The collapse of MF Global, the brokerage dealer headed by former New Jersey Governor and Goldman exec Jon Corzine, may seem like just another case of Wall Street fat cats paying the price for their speculation (actually, though Corzine may have run the firm into the ground, he’s reportedly going to receive a $12 million golden parachute). The MF Global affair, however, signifies something even deeper: how crony capitalists like Jon Corzine have used state pension funds for their political and financial benefit.
MF Global has declared Chapter 11 bankruptcy after Corzine led the firm to buy big holdings of debt from Spain, Italy, Portugal, Belgium, and Ireland at a discount. Now federal regulators are investigating how hundreds of millions in customer money has gone missing. But these were not simply financiers. Some of Corzine’s biggest clients were pension funds for teachers, public employees, and others. The fifth largest shareholder was TIAA-CREF, which owned 6% of the stock (MF Global’s Bankruptcy Petition is here). In 2008, before Corzine arrived, MF Global was sued by numerous pension funds over losses they had sustained because of MF Global trades, including the Iowa Public Employees’ Retirement System, Policemen’s Annuity Benefit Fund of Chicago, Southeast and Southwest Areas Pension Fund, and the State-Boston Retirement System. MF Global settled the suit for $90 million.
The MF Global bankruptcy will cost pension funds a lot. Pension funds around the country will likely take severe hits as their shares in the firm, bonds, or other holdings suffer huge losses. The Oregon pension fund had a heavy stake MF Global. Others are likely to follow.
This is nothing new for Corzine. In 2010, the state of New Jersey (Corzine was still governor) was charged with fraud by federal regulators over its pension funds. New Jersey failed to disclose that its state pension funds were severely underfunded when they offered state bonds to investors. “The commisions said that from 2001 to 2007, New Jersey claimed to have money set aside in a benefit enhancement fund as part of a five-year plan to pay for new benefits for teachers and general state employees,” reported the New York Times in 2010. “In fact, the fund was an accounting illusion and no such money was available.” The problems didn’t start with Corzine. Republican Governor Donald DiFrancesco played the same game, as well as James McGreevey. But Corzine took it to a higher level.
In 2008, as governor, he poured state pension money into failing Lehman Brothers in an attempt to help keep that firm solvent. The state pension fund lost $115 million in 90 days because of that gambit. To no one’s surprise, the pension fund was $2.6 billion in the red by the end of 2008. A study by a Northwestern University finance professor, Joshua Rauh, estimates that the pension funds will run out of money within a decade.
In the months following the financial crisis of 2008, Corzine decided to raid the pension funds as part of his “stimulus plan” for New Jersey. The idea was to pour $250 million in state pension money into community banks. Needless to say, he was heavily criticized for the outlandish plan. His hope was that community banks would make more loans to stimulate the economy. This scheme also included using state money to buy foreclosed homes. State Assemblyman Richard Merkt, Republican, a former trust banker and member of the New Jersey State Assembly Appropriations Committee, pointed out that Corzine was using the state pension funds to get money to construction unions and other parts of his political base. Lean budget times led him not to make serious cuts in the budget but instead to scale back payments to the state teacher pension fund to save money. Letting someone else worry about it seemed to be his political calculation. “New Jersey has a long history of failing to make required contributions and that has played an important role in the plan’s poor funding condition,” said Keith Brainard, research director of the National Association of State Budget Officers. “They’re not alone, but they’re worse than most.”
But the problem goes beyond Corzine. The politicos who run state pension funds are notorious for seeking kickbacks for giving certain investment houses their business. In places like Chicago, politically-connected “investment advisors” have apparently made big money running pension funds and doing a lousy job of it. In California, the California Public Employees’ Retirement System (CALPERS) steers money to politically-connected firms like Yucaipa, which is headed by Ron Burkle. Pension fund investments go to minority set-asides, alternative energy investments, etc. People like Corzine and other financiers use their political connections and relationships to get pension business.
Pension funds are making decisions about who runs their investment funds (and makes big money) and what some of those investments will be (politically-correct business sectors), so if they lose money or become insolvent what happens? Either we bail them out, or pension recipients will have to get by with less.
Forget all the rhetoric about protecting the middle class and fighting the rich. Big financiers that are hurting pension funds (and getting rich doing it!) are the real robber barons of today.
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