Ann Pettifor had a very good article on Black Rock in the Guardian late last week. As she rightly pointed out, its newfound commitment to green investment looks horribly like greenwash when the true nature of its activities in shadow banking is understood. I'm not going to repeat what Ann said: I suggest a read.
There is, however, something to add. And that is that companies like Black Rock have another enormous significance. This is that they add yet another layer of opacity between companies and their suppliers of capital. And that opacity is really dangerous.
Time and again we hear companies justifying their behaviour by saying they must act in the interests of shareholders. And time and again I go to events where shareholders are supposedly represented. And yet they almost never are. They may be represented by pension funds or insurance companies, which organisations used to put their names on the investments that they supposedly managed on behalf of clients. But now that those pension funds and insurance companies themselves invest through organisations like Black Rock, tracker funds and ETFs then it is not even the pension fund that has its name on the investment. The fund does.
Most people know remarkably little about these various types of fund. Those funds like it that way. The greater the degree of separation they enjoy from their clients the more they like it. That's simply because although these funds know the funds that they manage are not really their own, given the convoluted ownership structure that links the actual saver to these funds the chance of anyone really challenging their use of them, or holding them to account for it, is minimal. That's compounded when they undertake the types of activity Ann describes.
And this matters, enormously. The whole essence of shareholder capitalism is that there should be appropriate checks and balances so that the shareholder's interests are protected. But when the real owner of an entity is literally unidentifiable by the entity itself, and also by that real owner - and that is now the norm- then this logic fails, completely. Not only is there no accountability by corporations, but the real shareholders do know that they can, or should, hold the entity to account. The whole logic of shareholder capitalism fails.
In its place Blackrock becomes, at best, accountable to fund managers. And fund managers look like, think like, maybe earn like, and certainly want to behave like Blackrock managers. They're all in the City. So there is a singularity of view that in no way represents shareholder interests.
This permits the out-of-control capitalism we have seen.
It lets auditors report on accounts for shareholders that they know are not the real beneficial owners of the entities on which they are reporting.
And it gives rentiers free rein.
So, what to do about it?
That's hard. But there are three opti0omns. One, of course, is to reform pensions along the lines I suggest for the Green New Deal: force funds to invest in infrastructure that can be identified by those saving so that they can see what they are doing with their funds. That seems profoundly attractive to me.
The second is to require all pension funds to prepare accounts that they must send, in full, to their members explaining exactly where and how their funds are invested, with a list by name, type and activity of all the companies likely to have materially (which is measured at a very low level) to have contributed to their fund in the year. It is ludicrous that pension funds are at present an accounting black hole that is almost impenetrable to most in those funds when so much effort is put into making companies accountable.
And third? The reporting requirements of these funds needs to be improved as well.
When the reform of capitalism is essential so too is the reform of its accountability. And we have a long way to go on that one.
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“reform pensions along the lines I suggest for the Green New Deal:”..as i understand this this is your idea to offer pension/ISA tax breaks to savers in return for Government backed Green bonds. They will pay a coupon of circa 1% pa (or thereabouts) over a long term (10, 15, 25, 30yrs etc) and they can be cashed in at any time with some penalty.
Long term investing for long term investment. What could possibly go wrong?..well a lot actually.
As it stands a GRYs on Gilts on different maturities”
5yr – 0.41%
10yr – 0.63%
30yr – 1.16%
Currently consumer price inflation is around 1.7%, and RPI around 2.4% so as it stands it is plausible to issue Green bonds on these terms with the tax break. The big concern is the “penalty for early redemption”. The Gilt market has travelled a long way since 2010 with deflationary concerns and aggressive QE. Let us suppose inflation starts to rise and for argument sake say is running at 6% in a few years time with interest rates rising to similar levels. Well under this scenario a 30 yr gilt would fall in price by around 60%!! Yes owners of a “safe” Government backed gilt would see a 60% fall in the value of their capital. So what for there terms of the “penalty” to owners of your Green bonds? Well fair pricing would involve a penalty of similar proportion being imposed for those wishing to redeem early. Anything less is further Government subsidy..But could you imagine the public outcry? It would be seen as a PPI type miss selling scandal perpetrated by the State.
