Gadfly: The Pea In This Shell Game Is Real Tacky

Ed Raymond

City of Fargo employees would be wise to save these tips about three companies in which to invest their 401K funds if the City Commission decides to privatize their retirement system from pensions to 401Ks as proposed by Commissioner David Piepkorn. All of these investment comments have been assembled from national news sources and company publications

Company #1. “Largest trader and marketer for electric and natural gas energy. Buys energy at a negotiated price and sells when price increases. Is #5 on Fortune 500 list and rates fifth in overall sales. Company has interests in utilities, power plants, and energy projects around the world. Named as most innovative company in America six years in a row.”

Company #2.  “Has international data, Internet, and other operations, including business long-distance. It is the #2 long-distance carrier in the U.S. behind AT&T. At one time tried to acquire Sprint but government cited anti-trust laws to thwart takeover. An up and coming company, it acquired 75 related businesses in 1990. It owns a third of the high speed data cables in the U.S. and runs the second largest long-distance service.”

Company #3.  “Has been around almost 300 years, tracing its roots to an English sugar-trading company that began business in 1793. As of August 1 the company had $7.1 billion in the commodities future market. The company was also one of 22 official trading counterparts with the New York Federal Reserve Bank. Currently run by a former chairman of Goldman-Sachs who was later governor of a large Eastern state,  later elected to the U.S. Senate.”

Guess Which Shell The Little Pea Is Under

Almost 60 years ago a buddy and I spent a summer working for a concessions firm out of Fergus Falls selling ice cream sandwiches and foot-long hot dogs at dozens of county and state fairs in the region. We hustled for business on the carnival midway because that’s where the money is. We often put in 18-hour days traveling from fair to fair, operating a two-ton truck loaded with freezers and carts. We traveled with the midway units because these guys could fix anything with spit, wire, and tape. Carnies are fascinating people, fanatically loyal to their family and fellow workers and suspicious of everyone else. I think it was worth at least a semester of psych classes. Once they got to know you–and if they liked you–they treated you like family, sharing meals and sometime sharing tricks that separated rubes from their money.

A good family man operated the carnival shell game. You know it. Guess which shell the pea is under and double your money. As much as I watched his quick hands, I rarely guessed right. He was teaching a son to hustle the game. He was going to be good, but the son wasn’t as good as his old man. There are some secrets to the game. The pea was always slightly tacky so it would not roll around on the table. If you listened to the old man’s chatter and blinked you lost money. I thought of the shell game when I saw Piepkorn was pushing 401Ks instead of regular pensions for Fargo city employees. If a Fargo employee had invested $1,000 from his 401K in S & P’s 500 index in 2000 it would have been worth $991 in 2010. Mighty tough to retire on these numbers.

Wall Street Bankers And Big Business CEOs Love 401Ks

I have never “played” the stock market because I never had money to lose. I don’t buy  lottery tickets either. I’m sure my pension depends on what might bring in a few bucks. The stock market has been lousy for ten years. 

The shift to 401Ks from normal pensions brings joy to Wall Street brokers and big business pension funds, but the little guy might as well go to Vegas or the local VFW and hit the blackjack tables. How is a maintenance person or a snowplow driver going to choose “profitable” stocks when financial planners can’t? I briefly described three companies earlier. They sound like terrific investments. Enron was the first company. Go back and read the description. “Kenny Boy” Lay, buddy and big political contributor to the Bush family with his “smartest guys in the room,”  ran one of the biggest scams in American business history. When Enron went bankrupt 6,500 employees lost their jobs and 401K retirement funds. But the “smartest guys” took good care of themselves before they ended up in jail cells. On the last business day before filing bankruptcy Lay and his “smart guys” awarded themselves $55 million in cash bonuses on top of other millions “bonused” out a few weeks earlier. Just a year before the bankruptcy, Lay and 140 top company officials split$310 million in salary and bonuses and exercised $434.5 million in stock options.

While the smart guys were cleaning up, Enron employees lost $850 million held in their 401K accounts. Line repairman Roy Rinard, a veteran of 35 years, had  moved funds into his 401K from other accounts and bought more Enron stock. When the company went bankrupt Roy lost $470,000, most of his retirement. The pea wasn’t under the shell he had picked.           Company #2 was WorldCom under the leadership of Bernie Ebbers. Go back and read my description. When business declined in 1999,  Ebbers decided to buy other telecom businesses on the brink, spending $41 billion. Then Ebbers and WorldCom did some very fancy accounting which aroused the interest of the Securities and Exchange Commission. Before WorldCom went belly up, Ebbers personally borrowed $366 million, arranged a $1.5 million annual pension for himself for life, and sold $140 million in stock. Before fraud was finally charged and trading halted, WorldCom stock was at nine cents. WorldCom employees? A quick goodby to 401K funds. They didn’t find the pea either.

