Two books, one from either side of the Atlantic, tell the sorry tale of what happens when governments are in thrall to finance capital…
The Great Pensions Robbery: How New Labour Betrayed Retirement, by Alex Brummer, paperback, 226 pages, ISBN 978-1-847-94037-7, Random House Business Books, 2010, £12.99.
|Pensioners: ripped off while the banks were bailed out.|
Alex Brummer, City editor of the Daily Mail, has written a superb account of the pensions crisis and its causes. Before 1997 Britain’s pension funds were solvent, with strong cash flows. £830 billion was invested in private pensions to meet future pension payments, more than the rest of the EU put together. We had the best occupational pension system in Europe. 90 per cent of private occupational pensions were final salary (defined benefit).
What caused the current pensions crisis? In 1997 the Labour government decided to remove the tax credit on dividends received by pension funds, which had allowed the funds to receive dividend payments tax-free. This was worth £5-6 billion a year. A fund receiving an £80 dividend, for example, could receive £20 of tax relief, which could then be reinvested in the fund to build up endowment for the future.
The Treasury and independent actuaries warned this decision would push pension schemes into deficit, close down many occupational pension funds, and cut pensions. Brown ignored these warnings.
We now have a broken system of private provision and a state pension that is among the worst in Europe, supported by humiliating and complex means-testing. Labour opposed restoring the earnings link for the state pension. Two million pensioners are trapped in poverty.
By 2002, Britain’s pension funds were paying pensioners on average 28 per cent less than in 1997 and final salary pension plans were nearly dead: two-thirds had been closed to new members. Most firms that cancelled these plans moved future retirees into money purchase schemes, shifting the risk from employers and shareholders to employees.
In doing this Labour obeyed European Union diktats. The European Central Bank in April 2003 demanded “reductions in public pensions” and “measures to raise the effective retirement age”.
The value of assets in life assurance and pension funds fell from 176 per cent of GDP in 1999 to 128 per cent in 2008. In January 2009 the Office of National Statistics calculated that the deficit in defined pension schemes – the heart of Britain’s occupational pension system – was £194.5 billion.
The government also refused to bail out Equitable Life’s one million plus pensioners, who include Tesco and Post Office workers who lost out due to the government’s regulatory failure and maladministration, although later it bailed out depositors with RBS and Icesave.
The government bailed out the banks, but ripped off all our pensioners.
Too Big to Fail: Inside the Battle to Save Wall Street, by Andrew Sorkin, paperback, 600 pages, ISBN 978-1-846-14238-3, Allen Lane, 2009, £14.99.
Andrew Sorkin is the chief mergers and acquisitions reporter for The New York Times. As he himself writes, the book is “a chronicle of failure”, capitalism’s failure. He gives a detailed account of events from 17 March 2008, when JP Morgan took over Bear Stearns, one of Wall Street’s big five.
Sandy Weill, the architect of Citigroup, said in 2007, “The whole world is moving to the American model of free enterprise and capital markets.” They promised a new world of risk-free investment. Wall Street firms had a debt/capital ratio of 32/1. Also in 2007, the Securities and Exchange Commission dropped its 1938 rule preventing investors continually shorting a falling stock. Lax regulation met greedy bankers.
In 1999 Ben Bernanke (now chairman of the Federal Reserve) said the dotcom bubble was not a big concern, unless and until it fed inflation. Similarly, the Fed ignored the growing housing bubble.
Bush’s Treasury secretary Henry Paulson, a devout Christian Scientist and huge fundraiser for Bush, asked a possible new recruit to the Treasury, “Are you a Republican?” Sorkin writes, “As luck would have it, he was.”
Monsters, not masters
At a Goldman Sachs board meeting in June 2008, held to discuss a possible merger with AIG, nobody noted that AIG had overvalued its securities, even though they knew about it. Best and brightest? They may think so. They are the monsters, not the masters, of the universe.
As the crisis began, the head of one private-equity giant whinged, “Everybody is just pursuing his self-interest.” When Wall Street’s top nine CEOs met the Treasury team, on 13 October 2008, to agree the bail-out, the first question was, “Why am I in this room, talking about bailing you out?”
The second, and last, question was, “What kind of protections can you give us on changes in compensation policy?” A Treasury man replied, “We are going to be producing some rules so that the administration will not unilaterally change its view.” As soon as they heard that their unlimited bonuses were safe, courtesy of the taxpayer, the CEOs signed.
Workers outside held signs saying, “Jail not bail” and “Crook”. The $1.1 trillion bail-out was by Wall Street, for Wall Street. As Jamie Dimon, CEO of JP Morgan, asked, “Why would you try to bail out people whose sole job it is to make money?” Wall Street served and saved only itself, not its clients, not its borrowers, not the economy, not the American people.
Sorkin warns that “vulture investors” are looking forward to the collapse of commercial real estate. There have been no real changes to Wall Street, so “when the next, inevitable bubble bursts, the cycle will only repeat itself.”