Now i am not saying inflation and interest rates are going to rise but they might. The point i am making is long dated fixed income investments at current prices are incredibly risky. Not about the security of getting your capital back but the price in mid life and obviously the acute risk as to a decline in purchasing power. I am not sure your idea about green bonds has been clearly thought through.
I suspect you are the person who has not thought things through.
First where is your inflation coming from? Please tell. The most massive effort from governments around the world is failing to deliver it right now
Second, what is you alternative? Equities? Have you but noticed the problems in them? Have you heard of climate change and stranded assets?
Third, I was not suggesting 1 per cent. I have suggested 1.85 per cent to reflect current average cost of government borrowing.
Fourth, did I ever mention 30 years? I think 5 years might make sense. Beyond that? Why? I would be quite confident of securing substantial locked in five year funds that would roll over, just as building societies do now
And indeed gilts do
So I am not sure what your issue is
Three further obvious points why you haven’t thought this through ( aside from the “penalty” for early redemption.
1) why would the Government issue 5yr bonds at 1.85% when they are currently priced at 0.41% ?? that is insane.
2) And I have shown you a snapshot of the yield curve how does an average of that equal 1.85%?
3) and why would you issue 5yr (or any term) by using an average of the term structure of interest rates. Unless the yield curve is completely flat you will will be either saturated with demand or have hardly any at all.
I repeat you don’t have the tools to do this analysis or if you have you haven’t thought this through.
Have you heard of policy?
And that there are biggest issues?
And that your thinking is that which is alien?
“Have you heard of policy”..
That sounds like the reply of someone who isn’t equipped to answer the points in question. You are attempting to match policy with the demands of the pension and saver marketplace hence my critique. You are clearly putting a “finger in the air” and guessing when it comes to number crunching. I sense maths might not be your strong suit?
You rather prove my argument
And actually, part of my degree is in maths, but what the heck?
But you also completely miss my points
First, I have never claimed this is more than an outline of the general terms of a scheme – and only someone pretending they don’t understand would claim otherwise
And secondly, why not issue bonds with social intent? When you notice how much we tax subsidies savings by why not do so through the interest rate? I suspect such macro thinking way beyond you though
” Let us suppose inflation starts to rise and for argument sake say is running at 6% in a few years time with interest rates rising to similar levels”
LOL – yeah? What from? A massive Brexit induced depreciation of the pound? Heaven forbid.
‘Sam Walker’ Worstall I suspect.
Or an acolyte
They turn up like rotten apples
Marco – i used the 6% inflation number to highlight the sensitivity of a move in inflation & interest rates and the impact on bond pricing. If Interest rates rose to 2 or 3% then the pricing impact is still dramatic. Are you saying this is never going to happen?
Richard – “Turn up like rotten apples” …what critical thinkers who highlight your shortcomings!!…although “I have never claimed this is more than an outline of the general terms of a scheme” is an admission of sorts that you have a very limited understanding.
Tell me when, why and where this inflation is going to come from
And given what I have said about the government guaranteeing liquidity in this market where the risk is
I have considered the issue
You made up a scenario that is currently unimaginable to all serious thinkers on the issue
I’d say that’s you with the limited understanding, of anything but game playing
But I am really not interested in your name calling. I’m more than happy to have sensible alternative opinion debated. You did not come here for that reason. Which is why you are now in the blocked list. This place survives for intelligent debate precisely because the name callers are not welcome
Problem with Ann Pettifor’s article is that it is simply wrong.
“Shadow Banking” as she calls it is not what she claims it is, and moreover, it is HIGHLY regulated.
