The 314-Member Club — With $81 Billion in their IRAs

By Pam Martens and Russ Martens: September 17, 2014

Broken Piggy BankYesterday the Senate Finance Committee convened a hearing to chew on one humdinger of a new report from the Government Accountability Office (GAO). The GAO report found that 314 taxpayers have squirreled away at least $25 million in their Individual Retirement Account (IRA) for an aggregate of $81 billion for all 314 taxpayers. That puts the average account within the $81 billion at an astonishing $258 million.

The GAO used 2011 data, the most current available to them from the IRS, and noted that since some of the tax returns were for joint filers, the term “taxpayer” may mean an individual or a couple. Still, even two IRA accounts tallying up to $258 million is off the charts.

The figures are raising eyebrows in Congress. No one can say with any certainty how an IRA could grow to such astronomical sums. IRAs have only been around since 1975. Adding to the perplexity, the GAO calculated that if a person made the maximum IRA contributions from 1975 through 2011 and invested the money in the Standard and Poor’s 500, it would have grown to only $353,379.

Senator Ron Wyden, Chair of Senate Finance Committee Taking Testimony on Retirement Plans for Americans

Senator Ron Wyden, Chair of Senate Finance Committee Taking Testimony on Retirement Plans for Americans

Senator Ron Wyden, Democrat from Oregon, chairs the Senate Finance Committee and opened the hearing with this assessment of the magical IRAs:

“So how did those massive IRA accounts come to be? In many cases, they’re sweetheart stock deals that most investors would never have access to. Executives buy stocks at a special, rock-bottom price – sometimes fractions of a penny per share – and use an IRA as a tax shelter. The stocks start out dirt cheap, but just like that they turn to gold, and the IRA shoots up in value.”

One beneficiary of sweetheart stock deals and a member of the privileged 314-Club is former Presidential contender Mitt Romney. The Washington Post’s Tom Hamburger explained in 2012 how Romney got an estimated $87 million in his IRA when he exited Bain Capital, the private equity firm he founded. Hamburger wrote:

“What determines an IRA’s growth is the performance of the investments, and Bain enabled Romney, its other employees and its partners to score big on that front. It was not uncommon for senior Bain executives to accrue IRAs valued at tens of millions of dollars, according to former and present company employees, by buying into Bain investments at very low prices and then reinvesting the returns in other low-priced Bain investments after the initial investments appreciated.

“When Romney was chief executive, Bain set up Simplified Employee Pension IRAs, or SEP-IRAs, under which the company contributed up to $30,000 a year to employees’ retirement accounts, according to people familiar with the program. Many of the employees decided to use this contribution to buy stock in the companies that Bain had acquired in the course of its business as a private-equity firm.”

When a stock is sold inside an IRA, there is no tax due on the gains, even if the stock has dramatically appreciated.

Wyden said that in 2014 the tax perks inherent in IRAs and other retirement accounts would cost the government an estimated $140 billion in foregone tax revenue. IRAs, said Wyden,  “were never intended to become tax shelters for millionaires – they’re designed to help typical Americans save for retirement.”

The typical American, however, is getting little benefit from the IRA or 401(k) tax benefits because he or she cannot afford to save, or save adequately, for retirement because household expenses are outstripping wages.

A recent study from the Federal Reserve found that a third of workers have no pension and nothing set aside for retirement. Wyden noted during the hearing that the “Federal Reserve last month found that an employee with middle-of-the-pack savings has $59,000 set aside for retirement.”

Today’s Stock Market: Shades of the Company Town

By Pam Martens and Russ Martens: September 16, 2014

The Company Town -- Front Book CoverThe Wall Street Journal carries a story today which builds on a topic we have been reporting on since July: that corporations, themselves, have become the largest single participants in the stock market through the repurchase of their own shares. Using data from Birinyi Associates, the Journal reports that U.S. companies bought back a total of $338.3 billion in the first six months of this year, “the most for any six-month period since 2007.” The year, 2007, by the way, was the year before the stock market imploded.

