Monthly Archives: November 2014

Counterpunch on the Big Pharma Ripoff

Big Pharma

Crony Capitalism Out of Control


Two recent news items about the voracious drug industry should call for a supine Congress to arouse itself and initiate investigations about the pay-or-die drug prices that are far too common.

The first item—a page one story in the New York Times—was about the Cystic Fibrosis (CF) Foundation, which fifteen years ago invested $150 million in the biotechnology company Vertex Pharmaceuticals to develop a drug for this serious lung disease.

On November 19, the Foundation reported a return of $3.3 billion from that investment. Kalydeco, the drug developed with that investment, is taken daily by CF patients (who can afford it) and is priced at $300,000 a year per patient. Who can pay that price?

The second news release came from the drug industry funded Tufts Center for the Study of Drug Development. The Center’s Joseph DiMasi asserts that the cost of developing a new prescription medicine is about $2.558 billion, significantly higher than the previous estimate of $802 million that the Center claimed in 2003.

The drug industry promoters use this ludicrous figure to justify sky-high drug prices for consumers. Unfortunately, the criticism of this inflated number does not receive adequate media attention.

Half of the DiMasi assertion is opportunity costs foregone if the drug company invested its money elsewhere. That cuts his estimate by almost half to $1.395 billion. This maneuver gives “inflation” a new meaning. According to economist James P. Love, founder of Knowledge Ecology International, DiMasi also conveniently ignores government subsidies such as so-called orphan drug tax credits, research grants from the National Institutes of Health and government support of the cost of clinical trials that qualify (see

Mr. Love adds that the drug companies spend “much more on marketing than they do on research and development.”

Rohit Malpani, Director of Policy and Analysis of Doctors Without Borders (which received the Nobel Prize in 1999), says that if you believe Tufts’ figures, whose alleged data analysis is largely secret, “you probably also believe the Earth is flat.”

Mr. Malpani cites GlaxoSmithKline’s CEO Andrew Witty himself who says that the figure of a billion dollars to develop a drug is a myth.

Malpani adds that “we know from past studies and the experience of non-profit drug developers that a new drug can be developed for just a fraction of the cost the Tufts report suggests. The cost of developing products is variable, but experience shows that new drugs can be developed for as little as $50 million, or up to $186 million if you take failure into account…not only do taxpayers pay for a very large percentage of industry R&D, but are in fact paying twice because they then get hit with high prices for the drugs themselves.”

Mr. Malpani was referring primarily to the U.S., where the drug companies show no gratitude for generous tax credits and taxpayer funded R&D (that they get mostly free.) Add the absence of price controls and you the consumer/patient pay the highest drug prices in the world.

Another largely ignored aspect of the industry’s R&D is how much of it is directed to products that match, rather than improve, health outcomes—so-called “me too” drugs that are profitable, but don’t benefit patients’ health.

Also, the consistently profitable drug industry has been continually unable to restrain its deceptive promotion of drugs and inadequate disclosure of side-effects. About 100,000 Americans die every year from adverse effects of pharmaceuticals. Tens of billions of consumer dollars are wasted on drugs that have side effects instead of drugs for the same ailments with lesser side-effects (see

During a visit in 2000 with military physicians and scientists at the Walter Reed Army Hospital, I asked how much they spent on R&D to develop their antimalarial drugs and other medicine. The answer: five to ten million dollars per drug, which included clinical testing plus the salaries of the researchers.

This “drug development entity” inside the Department of Defense arose because drug companies refused to invest in vaccine or therapeutic drugs for malaria—then the second leading cause for hospitalizing U.S. soldiers in Vietnam (the first being battlefield injuries). So the military brass decided to fill this void in-house, and with considerable success.

The problem with the stinginess of the coddled private pharmaceutical industry regarding vaccine development continues. Drug resistant tuberculosis and other infectious diseases rampant in developing countries continue to take millions of lives each year. The Ebola epidemic is a current lethal illustration of such neglect.

The survival of many millions of people is too important to be left to the drug companies. For a fraction of what the federal government is wasting on spreading and failing lawless wars abroad, it can expand from the Walter Reed Army Hospital example to become a humanitarian superpower that produces life-saving vaccines and medicines as if the plight of sick people mattered more than windfall profits for Big Pharma.

Ralph Nader’s latest book is: Unstoppable: the Emerging Left-Right Alliance to Dismantle the Corporate State.


Jim Hightower on the Poor Little Rich Boys


Pity the poor stressed-out rich

Friday, November 14, 2014   |   Posted by Jim Hightower

Here’s a random thought that might not have occurred to you: It’s not easy being rich.

Well, yes, there are all those things that money can buy to alleviate the burden of fabulous wealth—things like servants, summers in Provence, private jets, and such. But, as an article in the “Wealth” section of the New York Times reminds us, money buys things, not happiness—and the article reports that America’s poor upper-one-percenters are not happy.

The chief source of superrich sadness? Overwork. It seems that our vaunted CEOs and Wall Street titans feel as though they’re always on the clock, expected to be in charge of every little facet of their business. But, before you fall into uncontrollable weeping over their suffering, let me give you the good news that whole flocks of psychologists, neuroscientists, and other healers are rushing to conquer this tragic malaise of the rich. They’ve even coined a term for this trauma: “Stress of High Status.”

The main symptom of SHS syndrome, we’re told, is “the feeling of always being rushed for time.” Excuse me, but if all these soothers of the elite think high status is stressful, they might examine the lives of those with low status. Try being a single mom with a couple of kids who’s juggling two part-time fast-food jobs and her kid’s schedules, while worrying about making the rent this month, and then having her car break down. Yet the Times devotes a full page to the pseudo-misery of these pampered ones, even citing a prominent psychologist who laments that “[wealthy] people spend less time doing pleasurable things and more time doing compulsory things and feeling stressed.”