Asset managers will borrow and lend securities (including cash) for various reasons, which is the “shadow banking” part, but they can’t just lend to anyone – normally not even to each other without a government or regulated bank intermediary. Then there are VERY strict regulations (through banking and pensions regulations) regarding what and how they can lend those securities.
In simple terms, Asset managers can only lend to government or banks, the banks can then lend on to other institutions. But banks are regulated.
Had Pettifor bothered to read the FSB report she quotes, she would understand this – but looking at her article she either didn’t, or didn’t care.
Yes, the “shadow banking” sector provides a lot of capital to the greater world economy, but the worry from the FSB is that what happens if this capital is withdrawn from the markets which would give rise to financial stability risk.
Pettifor’s solution? “We must begin by switching off the giant tap of unregulated credit”. So doing exactly what the FSB are worried about in the first place – and not understanding that it is regulated.
I also take issue with points you make in your article. It is simply not true that pension funds and asset managers are opaque structures. Both have to give a breakdown of their holdings, assets and major investments (depending on the jurisdiction the minimum size will vary but with 13F filings the amount is very small). They don’t do this every day but typically you can find a quarterly update (AM’s) or at worst annual (Pension Funds) with most if not all of the information you are claiming they don’t provide. It’s even more simple with tracker funds and ETFs as you can find out EXACTLY their holdings at any given point in time.
What I think you are really trying to ask for, is that every individual pensioner should be represented on an individual basis by dint of the investments they hold, rather than doing so by proxy through the pension funds they invest in or the asset managers which directly manage those funds.
In a perfect world that might be a nice idea, but in reality it is just not practical. The costs involved would be dramatic and these would be passed on, and for the most part the few shares an individual holds in a company will not make a difference in terms of voting at their AGM. Which is why Pension funds have trustees who aggregate and act as the proxy for the individuals. Those trustees by law have to have their own AGMs, where the individuals can make their views felt. If enough do – those trustees will be forced to do something. Even now many pension funds have become highly active in the corporate governance sphere. I think the bigger problem for you is that most people simply don’t care as long as their pensions are safe and growing.
So when you say:
“The second is to require all pension funds to prepare accounts that they must send, in full, to their members explaining exactly where and how their funds are invested, with a list by name, type and activity of all the companies likely to have materially”
They already do, by law. So do any material holdings Asset Managers. Again, by law.
Lastly, when you say this:
“force funds to invest in infrastructure that can be identified by those saving so that they can see what they are doing with their funds.”
I don’t think you have done your homework. You are asking pensioners, via their funds, to invest in specific infrastructure projects. Those specific projects will be totally illiquid and high risk and may or may not provide a return for long periods of time. It’s a terrible idea. Would you stick large parts of your pension in a single project, which might not provide a return for decades, and might also fail?
Of course not. Which is why pension funds do invest in infrastructure, but through much more suitable vehicles like pooled funds and plain old government bonds.
I’ll leave Ann to defend herself on shadow baking, but trust me, your claims are the more incredible
As for your claim on pension fund accounts; excuse me, but that simply does not happen in the way I am suggesting is necessary
And I am entirely happen for bonds to be used for infrastructure purposes: I have said so for decades now
I think you wilfully miss my point
And misrepresent your case
Ryan,
You seem to have an insider’s knowledge of this subject and an insider’s disposition as well. People within your industry are generally convinced of the idea that it is stable and highly regulated. People outside of the industry seldom agree.
There is a big mismatch of perceptions (or perspectives) on that account and it shows in your comment.
Surely the people who know what they are talking about are the ones that do this on a daily basis, not those who look from the outside, have a pre-set agenda, and who don’t have anything to back up their claims?
Which side are you and Richard on?!
I am not in the side of trolls
And I am very confident that this is your latest trolling identity here
Politely, go away and waste someone else’s time
Trevor Batten says:
“Surely the people who know what they are talking about are the ones that do this on a daily basis,….”
You’d think so wouldn’t you ? So what happened in 2008 ?