The workers of America, whose 401(k) plans represent their savings and hopes for a better, easier life one day in retirement, are increasingly buying funds indexed to the top 500 companies in America, the Standard and Poor’s 500. This is, effectively, giving a steady source of cheap capital to the biggest companies in the U.S. from rank and file workers — which is now being used to buy back their own shares instead of innovating and creating new job markets.

This level of control over workers’ savings and hopes and dreams and ability to retire one day reminded us of the not so beneficent company towns of yesteryear which wielded control over most aspects of a worker’s life: owning the home he rented and the stores where he bought his groceries and clothed his children and, as the only major employer in the region, able to set wages and working conditions as it saw fit.

In 2010, Basic Books released Hardy Green’s The Company Town: The Industrial Edens and Satanic Mills That Shaped the American Economy. Green, a former Associate Editor at BusinessWeek with a Ph.D. in U.S. history, looked at the models underpinning the several thousand company towns that dotted the U.S. landscape from the 1800s onward.

In Chapter Three of his book, titled “Exploitationville,” Green writes about one model as follows:

“Perhaps the apotheosis of such towns may be found in Appalachian coal country, home of the likes of Lynch, Wheelwright, and Coal Run, Kentucky. The logic behind such places is simple and familiar. It rests on the thinking of every bean counter: Business exists to make a profit, not to coddle employees…The very ruthlessness that surfaced in these places seems less like an inevitable outgrowth of such logic than a willful expression of malicious personalities.”

Even where Green found a more humane model by corporate overlords, a book reviewer at Publisher’s Weekly was not so sure, writing: “Marked by the domination of a corporation over the lives of its workers, company towns also became scenes of social control and experiment: capitalist utopianists like candy-maker Milton Hershey strived to create communities that would improve worker productivity, moral rectitude, and docility.”

Is docility to corporate overlords back? Why is planning for one’s retirement now conscripted to the feckless fortunes of the largest, and frequently environment-polluting, consumer-unfriendly globe-trotting corporations and their Wall Street agents who are eating up two-thirds of a workers’ retirement savings over time.

Thanks to an upheaval of thinking brought on by the 1930s economic collapse and the New Deal era, growth in new company towns subsided. And yet, here we are in 2014, just six years after the worst economic crash since the Great Depression, and we are reading this very month of plans for a mega company town in an economically distressed area of South Florida.

On September 1, Susan Salisbury of the Palm Beach Post reported on a proposal for a large scale company town to be given the comforting name, Sugar Hill. Salisbury writes:

“U.S. Sugar Corp. and pioneer ranch family Hilliard Brothers of Florida have joined to create a vision for 67 square miles in northeastern Hendry County to the southwest of Lake Okeechobee. The development would be made up of 18,000 residential units and 25 million square feet of industrial, retail, office and other commercial space.” U.S. Sugar is one of the largest employers in that farming region, raising tens of thousands of acres of sugar cane.

With the Supreme Court’s embrace of greater corporate control in their Citizens United decision; with the Justice Department’s non-prosecution, laissez faire attitude toward corporate criminality; now with corporate control of the stock market through buybacks; and this latest proposal for the thoroughly discredited company town model, where are the screams for a New Deal, for enlightened thinking?

As one commenter recently noted, the real outrage is the lack of outrage.

There’s a Bear Growling in this Bull Market

By Pam Martens and Russ Martens: September 15, 2014 

Growling Bear DrawingLast Friday, the Dow Jones Industrial Average closed down a mere 61.49 points or 0.36 percent, but the overall market breadth (number of stocks advancing versus those declining) was abysmal. At the New York Stock Exchange, there were 666 stocks advancing versus 2,515 declining. Nasdaq showed 893 advancers versus 1,834 decliners.

Equally troubling for those who have jumped into stocks with both feet, Bloomberg News has a heart-stopper headline out today: “Record S&P 500 Masks 47% of Nasdaq Mired in Bear Market.” The article, by Lu Wang and Joseph Ciolli, advises that:

“Beneath the U.S. Stock market’s record-setting gains, trouble is stirring. About 47 percent of stocks in the Nasdaq Composite (CCMP) Index are down at least 20 percent from their peak in the last 12 months while more than 40 percent have fallen that much in the Russell 2000 Index and the Bloomberg IPO Index.”