More time doing “compulsory things” than that single mom? Get a grip! The sickness that has infected the wealthy class is not stress, but a plague of narcissism.

“How to Gladden a Wealthy Mind,” The New York Times, October 23, 2014.



Humor: The Borowitz Report

G.O.P. Unveils Immigration Plan: “We Must Make America Somewhere No One Wants to Live”



WASHINGTON (The Borowitz Report)—Senate Majority Leader Mitch McConnell unveiled his party’s long-awaited plan on immigration on Wednesday, telling reporters, “We must make America somewhere no one wants to live.”

Appearing with House Speaker John Boehner, McConnell said that, in contrast to President Obama’s “Band-Aid fixes,” the Republican plan would address “the root cause of immigration, which is that the United States is, for the most part, habitable.”

“For years, immigrants have looked to America as a place where their standard of living was bound to improve,” McConnell said. “We’re going to change that.”

Boehner said that the Republicans’ plan would reduce or eliminate “immigration magnets,” such as the social safety net, public education, clean air, and drinkable water. The Speaker added that the plan would also include the repeal of Obamacare, calling healthcare “catnip for immigrants.”

Attempting, perhaps, to tamp down excitement about the plan, McConnell warned that turning America into a dystopian hellhole that repels immigrants “won’t happen overnight.”

“Our crumbling infrastructure and soaring gun violence are a good start, but much work still needs to be done,” he said. “When Americans start leaving the country, we’ll know that we’re on the right track.”

In closing, the two congressional leaders expressed pride in the immigration plan, noting that Republicans had been working to make it possible for the past thirty years.

Naked Capitalism: The Looting of Public Schools

Wisconsin as a Frontier of School Privatization: Will Anyone Notice the Looting?

Posted on November 19, 2014 by

I never dreamed that a class I took in college, The Politics of Popular Education, which covered the nineteenth century in France and England, would prove to be germane in America. I didn’t have any particular interest in the topic; the reason for selecting the course was that the more serious students picked their classes based on the caliber of the instructor, and this professor, Kate Auspitz, got particularly high marks. The course framed both the policy fights and the broader debate over public education in terms of class, regional, and ideological interests.

The participants in these struggles were acutely aware that the struggle over schooling was to influence the future of society: what sort of citizens would these institutions help create?

As the post below on the march of school privatization in Wisconsin demonstrates, those concerns are remarkably absent from current debates. The training of children is simply another looting opportunity, like privatizing parking meters and roads. The objective is yet another transfer from some of the remaining members of the middle class, public school teachers, to the promoters. And this process also produces an important side benefit for socially unenlightened capitalists: that of slowly breaking one of the last influential unions.

And lest you had any doubt, despite the claim that charter schools help children, the evidence is that it doesn’t. Moreover, the pattern in capitalism American style is towards ever-greater crapification. So imagine what private schools, where the operators are on relatively good behavior because the project is still in its demonstration phase, look like in ten years.

Moreover, international comparisons show that higher teacher pay is strongly correlated with better educational outcomes, which should hardly seem surprising. Higher compensation, if nothing else, is a sign that society confers some stature to teachers, which helps in attracting capable people into that role. From a summary of a 2012 study:

Peter Dolton and Oscar Marcanero-Gutierrez, two economics professors at the University of London and University of Malga respectively, collected data from the Organization for Economic Cooperation and Development’s (OECD) annual Education at a Glance reports, the Programme for International Student Assessment (PISA) and Trends in International Mathematics and Science Study (TIMSS) to determine the relationship between pay and student achievement. They concluded that – guess what? – better teacher pay leads to teacher quality and that leads to improved student performance.

In their analysis, Dolton and Gutierrez identify two key factors that determine how professional pay enhances teacher quality, particularly as it pertains to attracting new teachers. One, higher pay promotes competition and therefore more and better teaching applicants. Secondly, improving pay increases the “national status” of the profession, again making it more attractive to potential recruits.

Specifically, Dolton and Gutierrez used recent PISA and TIMMS results to draw a clear statistical correlation between higher pay and student performance across different countries (see chart below).


From this and other data, they conclude that a 10 percent increase in teachers’ pay would produce a 5-10 percent increase in student performance.

For a window on how school privatization is on the march, here’s an update from Wisconsin.

By Christopher Fons, a social studies teacher in the Milwaukee public school system

With the victory of Scott Walker and the Republican Party in Wisconsin this past election day – they increased their majorities in both the Assembly and Senate – the Milwaukee Public Schools have joined the “endangered species list” of public school districts in the United States.

Within the next few months the school privatization lobby and religious schools will draw up a plan that will for all intents and purposes end public education in one of the largest school districts in the United States. This will leave some of the poorest, and most incarcerated people (Wisconsin imprisons more black men than any other state) in the nation exposed to “market forces” when it comes to educating their children.

“Free choice” in the market will give Milwaukee students, the heirs to the Schlitz Brewing fortune as well as the children of the homeless, the choice to go to the best schools or to the most underfunded schools that primarily serve special education students, English language learners, chronically truant or behaviorally problematic students.

25 years ago the Bradley Foundation and a number of other right wing “free market” oriented think tanks convinced the Republican Governor Tommy Thompson, a majority of Republicans, “New Democrats” like Milwaukee Mayor John Norquist and a few Democratic Black Nationalist legislators like Polly Williams that it was time to help the poor of Milwaukee by allowing them to accept state money to attend private or charter schools instead of their neighborhood schools.