I strongly suspect that Trevor was not there
I suspect he’s never been nearer real finance
[…] Cross-posted from Tax Research UK […]
Surely the ‘troll‘ is the person who keeps making claims that don’t stand up to credible scrutiny on the basis that they can simply censor anyone who actually knows what they are talking about?
Why are you worried about free speech?
I have many concerns in life
One of them is with integrity
And a person using multiple identities to comment has none
And their comment are worthless
Free speech survives here despite the attempts of trolls and that is precisely why you are now on the blocked list
“force funds to invest in infrastructure that can be identified by those saving so that they can see what they are doing with their funds.”
Hello Richard
I can see why forcing people to do the things you think are right would be attractive to you but how is that democratic? At the moment I choose which funds to invest my savings in and I know exactly which companies those savings are invested in. I may not be able to exercise a shareholder vote but I can exercise a right just as powerful. If I do not like what a fund or company is doing, I can withdraw my investment and move it eslewhere.
Would I have any more power if my savings were forced into green projects that might or might not be profitable? Would I get a vote on what the company did? What power would I have? To be able to identify projects I had been FORCED to invest in? What good would that do me if I didn’t think they were a good investment? I am supposed to reply on the judgement of some government mandarin? I can’t see that governments have a good track record of sound investments producing decent returns.
My own free choice investments have produced compound growth running at around 11% p.a. over the last 8 years. Can you match that?
How is compulsory pension saving democratic?
How is compulsory NIC democratic?
Or is it of people want tax relief they have to take the conditions?
No one is forced to have tax relief
Steven Liddell
“I can see why forcing people to do the things you think are right would be attractive to you but how is that democratic?”
You would still be able to play investment games, which are probably lots of fun (in fact I know they are). But I for one would prefer not to have to make speculative choices everytime I take out a new utilities contract, because it’s a waste of my time and millions of other peoples’ time and the returns are piffling and the choices are baffling and choice anyway is stressful. The market dogma of choice makes people ill. Did you know that ?
It is one of the key functions of government to consider the security of the population. That doesn’t just mean being prepared for an unlikely invasion it means financial security too. Neoliberalism and the obsession with markets creates mass insecurity.
An eleven percent growth in my annual savings wouldn’t pay for a pint to celebrate, and that goes for a lot of other people too.
“My own free choice investments have produced compound growth running at around 11% p.a. over the last 8 years. Can you match that?”
Yours sincerely,
Bernie Madoff
🙂
Many of the critical pseudonymous comments you get here are just some evidence that neoliberalism is in its death throes. They might be from those who have some skin in the current game or from those who fantasise that they have or should have. Who knows? But they must be worried, because it is unlikely they would put in the effort otherwise.
I could be wrong, but I suspect their fear is that voters will demand a radical overhaul of capitalism and politicians in their “there goes the mob, I am its leader” mode will attempt to deliver. So they will attempt to rubbish any critique of, or proposals to radically change, the current regime lest they get any popular traction.
I know it’s time-consuming and frustrating, but, rather than blocking and excluding them, I’d be inclined to give them more rope with which to hang themselves.
For them, it all comes back to the ferocious, but ultimately futile, defence of the only liberalism in neoliberalism: the freedom of all sectors other than the government sector to behave as they wish without any constraint, with the government sector expected to adapt to and facilitate this, and, in particular, the freedom of the powerful and wealthy and of those who service them to capture economic rents on a sustained basis at the expense of all other citizens. The alternative, which they fear and dread, involves governments influencing and moderating the behaviour of all other sectors to drive increased and more widely spread sustainable prosperity and well-being and to ensure economic stabilisation.
My sanity demands I block them
And they do no0t give up with abuse: the pattern is always an innocuous one or two posts, then a hint of aggression followed by escalating name-calling and a suggestion that blocking them is a denial of their human right of free expression wherever they wish
It’s too boring to waste time on
And pouts other people off
I fully understand your response to the antics of these commenters. But you should be encouraged by their antics. When neoliberalism was at peak hubris, any critique was simply ignored. Now they see the writing on the wall and they’re worried.