This is not atypical of a tired bull facing serious headwinds. As the authors note, today’s market does not look all that different from the last market peak: “At the last market peak, losses across small-cap stocks, IPOs and technology companies were as widespread as they are today. About 45 percent of the shares were down at least 20 percent from a 52-week high in October 2007…”

A bull market with real legs should be lifting more boats. But despite the Standard and Poor’s 500 stock index setting new highs 33 times this year, the Bloomberg writers note that the Russell 2000 Index has delivered a negative return of 0.3 percent this year.

To put the whole matter in sharp perspective, what we actually have is a big cap bull market and a broad market rowing frantically against a rip tide. But as we know well from past Fed-fueled bubbles, things can get a lot frothier before the bubble pops.

The Fed’s long patch of historically low interest rates is not the only thing helping the big cap stocks levitate their market indices. As we previously reported, for calendar years 2006 through 2013, corporations authorized $4.14 trillion in buybacks of their own publicly traded stock according to data from Birinyi Associates. And they did it while simultaneously taking on more debt.

In just 2013, corporations authorized $754.8 billion in stock buybacks while borrowing $782.5 billion from credit markets. Jeffrey Kleintop, Chief Market Strategist for LPL Financial reports that corporations are now the single largest buying source for all U.S. stocks. The rapid pace of buybacks has continued into this year with Standard and Poor’s 500 corporations buying back approximately $160 billion in the first quarter.

Despite all the talk about the cash hoards that corporations are holding, MarketWatch columnist, Brett Arends, reported in August that U.S. non-financial corporate debt has risen from $7.2 trillion in 2007 (the year before the crash) to $9.6 trillion today, according to data from the Federal Reserve.

Putting aside the question of whether a corporation should be saddling itself with debt for no more innovative purpose than buying back its own shares, there is the question of what happens to stock buybacks (and new highs in the big cap stocks) when corporate bond buyers say “enough”!

It feels like the Federal Reserve may have also been thinking about this. In a truly unfathomable step, earlier this month the Fed and its fellow bank regulators ruled that the nation’s largest banks can hold corporate bonds and stocks in the Russell 1000 to meet liquidity needs in an emergency, along with the decidedly more liquid U.S. Treasury securities.

The Fed’s announcement comes as the corporate junk bond market is once again showing signs of strain. Barron’s Michael Aneiro reported Friday that “high-yield mutual funds and exchange-traded funds lost $766 million to investor withdrawals in the week ended Wednesday, following a $198 million loss the week before,” according to Lipper.

While that pales in comparison to the $7.1 billion withdrawn in a single week in early August, the chart below shows a worrisome trend. The fear is that the outflow from junk becomes an outflow that moves up the higher-rated corporate bond ladder.

If this is indeed what the Fed was thinking when it put corporate bonds on the liquidity list for the biggest banks, that’s the kind of market tinkering nobody wants to see from the nation’s central bank.

The Fed made another unusual move on Friday when it announced that it was forming an internal committee to be headed by Vice Chairman Stanley Fischer to oversee the work of its Office of Financial Stability Policy and Research. Fed Chair Janet Yellen already sits on the Financial Stability Oversight Council (FSOC) which includes the top representative of every bank regulator in the country.

On July 10, Fischer gave a speech in Cambridge, Massachusetts that appeared to question the structure of the FSOC, stating: “It may well be that adding a financial stability mandate to the overall mandates of all financial regulatory bodies, and perhaps other changes that would give more authority to a reformed FSOC, would contribute to increasing financial and economic stability.”

Congress created the FSOC under the Dodd-Frank financial reform legislation. It’s not clear where Fischer got his mandate to create a shadow FSOC. 