The Milwaukee Parental Choice Program initially allowed a few hundred low-income students to participate in the program. Today the program has expanded to over 28,000 students and the means test for getting a voucher is $78,000 if the student’s parents are married. The last Wisconsin budget also expanded the program state-wide and allows a tax deduction of $10,000 if your child goes to a private high school and a $4,000 deduction for an elementary school student.

An important fact to remember is that the private voucher and charter schools have shown no ability to improve student achievement. Even though this is the case year after year the plan has been expanded. This is because the program was never about giving students a better education. For the ideologues, it’s about destroying the public school “monopoly” and private players gaining access to the billions of dollars that is now captured by the public sector with its troublesome democratic school boards, organized workers and efficiencies of scale.

The incoming legislature is an extremely right wing group. They have already announced plans to expand the voucher program state-wide and pass an “accountability” bill that will convert “failing schools” into private schools or charters.

The accountability scheme was floated last year by a number of moderate Republicans in an effort to make more palatable the subsidy that religious and other fly by night charter schools are receiving on the tax payer dime. The idea is that if a school is doing poorly, as determined by standardized tests and a state-wide report card, then both private and public schools could be closed. The voucher lobby balked at this because they were concerned that a number of voucher schools would not be able to make the grade.

This year all bets are off as the Republican majority is emboldened by their perceived landslide nationally and by increased majorities in the Assembly and Senate.

The upshot then is that although the Milwaukee Parental Choice Plan has shown no improvement in student achievement, is more and more becoming a subsidy to the middle class and has created new levels of corruption as numerous schools have been proven to be criminal fronts, the neo-liberals in charge of our state are intent on destroying an institution, Milwaukee Public Schools, that is democratically controlled, creates thousands of family supporting jobs and serves the poorest, most disabled and newest immigrants to our country. All this in an effort to transfer billions to religious institutions that don’t pay taxes, educational consultants, dubious operators of fly-by-night charter schools, computer software and hardware companies and numerous other profit-seeking grifters that now will have little transparency and less accountability.

The question is: Will anyone notice?

Greg Palast: The Theft of the Senate

The Secret Lists that Swiped the Senate

By Greg Palast
Tuesday, 18. November, 2014

Statistics guru Nate Silver simply can’t understand why every single legitimate poll indicated that Democrats should have gotten 4% more votes in the midterm elections than appeared in the final count.

The answer, Nate, is “Crosscheck.”

No question, Republicans trounced Democrats in the Midterm elections.  But, if not for the boost of this voter-roll purge system used in 23 Republican-controlled states, the GOP could not have taken the US Senate.

It took the Palast investigations team six months to get our hands on the raw files, fighting against every official trick to keep them hidden.

Here’s what we found.

Interstate Crosscheck is computer system that officials claim can identify anyone who commits the crime of voting twice in the same election in two different states.  While the current list of seven million “suspects” did not yield a single conviction for double voting, Crosscheck did provide the grounds for removing the registrations of tens of thousands of voters in battleground states.

The purge proved decisive in North Carolina, Colorado, Kansas and elsewhere.  Without Crosscheck, the GOP could not have taken control of the US Senate.  [Read my original investigative report.]

Nate Silver might want to punch these numbers into his laptop:

  • In North Carolina, Republican Thom Tillis upset incumbent Senator Kay Hagan by just 48,511 votes.  North Carolina’s Crosscheck purge list targeted a stunning 589,393 voters.
  • In Colorado, Cory Gardner, the Republican, defeated Mark Udall by just 49,729 votes.  Colorado’s Crosscheck “potential double voter” list totals 300,842.

The Crosscheck purge list also swamped GOP Senate margins in Alaska and Georgia and likely provided the victory margins for GOP gubernatorial victories in Kansas and Massachusetts.

No, states do not purge every name on the lists.  Typical is Virginia which proudly purged 64,581 “duplicates” from its voter rolls in 2013, equal to about 19% of its Crosscheck list.  Other states refuse to provide numbers, but their scrub methods are the same, or even more aggressive, than Virginia’s.

We can conservatively calculate that the purge of 19% of the Crosscheck lists accounted for at least three GOP Senate victories – and thereby, control of the Senate.

If the Crosscheck lists truly identified fraudulent double voters, then we’d have to concede that the election results are legit.  But the ugly truth is, the lists are nothing more than racially-loaded lists of common names.

Click to Enlarge
And that’s why GOP Secretaries of State, a gaggle of Katherine Harrises, hid the lists until we cracked through the official wall of denial and concealment. These election chieftains refused our demands for the lists on the grounds that these millions of voters are all suspects in a criminal investigation and so must remain confidential.

Eventually (and legally), we were able to get our hands on 2.1 million of the 6.9 million names—and had them analyzed by the same list experts who advise eBay and American Express.

What we found is simply a giant list of common names—a lot of voters named Michael Jackson, David Lee and Juan Rodriguez.  The racial smell of it was apparent and awful.  As the US Census tells us, African-Americans, Asian-Americans and Hispanics are 67% more likely to share a common name as a white American.  In other words, the lists heavily targeted “blue” Americans, Democratic leaning voters.

While state officials claimed that the criminal double voters were matched by social security number and other key identifiers, we discovered that, in fact, they only matched first and last name.  Nearly two million of the pairs of names lacked middle name matches.  Example:  James Elmer Barnes Jr. who voted in Georgia is supposed to be the same person as James Cross Barnes III of Virginia.

