While the private sector digs out from under the burden of a debt bubble, the financial sector profits from federal giveaways. Wall Street CEO pay rose 20% in 2011. And here’s our new friend, Barry Dyke, reporting and commenting:
…while Main Street net worth has been pummeled, Wall Street asset managers’ compensation is soaring. In his new book, the author documents the explosion of the investment asset management business – which he calls the “asset management industrial complex” where managers are guaranteed Olympian paydays and consumers are left holding the bag with poor investment performance.
The current financial report card for Main Street Americans is grim. In June 2012, the Federal Reserve reported that the median net worth of families plunged by 39% in just three years from $126,400 in 2007 to $77,000 in 2010.
According to the Fed, the financial crisis, which began in 2007, wiped out nearly two decades of wealth – with middle class families bearing the brunt of the decline. This puts Americans roughly in the financial position they were in 1992. In three years, Americans saw two decades of economic efforts vaporize.
Much of Americans’ wealth resides in retirement plans managed by the asset management industrial complex (mutual funds, private equity, hedge funds, banks, etc.) – which the author estimates to be a minimum $18 trillion. However, management fees eat up investor returns – creating headwinds virtually impossible to overcome.
The author, citing Morningstar data, estimates that mutual fund shareholders – where most 401(k) funds reside – pay a minimum of 0.90 percent for every $10 thousand invested (and much higher when trading costs and other costs are factored in).
Private equity and hedge fund managers-extract a much higher fee schedule, commanding 2 to 3% manager fee, plus 20 to 30% incentive compensation fee known as “carried interest.” [Private equity is where Presidential Candidate Mitt Romney made his fortune].
The author comments, “On a whole, investment performance from highly paid investment managers has been horrible over extended periods of time. According to Morningstar, over 61 percent of stock mutual funds have lagged the S&P 500 index over the past five years.
In 2011, only 20 percent of funds beat the Standard & Poor’s 500-stock index, the worst showing for active fund managers in over a decade. Returns for private equity and hedge funds [both get much of their money from state pension funds] have been inconsistent, opaque, self-serving and hard to measure.”
However, asset managers saw their compensation soar. According to reports filed with the SEC in 2012, in reporting to go public, the private equity firm The Carlyle Group [which gets a great of investment money from state pension giant CalPERS] reported that three billionaire founders David Rubinstein, William Conway and Daniel D’Aniello reported a combined payday of $402 million in 2011. Most of this compensation was in cash dividends, where financiers enjoy a highly favorable 15% capital gains taxation rate on income.
The author details one of the greatest compensation crimes in 2008 when Citigroup and Merrill Lynch blew up and had to be bailed out by taxpayers for their failed cataclysmic bets in subprime mortgages.
Citigroup lost $27.7 billion yet paid its top bankers $5.33 billion in bonuses. [In the same year Citigroup froze its cash balance pension plan for rank-and-file employees].
Merrill Lynch lost $27.6 billion and paid its top bankers $3.6 billion in bonuses. In 2011, Robert P. Kelly, CEO of Bank of NYMellon, a giant asset manager, got $33.8 million in severance and benefits as an exit package in 2011 just prior to the bank being sued by the US Justice Department for allegedly overcharging pension clients as much as $2 billion over a ten year period.
Prior to this, Kelly was CFO of Wachovia, a failed bank which is now part of Wells Fargo. Not only were the banks bailed out during the crisis, most of the mutual industry was bailed out by the Federal Reserve.
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From the Archives…
The Disconnect Between US Household Wealth and GDP Growth
2012-06-15 – Bill Bonner
Playing The Financial Markets – The Greatest Game of All
2012-06-14 – Greg Canavan
The RBA’s Mortgage Market Denial
2012-06-13 – Dan Denning
Spanish “Assistance” or “Bailout”
2012-06-12 – Satyajit Das
Priming Your Investment Returns
2012-06-11 – Nick Hubble