Personally, I’m in favour of a bigger government – one that promotes social justice, fairness and equity. There is no such thing as a “free-market” – it’s underwritten by government as 2008 showed. Unfortunately government has largely swallowed the myth of “free markets which must be left to themselves” and has refused to regulate properly to prevent the cyclical financial crashes which seem endemic to capitalism, or to stop the most egregious abuses – the conspiracy against the public – or the financial rent-seeking activities that have no social value.
It’s good that Steven has the freedom to invest excess income successfully, but that freedom comes at a price – others don’t have that freedom for they don’t have excess income and many don’t even have enough to live on. I was watching My Fair Lady the other night (Pygmalion for dummies) and Alfred Doolittle described himself as one of the “underserving poor”..”up agen middle class morality”…”What is middle class morality? Just an excuse for never giving me anything.” A hundred years later and nothing has changed – strivers and skivers, immigrants, the unemployed, those who are ill or have disabilities – Tory morality despises them all.
My hope is one day we will have a government that rejects simplistic binary deserving/undeserving morality and which will rein in feral capitalism and apply principles of fairness and equity to every citizen so that all may enjoy a “good life” and not just the favoured few.
Corporate governance has become dominated by the need to maximise short-term shareholder returns to whoever or whatever they be. In doing so financial markets have grown more complex, dealing in highly intermediated, financial transactions using collateralised assets to be traded for short term gain rather than long-term investments in sound businesses. This kind of trading is a zero-sum game with no new wealth or social value created. For one person to win, another must lose and increasingly, the only real winners appear to be the army of financial intermediaries who control and perpetuate the giant Ponzi scheme. That, in short, is the basis of the shadow banking market which in itself owes its existence to the regulated banking market who either own or fund its operations. It is all about a further increase in the supply of “unregulated” credit and debt and by implication the creation of a money supply which increases the systemic risk of collapse through over leverage of assets. The last thing they are worried about is the “shareholder” stakeholder or beneficial owner. For those who claim such a market is “well regulated” it is not. Shadow banking entities are neither subject to banking regulation or meaningful oversight nor do they have access to deposit guarantee schemes or central bank money. Through the various loopholes yet to be closed by any half hearted attempt at regulation from 2012 they are still able to drive a horse and carriage down the path of regulatory arbitrage with again an increase in systemic risk.
jim craig says:
“Corporate governance has become dominated by the need to maximise short-term shareholder returns…..”
I can’t remember who it was explained that the way he saw it the problem, at bottom, is what drives that ‘need’ to maximise ….not shareholder returns, particularly, (who gives a toss about the shareholders ?) but the boardroom salaries determined by the share price. Share buybacks are a classic device for boosting a company’s share price without adding one iota of value.
The big corporations no longer operate on the tension between capital and labour. They are run by an elite intermediary group whose only real interest is how much they can cream out of a company which they are not the owners of, they are just temporary hireling contractors. Failure doesn’t ruin them. They have their gold-plated contracts and are paid for failure and another similar job is not far away. When it all goes tits up they say ‘Oooops’. They don’t even have the grace to say ‘Ooops, Sorry’. Because they aren’t sorry.
Amongst this elite group there are a few individuals who really can turn a struggling company round, but the rest ride on their reputation and are brass-necked charlatans and poseurs.
The financial sector works in a similar way, but without the inconvenience of actually having to produce anything at all except the zero sum profits you refer to, Jim.
Sajid Javid’s declaration of intent may sort the sheep from the goats, but the collateral damage to the people who rely on employment for their income will be a high price to pay and probably, anyway will only leave the parasitic financial sector standing. Well ‘teetering’, more likely and only for as long as the government keeps supplying enough chips for the market casino. The model is Las Vegas in the middle of an economic desert.
@ Jim Craig,
Many thanks for such a succinct description of the current Ponzi regime and the systemic risk it generates.