Republican officials have gone to great lengths to cover Crosscheck’s operations.  Voters purged are not told they are accused of voting twice.  The procedure, created by Kansas’ Republican Secretary of State Kris Kobach, is to send a postcard to each “duplicate” voter requiring them to re-verify their registration.  A large percentage are never delivered—Americans, especially renters and lower-income Americans, move often—or cards are tossed away confused for junk mail.

Brad Friedman, the investigative reporter with encyclopedic knowledge of elections shenanigans, was also bemused by Nate Silver’s confusion over the missing Democratic four percent.  He cites the Crosscheck purges we discovered and adds in all the other tried and true methods of bending the vote, from Photo ID restrictions to missing voter registrations and a deliberate shortage of paper ballots in minority precincts.  In Georgia alone, 56,000 registration forms collected by a coalition of minority voting rights groups were simply not added to the voter rolls.

The Tool to Take 2016
The purge of those snared in the Crosscheck dragnet has only just begun. The process of actually removing names from the voter rolls is subtle and slow, involving several steps over many months.  Some states mark their voters on the Crosscheck list as “inactive”— which means that, if they failed to vote in this midterm election, they will be blocked from voting in 2016.  As a result, Crosscheck will take an even bigger bite out of the 2016 voter rolls.

This bodes ill for the upcoming Presidential contest when, once again, Ohio is expected to be decisive. Ohio’s Republican secretary of state, John Husted, has embraced Crosscheck.

We enlisted Columbus State University professor Robert Fitrakis, an expert in voting law to canvas county voting officials.  He found these local elections officials concerned that the Republican Secretary of State is pushing counties to scrub voter rolls of “duplicates” within 30 days of receiving the names from the Secretary’s office.  This gives counties little time and no resources to verify if an accused voter has, in fact, voted in a second state.

Secretary of State Husted has refused to give us the list of the 469,201 names on Ohio’s Crosscheck list—but we’ve obtained thousands anyway.  We found that Ohio’s lists have the same glaring mismatches as we saw in the Virginia, North Carolina and Georgia lists.

We have now launched an investigation to uncover the names of all the voters Ohio plans to scrub from the registration rolls by 2016.  The answer may well determine who will choose our next president: the voters or Crosscheck.

Common Dreams on Homeless Children

Study: More Homeless Children Now Than Any Point in US History

A new report on child homelessness in America finds that 2.5 million children experience homelessness annually.

New report, America’s Youngest Outcasts, looks at child homelessness nationally, ranks the states, and examines causes of child homelessness and the solutions. (Image: National Center for Family Homelessness)

The annual levels of homelessness among children have never been higher in the United States, according to a new comprehensive report released on Monday.

Prepared by the National Center on Family Homelessness, the report—America’s Youngest Outcasts (pdf)—shows that with poverty and inequality soaring in recent years, approximately 2.5 million children in 2013 found themselves without a roof over their head or place to call home. That number equals one in 30 American children nationally, and constitutes an 8 percent increase over the previous year.

“Child homelessness has reached epidemic proportions in America,” said Dr. Carmela DeCandia, director of the NCFH, in a statement. “Children are homeless to night in every city, county and state — in every part of our nation.”


Based on federal and other available data and broken down by state, the analysis shows that homelessness among children varies widely depending on geography. The report includes an index ranking based on four basic criteria: 1) the extent of child homelessness (adjusted for population); 2) general well-being of the children; 3) risk for family homelessness; and 4) state policies designed to combat the problem. Ranked from 1-50, the states with the best scores were Minnesota, Nebraska and Massachusetts. The worst states for homeless children were Alabama, Mississippi and California.


The report cites the major drivers behind the crisis, which include: 1) the nation’s high poverty rate; 2) a lack of affordable housing across the nation; 3) the continuing impacts of the Great Recession; 4) racial disparities; 5) the challenges of single parenting; and 6) the ways in which traumatic experiences, especially domestic violence, precede and prolong homelessness for families.

According to a fact sheet (pdf)released alongside the study:

Research shows that homeless children are hungry and sick more often. They wonder if they will have a roof over their heads at night and what will happen to their families. Many homeless children struggle in school, missing days, repeating grades, and drop out entirely. Up to 25% of homeless pre-school children have mental health problems requiring clinical evaluation; this increases to 40% among homeless school-age children.

The impacts of homelessness on the children, especially young children, may lead to changes in brain architecture that can interfere with learning, emotional self-regulation, cognitive skills, and social relationships. The unrelenting stress experienced by the parents may contribute to residential instability, unemployment, ineffective parenting, and poor health.

Dr. DeCandia notes that federal policies seeking to address the problem of homelessness among veterans and other chronically vulnerable adults have showed that improvements can be made, but says specific federal action to fight child homelessness has not been adequate to address the growing national crisis of homeless youth.

“Living in shelters, neighbors’ basements, cars, campgrounds, and worse — homeless children are the most invisible and neglected individuals in our society,” she said. “Without decisive action now, the federal goal of ending child homelessness by 2020 will soon be out of reach.”

If the situation does not change soon, she said, the society is “going to pay a high price, in human and economic terms.”

Naked Capitalism: Skimming Your Retirement Funds


Private Equity Now Looking to Even Bigger Chumps, Namely 401 (k)s and Retail

Posted on November 17, 2014 by

One of the reasons that private equity has managed to flourish is that its biggest investor group is what is traditionally referred to as dumb money: public pension funds, which account for 25% of industry assets. Readers may recall that even CalPERS, widely considered to be the savviest public pension fund, recently had a public board meeting where the questions asked of prospective gatekeepers, the pension fund consultants, were, with one exception, softballs. And that question was the only one to address the SEC’s revelation that private equity firms have been engaging in large scale fee-skimming and other forms of grifting. And remember, the SEC also stated that the investors in these funds, known in industry nomenclature as limited partners, have done a crappy job of negotiating their agreements.

