Some readers may also be watching the TV commercials by Silicon Valley-backed political groups fighting antitrust legislation that might hinder their growth rates, lucrative merger opportunities and oligopoly market-pricing power. Is there a connection? Indeed there is. What these two recent events have in common is a clever and manipulative strategy of hiding private-sector financial interests behind the skirts of public employees, retirees and their pension plans. It’s all Madison Avenue hogwash to con ordinary Americans and voters into thinking that somehow the livelihoods of public-sector workers and retirees will be horridly impaired if Congress were to close tax loopholes and approve anti-monopoly legislation. This is blatant, cynical misrepresentation.
Public pension funds, public employees and their associations need to put a stop to this, and they have both the moral high ground and the clout to do so. It’s high time for political and financial blowback. The PR firms orchestrating this nonsense will just keep it up until their profiteering clients get called out.
The premise of the private equity lobbyists who defend their carried interest tax loophole is that if somehow the income of the promoters and money managers were taxed at the same rates as everybody else, the value of pension fund investments would fall out of the sky. Of course, there is no evidence, let alone proof, of this. It’s just advertising mythology. An illusion. Magical misdirection.
History and Mythology
Readers may wonder where the term “carried interest” came from. It goes all the way back to the medieval times of the European ship captains and trade merchants who would raise royal and private money to fund an expedition. This was dangerous, risky business. Ships laden with treasure and goods could sink or disappear for any number of reasons, including piracy. The financiers wanted some assurance that the captain wouldn’t jump ship at the first sign of trouble or yield control of the vessel without a fight. So they invented the novel concept of carried interest, which was the captain’s 20 percent share of the profits on the cargo he brought back. It was in his direct interest to carry the goods home in good condition, and thereby arose the term.
Nowadays most seafaring shippers have private insurance on their cargos, and carried interest is now all about financial partnerships, not marine transport and seaborne piracy. These money managers put neither their lives nor their own money at risk, but still get the carry, most commonly 20 percent of net profits, and that’s on top of their annual management fees, which are two to three times what traditional portfolio managers get.
There is no societal benefit from the tax preference allowed for carried interest. That’s completely a myth. These tax-dodgers don’t have to invest their own money to win carried interest tax rates. They spend no more time doing their work than top-rated institutional fund managers who trade in public securities, yet they are paid lavishly along the way while doing that. So their carried interest is essentially bonus compensation. The legal fiction of calling these back-end payoffs a pseudo-security to rationalize their capital-gains tax preference is political hocus-pocus.
The reality is that if the fund managers had to pay standard tax rates on their income, it would have zero impact on pension systems’ returns. What are the managers going to do? Cook up fewer deals? Pull up stakes and move to a tax haven? Demand even higher fees on top of their already cushy income? They can huff and puff all they want, but pensioners would lose nothing if the loophole were plugged.
The public pension community, including its various associations, needs to stand up to the carried interest lobbyists and marketeers and tell them to back off. Yes, that will require biting the hand that feeds pension conferences that rely on such corporate sponsors to pay for their buffets, open-bar receptions, celebrity speaker fees and such, but let’s be realistic here: The value of winning public pension investment gigs is worth far more to these private managers than their 10- to 15-percentage-point income tax breaks. They already live in that stratospherical investment managers’ world where the gross profit margin on new business is typically well above 60 percent, so you can do the math. Why else are they sending high-paid marketeers to curry favor with trustees and staffers at public pension conferences and paying controversial commissions to “placement agents” who bring them lucrative new accounts? The remedy for exorbitant fees, clearly, is not lower taxes for these money-grubbers.
The investment industry’s Managed Funds Association should be told that its charade must stop. In their requests for proposals, periodic due diligence and annual performance reviews, public pension funds should require these money managers to disclose their direct and indirect contributions to lobbying and advertising campaigns that assert damages to public employees and pensions if their carried interest tax break were removed. Trustees can then scold them in public and spread the word to others. Public pension networks should revoke and deny associate membership for such firms.
Big Tech’s Copycat Lobbying
But the tale of corporate greed built on the public’s goodwill toward public safety officers, nurses and teachers does not end there. The folks in Silicon Valley who run giant public companies are now following the same playbook, only in their case they are going directly to the voters, not just trying to buttonhole legislators on Capitol Hill. They have recently blasted the cable TV channels with political ads to oppose federal antitrust laws on the delusive grounds that somehow more market competition in their industry will hurt ordinary working Americans, and particularly public employees.
Last month, one of the most cynical of these commercials was one sponsored by the American Edge Project, reportedly founded and funded by Facebook (or “Meta,” as the company has rebranded itself) or its executives. Here’s the online version of how it is representing the potential impact of an antitrust bill on public employees and retirees:
“Hurts pensioners and retirees: This revised bill is one part of a series of pending legislation that would radically overhaul existing U.S. antitrust law. A new study finds these proposals would cost U.S. teachers, firefighters, nurses, police, and other public sector workers up to $109 billion in pension benefits through increased operating costs and declining stock values — an average expected harm of up to nearly $4,000 per person.”
Isn’t that $109 billion number just remarkable? It is so specific — why, it must be scientific! Who would dare to dispute a number so precise? Their edgy project’s specious math subliminally implies that it’s been carefully derived from very precise research by very smart people who have only the public’s interest at heart. And of course this dubious research finding has nothing to do with enriching billionaires, to hear them tell it.
Read the underlying research for yourself. You be the judge. But don’t forget that the richest 10 percent of Americans own 89 percent of U.S. stock-market wealth, according to reliably objective 2021 Federal Reserve data. Those Ten Percenters are typically not teachers and nurses and firefighters, and public pension funds own only a sliver of the remaining 11 percent. Where is the conspicuously missing segment of these Big Tech TV ads that would reveal those irrefutable and inconvenient truths? If you buy their hokum, I have a bridge to Brooklyn you can buy for $109 billion.
Time for Blowback
Here’s a way to counter these deceptive campaign ads that oppose effective anti-trust laws: America’s public employee unions can prompt their members and their families to boycott Meta and other companies that continue to sponsor misleading commercials and PR campaigns that exploit voters’ popular support of selfless public service to advance selfish corporate interests in Congress. Some heavy blowback will teach the Silicon Valley billionaires and their lobbyists a lasting lesson. Demand destruction can stifle monopoly power. Give them an ultimatum to stop it or else.
There always will be ample room for Big Tech and private equity firms in public pension portfolios. As more U.S. companies remain private for a host of reasons and technological innovation generates nice profits, those are wonderful industries for anybody privileged and lucky enough to have strolled into these hog heavens as their life’s work. But America’s most respected public pension professionals will never attest under oath that tax breaks for fat-cat fund managers have demonstrably benefited their funds’ performance — because they haven’t.
Let’s prod the greediest of these One Percenters to shape up, cut their cheesy misrepresentations and stop hiding behind the skirts of public employees, retirees and pension funds. Tell the lobbyists and PR spinmeisters that enough is enough: We’re on to their exploitative deceptions.
Governing's opinion columns reflect the views of their authors and not necessarily those of Governing's editors or management. Nothing herein should be considered investment advice.
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