How To Destroy A 300-Year-Old Company In the Blink Of An Eye

Jon Corzine, former head of Goldman-Sachs, former Democratic governor of New Jersey, and former U.S. senator, was the golden boy of investment banking for awhile. When he took over MF Global (Company #3 on my list) about 18 months ago, the stock immediately jumped 10 percent. Read the description for Company #3. He was given a salary of $1.5 million, had the company pay his lawyers $400,000, received $1.5 million as a signing bonus, and was given over $11 million in stock options. Later on he bought 440,000 shares of MF for himself and his children. He was already worth about $300 million from his CEO tour at Goldman-Sachs. But Jon suffered from Ronny and Nancy Traumatic Greed Disorder. He bought up over $6.3 billion of European debt. 

By June of 2011 MF Global had $44.4 billion in liabilities with only $1.4 billion in the bank. A leverage rate of 40 to 1. Not good for banking. Corzine, another “smart guy,” bet that European countries would bail out the big banks. MF Global was not big enough “not to fail.” The bankruptcy was a shocker for Wall Street and other big investors. Guess what happened to the 401Ks of MF Global employees. Corzine resigned with the FBI looking for $600 million missing from investor accounts. Global employees didn’t find the pea either.

Republicans Vote To Trust God–But Can We Trust Wall Street?

Commissioner Piepkorn says the Fargo business community and accountants have told him they are “overwhelmingly positive” ( Fargo Forum-10/30/2011)) about instituting 401Ks for all city employees. You betcha they are. The Wall Street casinos, big and small business, and the Republican Party have been aching to get rid of guaranteed pensions and Social Security since the 1930's. They would all love to get their hands on Social Security and 401K money to work their financial magic like Enron, Goldman-Sachs, Lehman Brothers, and MF Global. Just think of the bonuses coming from such a windfall.

I have known Dave Piepkorn and his family since he was three feet tall and could only dream he would become an offensive tackle for the Bison. Dave will always serve the community well. But I think he needs to do some homework on 401Ks. I would recommend a couple of books for Fargo citizens, commissioners, and city employees. And use Google. I Googled “401K disasters” just for fun. I got 2,240,000 responses in .2 seconds. Evidently there’s lots of 401K troubles in lots of River Cities.

Ellen Schultz has studied and researched retirement programs for many years and is considered one of the few experts around. The title of her book is “Retirement Heist: How Companies Plunder and Profit from the Nest Eggs of American Workers.”  I suppose you could ask her what she really thinks. Her reviewer Steve Weinberg put it this way: “The book is crammed with heart-breaking anecdotes of retirees suffering (and in some cases probably dying) because of pension-related corporate greed. (The Ronny and Nancy Traumatic Greed Disorder is alive and well today on Wall Street and in the business community.) But the perpetrators have not been charged with any crimes.”

In one section she covers the pension scenarios of our favorite tax evader General Electric.  GE made $14.2 billion in profits last year and didn’t pay a dime in federal income taxes. CEO Jeff Immelt complains that the company’s pension plans reduce profitability (!!) and should be changed to something like 401Ks. Schultz says Immelt didn’t mention the fact that GE pension plans contribute billions to the bottom line even if they have 230,000 retirees. She reveals that GE hasn’t contributed a cent to workers’ plans since 1987! It has plenty of cash on hand to pay all the current and future retirees. The pensions that really hurt GE are the executive pensions. The liability is now $4.4 billion it has paid out $573 million in just the past three years. Her reviewer writes: “How such corporate executives and their retirement heist allies sleep well at night is a puzzle to anybody with a conscience and a sense of fair play.” Read the book.

The Selling Of Junk And Crap

Another book that generally covers the 401K problem is “Lost Decades:The Making of America’s Debt Crisis and the Long Recovery” by Jeffrey Frieden and Menzie Chinn. One paragraph from the review by global economist writer Jon Rosen nails why we are in such a financial mess: “We learn how massive lending from abroad...encouraged an unprecedented spree of debt-financed consumption. We learn how lawmakers disarmed the financial regulators, allowing the proliferation of highly complex, unsupervised and interconnected financial instruments ( bankers call them “junk,” brokers sold them as “crap”), which enabled firms to increase profits by taking on riskier assets. We learn how some of those firms failed when one highly dubious assumption–that housing prices would continue to rise–proved false.”  The authors particularly blame the Bush administration, taking a $236 billion surplus left by Bill Clinton to a deficit of $650 billion by 2004 by tax cuts for the rich and two useless wars. It’s a good read because it outlines how greed still rules Wall Street and Washington.

Actually the idea behind 401Ks is a good one. All citizens should share in the assets and liabilities of a free but regulated market.  But business can only be conducted and based on trust. In a democracy we cannot have the golden rule that only those with the gold rule.

We are not ready for 401Ks. The worker cannot trust his employer now because businesses big and small have demonstrated they have lost all sense of community. Think Crystal Sugar. I think it is amazing that the rich don’t seem to realize yet they need a strong middle class to remain rich. The rich have gone 30 years without sharing their booty and  bounty with the worker. No worker should play the 401K game until he knows the shell game is  actually played with a pea. If you wish to practice the game, you can buy a set of three resin “walnuts”  complete with tacky pea for $9.95 on the Internet. If you get good at the game, you can join the carnival and work it–after you get your 201K or your .001K.