But in predictable fashion, as one group of marks, um, sales targets, starts to dry up, private equity funds, aka general partners, are hunting for new ones. And having gone very systematically after every conceivable large pot of money, the only place left for them to go is down market, in terms of size and sophistication. As private equity industry expert Eileen Appelbaum explains in The Hill, both public and private pension funds, another big money source for private equity, are shrinking as pensions generally are under attack. So the prize for private equity is to get its hands on retail investors, namely, even lower tier wealthy and 401 (k) plans.

Before we get into how this is happening, we need to step back and underscore why this is a terrible idea. Private equity returns, even for institutional investors, are exaggerated. These reported returns do not beat stocks on a risk-adjusted basis. And that’s even when you use a measure that flatters private equity, with is internal rates of return. As we’ve discussed, IRR is known by anyone with a even a smidgen of finance training to be a terrible measure. One of the big reasons why is it overstates performance relative to better metrics, such as the widely used gold standard of discounted cash flows, or one that some academics view fondly, called public market equivalent.

So understand this: private equity’s entire raison d’etre is its allegedly superior returns. If that is bunk, the rationale for investing in private equity collapses. The other justification for investing in it, that its profile of returns doesn’t covary much with other investments, is highly sus, given that private equity is essentially levered equity. Many experts believe that the supposed differentiated pattern of returns depends heavily on private equity “smoothing” as in not marking their portfolios to market at times when markets are terrible.

In fairness, there have been historical periods when buyouts, the main type of private equity deals (accounting for 85% of industry assets) produced sparkling returns for investors, such as in the 1980s, when there were lots of overdiversified large companies selling at conglomerate discounts. Making money in leveraged buyouts then was like shooting fish in a barrel, provided you could hire an investment bank to run a hostile takeover. Simply buying the company with a ton of debt (and achievable leverage levels were also higher back then, amping up returns), breaking it up and selling off the parts was an easy winner. Selling off other assets, like headquarters properties, the corporate art collection, and surplus jets, helped too, as did thinning out an often-bloated corporate center.

But looking dispassionately at the data shows that PE’s claims to better returns don’t hold up. And that’s before you get to factoring in issues that astonishingly, academics have managed to ignore despite them being blindingly obvious omissions. For instance, when an investor signs up for a private equity fund, he is contractually obligated the minute the ink is dry. Yet the general partner won’t begin making capital calls for months, sometimes starting as much as a year later. Those capital calls continue typically until year three or four after the commitment date.

The convention in the industry is to calculate returns ONLY when the money has left the investor’s pocket and gone over to the PE fund. Yet if you read limited partnership agreements, capital calls have very short notices. Five to ten days is the norm. The consequences of missing a capital call are draconian. Generally speaking, you lose the money you’ve put in. And even if you simply miss your first capital call (as in you lose no actual dollars), that general partner will never invite you into a fund again. If you are a typical limited partner that thinks getting into funds, particularly the illusory “better” funds, is important, that alone is a terrible sanction.

So that means the investors need to make sure they have enough dough on hand to meet capital calls. That means they need to be in liquid, hence generally lower-return investments. The cost of being in lower-term investments early in the life of private equity investments to accommodate general partner capital calls, which is inherent to investing in private equity, is not factored into return calculations. Low returns in the early years of any investment severely dampen total returns.

We anticipate being able to perform some analyses of this issue. In the meantime, a paper by Oxford professor Ludovic Phalippou is coming out shortly that looks at this issue on a theoretical level (as in not working from a specific data set). He told us that his conclusion is that the cost of being in lower-return investments is roughly 300 basis points a year.* Note that 300 basis points is conventional wisdom as to how much PE outperforms public stocks using its current dubious metrics (and that is before risk adjusting it for its illiquidity, which is also conventionally depicted as 300 to 400 basis points**).

So the reason to allow smaller investors to get into private equity at all looks spurious on its face, particularly since private equity returns have been declining in recent years. And remember, the return picture will look even worse for small investors than for the big boys because they will pay more in fees, more in expenses (pretty much inherent to smaller investments) and are also just about certain to be steered to at least some less than stellar funds. A New York Times article last month flagged some of these issues (emphasis ours):

Carlyle’s new vehicle, called Carlyle Private Equity Access 2014, whose existence has not previously been disclosed, is just one of several efforts by the industry to attract checks in the tens of thousands of dollars rather than in the hundreds of millions. In addition to annual fees paid to their wealth manager, investors pay Carlyle 1 to 2 percent of their capital plus 20 percent of any profits, in line with the industry standard….

Morgan Stanley, for example, was recently gathering capital from wealthy clients for a new Blackstone energy fund that is expected to exceed its $4 billion target when it finishes raising capital this year. It took the bank a single day to raise its entire $500 million feeder fund, which was about four times oversubscribed, people briefed on the matter said….

Traditional feeder funds can also allow investors to commit as little as $250,000, but the new Carlyle product is intended to provide a more diversified investment, including private equity funds focused on Japan, Asia and Europe, as well as an international energy fund…

Other firms, acting as middlemen, are allowing the private equity giants to attract a lower stratum of wealth. One firm, the Central Park Group, gives investors indirect access to Carlyle funds. It caters to so-called accredited investors, who have at least $1 million in assets not including their primary home. Because it is an intermediary, the firm charges a fee as high as 1.8 percent and an additional 0.55 percent for expenses, on top of the 1.3 percent of assets charged by the Carlyle funds in which it invests, according to marketing materials and a person briefed on the matter. Still, it has raised more than $500 million since its debut last year, this person said.