SPDR Barclays Capital High Yield Bond ETF (From BigCharts.com)

SPDR Barclays Capital High Yield Bond ETF (From BigCharts.com)

Jamie Dimon Gets a Personal Call from the Prez; Seniors Get Garnished

By Pam Martens and Russ Martens: September 12, 2014

Senior Citizen HandSometimes we have to pinch ourselves to make sure we are not sleepwalking in a Dickensian dream. Earlier this week we heard Senator Elizabeth Warren tell a Senate Banking session how JPMorgan’s CEO, Jamie Dimon, got a $8.5 million raise after craftily negotiating away all of the bank’s crimes with the payment of billions in shareholders’ money. (Two of those crimes, by the way, were felony counts for aiding and abetting Bernie Madoff in his Ponzi scheme – also craftily settled under a deferred prosecution agreement with the Justice Department, which effectively puts the bank on probation for two years.)

Last night, the Wall Street Journal informed the public that, apparently, none of this criminal activity at JPMorgan has dulled President Obama’s fondness for its CEO Jamie Dimon, who has recently been undergoing treatments for throat cancer.  The Journal reported: “During one of his earliest treatments, Mr. Dimon received a call on his cellphone from President Barack Obama, who wished him a healthy recovery, the bank confirmed.”

A President with a kind heart toward those experiencing health issues is, of course, a virtue. But it is more than likely that the President hasn’t similarly dialed up the victims of JPMorgan’s various and sundry wealth transfer assaults when they fall ill.

One day before the news of the President’s phone call to Dimon emerged, we learned from the U.S. Senate’s Special Committee on Aging and the Government Accountability Office (GAO) that some senior citizens are having their Social Security payments garnished over unpaid student loan debt, forcing them below the poverty threshold.

The GAO’s study, derived from the Survey of Consumer Finances, found that 706,000 households headed by those 65 or older still carry student loan debt. Stunningly, the outstanding federal student debt for this age group grew from approximately $2.8 billion in 2005 to an estimated $18.2 billion in 2013.  For persons of all ages, Federal student loan debt has risen from $400 billion to more than $1 trillion during the same period.

That’s more than a six-fold increase for seniors and only 2.5 times for persons of all ages. What’s going on here? We strongly suspect that seniors who were just getting by on the interest income they earned on their 4 and 5 percent certificates of deposit together with their Social Security payments have experienced an impossible task of paying bills over the past half decade as interest rates have plunged to 1 or 2 percent on CDs. When seniors let their student loans go into default, the amount of debt interest begins to compound, dramatically increasing the amount of principal due.

Since it’s pretty clear that no material number of seniors aged 65 and older are taking on new debt to attend college, and the GAO reports that 82 percent of the debt is their own, not that taken out for children or grandchildren, the above scenario seems like the most plausible explanation for the six-fold increase.

Now let’s take a moment to remember that it was the biggest Wall Street banks like JPMorgan who crashed the financial system in 2008 through 2010 through toxic debt practices, causing interest rates to plunge as the economy went into freefall. The Federal Reserve has kept short rates low ever since in an attempt to revive the economy. Those Wall Street banks and their foreign counterparts were allowed to borrow an aggregate of $16 trillion from the Federal Reserve – frequently at rates below 1 percent – to repair their balance sheets. They also received hundreds of billions in cash infusions from the taxpayer. No such help was offered to the average American to repair their balance sheet.

This is what the GAO report told us is happening to seniors who can’t make their student loan payments:

“After the loan has been delinquent for 425 days (approximately 14 months), Education determines whether to take actions intended to recover the money it is owed. These actions can have serious financial consequences for the borrower. For example, Education may charge collection costs up to 25 percent of the interest and principal of the loan. Interest on the debt continues to accumulate during the delinquency and default period. In addition, Education may garnish wages or initiate litigation. Education may also send the loan to a collection agency. The defaulted debt may also be reported to consumer reporting agencies, which can result in lower credit ratings for the borrower. Lower credit ratings may affect access to credit or rental property, increase interest rates on credit, affect employers’ decisions to hire…”

In addition, the senior citizen can have his or her Social Security payments garnished. The Treasury Department calls this garnishment “offsets.” The GAO reports the following:

“The number of borrowers, especially older borrowers, who have experienced offsets to Social Security retirement, survivor, or disability benefits to repay defaulted federal student loans has increased over time. In 2002, the first full year during which Social Security benefits were offset by Treasury, about 31,000 borrowers were affected…From 2002 through 2013, the number of borrowers whose Social Security benefits were offset has increased roughly 400 percent and the number of borrowers 65 and over increased 500 percent.”

