quixotic actions of pathetic helplessness in the face of pathetic haplessness by the same officials. The people of New Jersey, especially the state employees, have good reasons to turn these legal actions around. They may wish to charge their own government officials with reckless irresponsibility in handling the state’s assets and funds. And perhaps vote in a law banning the use of pension funds in Wall Street casino. Many other states may follow.

“That’ll be the day,” we can just hear the skeptics snickering. Perhaps. For, “where ignorance is bliss, ‘tis folly to be wise,” as Thomas Gray noted.