We’ll discuss in a later post why these hot energy funds look to be a particularly successful version of private equity picking investors’ pockets.

If you look at how the Carlyle funds that CalPERS has invested in have performed (and remember that CalPERS in theory can do a better job of fund-picking and can negotiate lower fees), you will see that on the whole, the foreign funds have performed less well than the flagship domestic funds. So “more diversified investment” appears to be seller talk for “putting you in funds with lower odds of payoff because we have less of an information advantage.”

Appelbaum explains why this downmarket trend is particularly troubling:

While private equity hasn’t tapped workers 401(k)s yet, Carlyle and other PE firms are currently developing new financial products that will let individual investors write small checks to PE funds.

This new focus on individual investors is facilitated by the Jumpstart Our Business Startups Act (JOBS Act) that went into effect in the fall of 2013…The rules that implement the JOBS Act do not incorporate basic investor protections…It is, however, still the case that individuals that participate in a PE fund must be “accredited investors.”

To be an accredited investor, an individual must have a net worth — alone or with a spouse — greater than $1 million, not including the value of his or her home. Alternatively, the individual can be an accredited investor if they have an annual income of $200,000 or more (or $300,000 with a spouse). These income thresholds were set in 1982 when $200,000 meant you were a lot richer. If these wealth and income thresholds had been adjusted for inflation, an accredited investor would have to have a net worth of $2.5 million or an annual income of $493,000 (or $740,000 with a spouse).

Granted, very few of us will ever qualify as an accredited investor. Still, about 8.5 million people meet the current criteria. And that includes many professionals, especially in two-earner households, who may head toward retirement with a million dollars in their 401(k)s. To put that in perspective, a million dollars in a retirement savings account comes to $40,000 to $50,000 a year in pre-tax income during retirement.

The kicker here is that the $1 million in net worth can include investment in retirement accounts. And as Appelbaum stresses, having a decent personal balance sheet or income does not mean someone is financially savvy.

What goes unstated is why the mythology of these superior returns goes unchallenged, when that legitimates the rush to syphon funds out of retail chumps. The fact is that private equity has effectively bought off, co-opted or cowed the very people who ought to be minding the store.

As we indicated with Harvard, which is also considered to be a sophisticated investor, its law firm, which is one of its most important resources in cutting deals with private equity firms, is more loyal to private equity kingpin Bain. This pattern is repeated across the industry, where private equity limited partners simply don’t pay remotely enough in fees compared to private equity firms to get the best legal talent on their side. This pattern is most obvious with attorneys, but it applies to all the other supposed gatekeepers who are afraid to rock the boat with PE firms because they’ll simply refuse to deal with them (remember, the gatekeepers, such as the supposedly independent consulting firms, need to get information from the private equity firms to do their job. And the consultants no doubt correctly fear that they would be frozen out of limited partner engagements if PE firms reported that they were difficult or implies that their information demands reflected a lack of sophistication, as opposed to well-warranted skepticism).

This situation is even worse as far as the mythology of superior returns is concerned. Key employees at private equity limited partners benefit directly from PE funds reporting exaggerated returns. Even at CalPERS, cetain members of the investment office get bonuses based on performance relative to benchmarks. At CalPERS and public pension funds, these bonuses are so small as to arguably not be terribly motivating, but at other opinion leaders, such as universities like Yale and Harvard, the performance bonuses are significant. And they are also much more meaningful at private pension funds and insurers, both large investors in private equity.

We’ve noted how the use of IRR exaggerates the return side of the performance equation. The benchmarking is often flawed too. For instance, Thompson Reuters is one of the most popular services for private equity benchmarking. It also happens to show the lowest returns. An industry insider tells us that Thompson Reuters is in the process of exiting this business, forcing limited partners who used Thompson to find new benchmarks. The replacement services, such as Cambridge Associates, use benchmarks that show returns that are sufficiently greater than the one Thompson showed as to call into question whether bonuses paid to investment staffers in prior years were deserved. One doubts that any fiduciary will have the nerve to try to claw back payments, or reduce going forward bonuses in light of what now looks like excessive prior payouts, but the differences are great enough in some cases as to be giving boards and trustee fits.

And to complete this sorry picture, last week, Private Equity Manager reported that the investors’ association, the ILPA, had stated in effect that limited partners were circling the wagons, and wanted only more transparency between themselves and the general partners. So to the extent any reforms take place (and don’t hold your breath), small fry players won’t benefit. That, as we often say here, is a feature, not a bug.

* Looking at illustrative or better yet actual capital calls will allow for much more granular analysis, as well as looking at the impact over the lives of various funds, which is the most important measure. Moreover, we are not sure a one-size-fits-all story on managing pre-capital call liquidity is the best way to look at this. Wealthy individuals and smaller investors like universities and foundations would need to keep most or all of their committed money in low-risk investments like cash equivalents or short-term, low-risk bonds to avoid missing a capital call. Note that in the dot-bomb era, when wealthy investor lost boatloads on their stock portfolios, defaults on private equity capital calls were widespread. Similarly, in the crisis, Duke famously missed private equity capital calls. Similarly, CalPERS was widely criticized for dumping stocks during the crisis. It is widely rumored that the reason was not panic but needing to meet private equity capital calls. However, a CalPERS nevertheless has much more money flowing in and out on a routine basis, and thus larger investors such as the bigger pension fund and endowments could be assumed to do somewhat better, in return terms, in managing their fund so as to accommodate private equity capital calls.