The study reports further that the amount of money collected from Social Security benefit offsets to repay defaulted federal student loans was about $150 million in 2013. The full report can be read here.

The GAO study comes on the heels of a report released by the Federal Reserve last month which asked respondents if they had set aside a rainy day fund that would cover three months of living expenses. For respondents aged 60 and over, 41.7 percent reported having no rainy day fund. (Among respondents of all ages, a majority, 57.9 percent, answered no to the question.)

Equally alarming, the study found that only 48 percent of Americans could raise $400 in an emergency from their own checking, savings, or through borrowing on a credit card which they would pay off when the next statement arrived.

The next time President Obama considers delivering well wishes to a Wall Street big bank CEO, it might do him well to remember just who put the country in this lingering economic situation.

Elizabeth Warren: Jamie Dimon Gets $8.5 Million Raise for Illegal Conduct at JPMorgan

By Pam Martens and Russ Martens: September 10, 2014

Senator Elizabeth Warren -- You May Get a Bigger Paycheck If Your Company Breaks the Law

Senator Elizabeth Warren — You May Get a Bigger Paycheck If Your Company Breaks the Law

Sparks were flying yesterday in what is typically a snooze-worthy Senate session. It felt like alien body snatchers had decided to remove the zombies and return the real U.S. Senators to their chairs on the Senate Banking Committee. Senators, right and left, asked tough, probing questions of the nation’s banking regulators, leaving many squirming in their chairs.

The session was so unusual that Senator Elizabeth Warren, a Democrat from Massachusetts, and Senator Richard Shelby, a Republican from Alabama, closed out the session in complete agreement that there is something seriously broken about the justice system in America.

Senator Warren told the hearing that in the past year, three of the nation’s largest banks — JPMorgan Chase, Citigroup and Bank of America — have admitted breaking the law and settled the claims for $35 billion. The Senator continued:

“As Judge Rakoff of the Southern District of New York has noted, the law on this is clear. No corporation can break the law unless an individual within that corporation broke the law. Yet, despite the misconduct at these banks that generated tens of billions of dollars in settlement payments by the companies, not a single senior executive at these banks has been criminally prosecuted. Now, I know that your agencies can’t bring prosecutions directly, but you’re supposed to refer cases to the Justice Department when you think individuals should be prosecuted. So, can you tell me how many senior executives at these three banks you have referred to the Justice Department for prosecution?”

Federal Reserve Governor Daniel Tarullo Has No Knowledge About Whether the Fed Has Made a Single Criminal Referral to the Justice Department

Federal Reserve Governor Daniel Tarullo Has No Knowledge About Whether the Fed Has Made a Single Criminal Referral to the Justice Department

Fed Governor Daniel Tarullo said he didn’t know the answer to the question. Senator Warren leaned forward in her chair to stare at Tarullo, incredulous at his answer. Warren then described the stark difference between this era and what happened after the savings and loan crisis, stating:

“After the savings and loan crisis in the 1970s and 1980s, the government brought over a thousand criminal prosecutions and got over 800 convictions. The FBI opened nearly 5,500 criminal investigations because of referrals from banking investigators and regulators.”

Warren, a former Harvard Law School professor, continued:

“The main reason we punish illegal behavior is for deterrence; to make sure that the next banker who’s thinking about breaking the law remembers that a guy down the hall was hauled out of here in handcuffs when he did that. These civil settlements don’t provide deterrence. The shareholders for the company pay the settlement; senior management doesn’t pay a dime. And, in fact, if you’re like Jamie Dimon, the CEO of JPMorgan Chase, you might even get an $8.5 million raise for negotiating such a great settlement when your company breaks the law. So, without criminal prosecution, the message to every Wall Street banker is loud and clear: if you break the law you are not going to jail, but you might end up with a much bigger paycheck. No one should be above the law. If you steal a hundred bucks on Main Street, you’re probably going to jail. If you steal a billion bucks on Wall Street, you darn well better go to jail too.”

