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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
- 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.
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?
You can't? You
don't know what the Wall Street Hoover is?
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.
How does it work?
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.
Where does the
hogwash come from?
From the White
House. And other places. Like Armonk, and Wall Street, too.
excerpt from “Great
American Hoover,” Washington Times, Nov 23, 1997).
Producers to Gamblers
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.
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
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.
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%.
(as of 3Q01), the households’ share of the U.S. equities is only 40%,
while the institutions control 47% of U.S. equities market.
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.
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.
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.”
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.
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.
Happy bargain hunting!
For additional Annex Research reports, check out...
casino comment (June 21, 2002)
of Stock Market Reaction to WTC (Sep 26, 2001)
Research’s Analysis of UN Report on Global Investments ...
Street Casino Revisited (June 21, 2002)
St.'s Conquest of America"
Will Wall Street's Bubble Burst?" (WT column, 8/23/98)
Street Boom, Main Street Doom
Volume XVIII, No. 2002-22
Editor: Bob Djurdjevic
P.O. Box 97100, Phoenix, Arizona
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