** We are not certain the 300 to 400 basis point illiquidity discount is the right way to look at this issue. Private equity investors face a high degree of uncertainty as to when they get their money back. They have effectively given the general partners that option. Long-dated options are extremely valuable. We suspect this option is worth more than 300 to 400 basis points.

Naked Capitalism: Corporate Profits vs. Wages

Corporate Profit Margins vs. Wages in One Disturbing Chart

Posted on November 14, 2014 by

Yves here. This brief post by Doug Short is even more important than it appears to be. We had an outburst of neoliberal orthodoxy in comments yesterday on a post that discussed how wealth of most households had fallen since 1987. Some readers assigned blame for stagnant average worker wages (which was a big contributor to the lack of growth in household wealth) to immigrants, particularly Mexicans and H1-B visa workers.

While immigration was no doubt an element, to give it the leading role is counterfactual. The argument made, explicitly, is “more workers leads to lower wages”. Ahem, there a a lot more variables than just the labor supply side. But even if you take a simple-minded point of view, women’s rising participation in the workforce, particularly given that women even now make 77% of what men make, would be a vastly bigger wage-rate depressor than Mexican workers. The number of working women rose by nearly 30 million between 1970 and 2010, vastly larger than any estimate of immigrant influx.*

The Doug Short chart below looks at corporate profit share versus labor share. This pinpoints the degree to which wage stagnation is the result of corporate managers and executives succeeding in cutting the pie to favor themselves (executive pay has become increasingly linked to stock prices, and relentless focus on short-term earnings, as well as stock buybacks, do wonders for earnings per share).

Short omits some key elements from his discussion. One is that until recently, a profit share of GDP of 6% was perceived to be a cyclical peak; no less than Warren Buffet deemed a higher level to be unsustainable. And in fact, we see an explosion of profit share from 6% to 10% of GDP in the runup to the crisis, roughly from 2003 to 2007. The “rescue the banks and financial markets” measures succeeded in bringing the profit share back to its pre-crisis levels, at the expense of workers.

Notice the inflection point in profit share is 1987, when Greenspan became Fed chairman. Correlation may not be causation, but the timing is almost exact.

But what about the years prior to 1987? We see falling labor share and rising profit share from the 1973 recession through 1979, then labor share and profit share falling through 1987. What is that about?

Interestingly, the chart shows that corporations did well in profit terms in the mid-1970s stagflation at the expense of workers. But they were perceived (correctly) as having their lunches increasingly eaten by Japanese and German manufacturers. Inflation kept rising, which hurt investment in plant and equipment (high interest rates make any long-term commitment look lousy). High inflation killed stock market valuations, which allowed corporate leaders to press an agenda of deregulation with the Carter Administration, which was desperate for any ideas to increase flagging growth levels.

In 1979, Volcker started pushing interest rates sky high. Banks and other financial players were hemorrhaging losses. Volcker was explicit privately that he wanted to break the bargaining power of labor. In Secrets of the Temple, William Greider reported that Volcker kept a notecard which tracked average pay in the construction industry. He wanted to see that fall before he was willing to let interest rates ease. The economy went into a sharp, nasty contraction, hence the reason for both falling profits and falling labor share.

But why did corporate profits continue to fall after the 1979-1982 recession was over? I’d hazard a big contributor was the rapid rise of the US dollar, which not only killed US exports, but also enabled foreign manufacturers to gain even more ground. If you look at auto imports to the US, the Japanese made tremendous headway after the dollar spike of the early 1980s.

By Doug Short, Advisor Perspectives. Cross posted from Wolf Street

Yesterday’s collection of Advisor Perspectives articles particularly caught my attention: Why Jeremy Grantham is Right about Corporate Profit Margins by Baijnath Ramraika and Prashant Trivedi. The article includes a number of fascinating graphs, the first of which is a snapshot of US Corporate Margins since 1947 calculated by dividing Corporate Profits after Tax by Gross National Product.

The article inspired me to produce a chart of the Profit-to-GNP ratio, but with an added and rather sobering overlay: Employee Compensation (wages and salaries), which I’ve likewise divided by GNP. Here it is.


If indeed corporate profits are mean reverting, a view supported by the authors of the Advisor Perspectives article, we see that this metric can spend many years at wide variance from the trend. Employee Compensation, however, has had a distinctly downward trend since its peak in 1970. The only conspicuous exception to the trend was the bubble period of “Irrational Exuberance,” as then Fed Chairman Alan Greenspan famously called it, that began in the mid-1990s.

* Note this is not meant to defend our immigration policies. But the idea that Obama might use an executive order to implement immigrant “reform” seems to be producing a lot of knee-jerk backlash. The crushing of labor bargaining power has been a much bigger, complex exercise. Undue focus on immigration has the convenient effect of getting the bottom 99% fighting among themselves rather than look hard at how the US version of capitalism has been redesigned in a very fundamental way against their interests.

And when it comes to wages, there are “Lies, Damn Lies, and Statistics.” Read… How to Obscure one of the Biggest Economic Problems in the US



Naked Capitalism: Plundering Your Pension


State Street, Governor Elect Rauner Both Implicated in Pay-to-Play Scandals

Posted on November 13, 2014 by

The more rocks you turn over in public pension land, the more creepy crawlies you find. No wonder private equity has such a secrecy fetish. The most obvious, and most offensive to the public, are so-called pay-to-play scandals, in which public officials who are in a position to influence how funds are invested, take campaign funding from individuals or firms who are currently managing government funds or in short order get a mandate.