Senator Richard (Dick) Shelby Sides With Elizabeth Warren on Broken Justice  System in U.S.

Senator Richard (Dick) Shelby Sides With Elizabeth Warren on Broken Justice System in U.S.

When Senator Richard Shelby’s turn to speak came next, a former prosecutor himself in Alabama, he picked up on the same thread, stating:

“I realize that you’re regulators. You’re not prosecutors. But if there’s $35 billion more or less in fines and settlements because of criminal conduct, and there’s no justice – justice is important for the big and the small. Something’s wrong with the justice department. People shouldn’t be able – whoever they are, not just financial institutions – shouldn’t be able to buy their way out for culpability, especially when it’s so strong it defies rationality. I agree with her [Warren] on that.”

Senator Chuck Schumer Grilling Bank Regulators

Senator Chuck Schumer Grilling Bank Regulators

Senator Chuck Schumer, Democrat from New York, was livid over the Fed’s nonsensical move last week to move corporate bonds into the category of “high quality liquid assets” for big banks to hold on their balance sheets in case of emergency liquidity needs while dumping municipal bonds from the category. (Every rookie broker in America is taught as part of his licensing exam that direct obligations of the states are second in safety only to issues of the U.S. government – because both are backed by taxing authority. Why rookie brokers know more than Federal regulators is cause for concern.)

Schumer told the regulators:

“By excluding municipal bonds from being considered high quality liquid assets, Federal regulators have run the risk of limiting the scope of financial institutions willing to take on investment grade municipal securities, which we know are the life blood of development in this country. My city and state, New York City and state, rely on this financing to pave roads, bridges and start construction in new schools. But it’s not just New York. Any city or state that has made tough decisions to protect their credit ratings – Chicago, Philadelphia, California – are susceptible to the impact of this rule.”

Schumer went on to cite examples from the last crisis in 2008 and 2009, stating:

“I’ve not yet heard a convincing argument why, for instance, corporate debt can be considered a high quality liquid asset but investment grade municipal securities cannot. Investment grade municipal bonds have comparable — if not better — trade, volume and price volatility and they performed well through the financial crisis. In fact, in 2008 and 2009, price declines on triple-A corporate bonds were greater than the price declines on both double-A general obligation bonds and revenue bonds.”

Schumer said mayors, finance directors and governors were “howling” about this rule and he asked the regulators if they were reconsidering including municipal bonds. Tarullo said the Fed was looking at the issue right now and some categories of municipal bonds might be added based on the outcome of their studies.

Senator Robert (Bob) Menendez of New Jersey Asks Why SEC Has Ignored One Million Public Comments

Senator Robert (Bob) Menendez of New Jersey Asks Why SEC Has Ignored One Million Public Comments

Senator Robert Menendez, Democrat of New Jersey, grilled SEC Chair Mary Jo White on why she hasn’t taken any action on forcing corporations to reveal their campaign spending. Menendez said:

“This summer, the SEC received its record one-millionth public comment supporting a rule to require public issuer companies to disclose their political campaign spending to investors. Supporters include leading academics in the field of corporate governance, Vanguard founder John Bogle, investment managers and advisors and the investing public. Without disclosure, corporate insiders may be spending company funds to support candidates or causes that are directly adverse to shareholders’ interests, without shareholders having any knowledge of it.”

SEC Chair White said the SEC was focused on rulemaking in the area of Dodd-Frank and the Jobs Act and had no current plans to address rules on campaign spending on the part of corporations.

Menendez countered that the Supreme Court’s decision in Citizens United “which opened the floodgates for corporate election spending” presumed that shareholders would have transparency in order to enforce accountability over executives. Menendez asked how shareholders could have transparency if they can’t even get basic information about what is being spent.