David Sirota, who has been all over this beat, explains why taking campaign donations from parties currently running public monies is sus. In a new story, Sirota describes how Illinois governor elect Bruce Rauner, who comes out of the private equity industry, took over $140,000 in campaign contributions from executives at funds that manage state money, which violates state and federal laws, since Rauner will be appointing pension system trustees.

Rauner’s aides tried dismissing the revelation arguing that these firms were already feeding at the public fund management trough. That argument doesn’t cut it from a legal or common sense standpoints, as Sirota explains:

But legal experts, former SEC officials and campaign finance lawyers interviewed by IBTimes said the [SEC] rule applies over the entire life of a pension fund investment because those investments can be terminated, sold off or extended at any time. The point is to prevent political contributions from influencing not just the original decision to invest, but the ongoing choice to continue or terminate the investment.

David Melton of the Illinois Campaign for Political Reform said pension “contracts come up for renewal periodically,” and that it’s therefore “inconsistent with the spirit and purpose of the law” to rely on the argument that the donations are acceptable because they were made after the original investment decision.

Mind you, Rauner was already a target for criticism due to the concerns that his past donations and payments made by his PE funds’ portfolio companies affected state investments. The SEC just prosecuted its first pay-to-play case (the rule is recent) over a $4,500 donation, much smaller than the donations that Sirota unearthed. And the agency has vowed it is going to dedicate real resources to this area. Punishment can be harsh: managers who’ve made verboten campaign donations can be forced to disgorge all fees received after the contributions were made. The Illinois State Board of Investment has just announced an investigation of the Rauner donations.’

In some ways, the State Street story, which was broken in the Wall Street Journal, is even more salacious and could have larger ramifications. State Street runs a simply huge custody business. The term originates from keeping custody, as in holding, securities on behalf of investors. Custody services today include payment services, fund administration, and recordkeeping. For CalPERS, custodial fees to State Street are roughly $6 million, and by virtue of CalPERS’ size, the pension system can presumably negotiate the best prices. Even so, due to how concentrated the custody business has become (its system intensity means it has huge scale economies), it’s not as if pension systems have much in the way of choice. Consider this section from a 2011 Bloomberg story:

California Governor Jerry Brown sued State Street Corp. (STT) in 2009, when he was attorney general, for “unconscionable fraud” against pension funds over foreign- exchange pricing. That didn’t stop the largest of the funds from striking a new three-year deal with the firm.

The $232 billion California Public Employees’ Retirement System last week signed a contract for Boston-based State Street to continue handling all its custody work, said Wayne Davis, a pension spokesman. Calpers, as the Sacramento-based fund is known, passed over competing bids from New York’s JPMorgan Chase & Co. (JPM) and Bank of New York Mellon Corp. (BK)

“It does seem contradictory,” George Diehr, a Calpers board member representing state employees, said in a telephone interview. “It was difficult to find someone who would provide all the services and at the terms we required.”

You’d think with so little in the way of competitors that State Street would enjoy its oligopoly status. Think again. The SEC has found what sure looks like a case of pay to play in Ohio with a lobbyist that has already pled guilty in a separate money laundering/bribery case. The agency also strongly hints that it is looking into other dodgy behavior by State Street.

From the Wall Street Journal report:

Federal officials are examining the connections between Boston financial giant State Street Corp. and an Ohio lobbyist as part of a broader look at the company’s dealings with public pension funds, according to people familiar with the investigations.

The scrutiny from the Justice Department and the Securities and Exchange Commission centers on State Street’s hiring of the lobbyist in 2010, several months before winning a contract to provide administrative services for $32 billion in three of Ohio’s largest retirement systems…

In Ohio, the investigation in part concerns the relationship between lobbyist Mohammed Noure Alo and Ohio’s then-deputy treasurer, Amer Ahmad. The men were in touch roughly 14 times a day over a certain period via text and phone, according to court testimony from an agent with the Federal Bureau of Investigation. The treasurer’s office had oversight of the contract…

State Street’s interactions with Mr. Alo, the founding member of a Columbus law firm, began in early 2010, when Mr. Alo met a State Street representative at a campaign event for the state treasurer, according to the FBI agent’s testimony last week during a U.S. court hearing. State Street contacted him with a draft contract for work as a lobbyist and Mr. Alo forwarded that document to Mr. Ahmad, the FBI agent said.

Mr. Alo, who became a registered Ohio lobbyist in 2010, also approached Bank of New York Mellon Corp. with the same request, leaving a voice mail claiming the bank’s existing business with the state was “not really guaranteed to stay with you,” according to the testimony. Both banks were vying for a contract to handle assets held by three Ohio pension funds. Bank of New York Mellon didn’t retain Mr. Alo, while State Street eventually agreed in the contract to pay him $16,000 upfront, according to the FBI testimony. BNY Mellon declined to comment.

Federal officials uncovered what they described as a separate $3.2 million kickback scheme involving an Ohio securities broker and the Ohio treasurer’s office while investigating the State Street deal. They brought charges in that case against Messrs. Alo and Ahmad and two other men. All four have pleaded guilty.

Reading between the lines, one might guess that Alo is a pay to play entrepreneur. But even if he was the instigator, State Street is culpable if they went along. Moreover, given what a cesspool government-related finance is, you can see why the SEC has taken interest. If State Street was indeed receptive to this kind of pitch in Ohio, they would presumably have been just as receptive with similar “proposals” for other public pension funds.