A Senate hearing exposes violations of American System principles

By Nancy Spannaus[1]

March 17, 2022—On February 17 the Senate’s Committee on the Budget, chaired by Democrat Sen. Bernie Sanders, held a hearing devoted to the activities of one of Wall Street’s primary abusers of the American System principle of the general welfare, private equity funds. The particular subject under discussion was a strike underway at the Warrior Met Coal company in Alabama, where more than 1100 miners are demanding restoration of their basic labor rights, which were stripped from them by private equity firms which took over the company.

Wall Street Firms More Powerful than Government!
BlackRock, the world’s largest private equity fund. (aljazeera.com)

The title of the hearing was Warrior Met and Wall Street Greed: What Corporate Raiders are Doing to Workers and Consumers.” The written testimonies can be accessed here. Senator Warren’s testimony is particularly useful in describing the nationwide destruction overseen by the private equity companies, which have a sordid record of looting firms, slashing wages, cutting benefits and jobs, and raising prices for consumers–all in the interest of increased dividends.[2]

In addition to the testimony from Senator Warren, who  introduced a bill entitled Stop Wall Street Looting in 2019, the Senators took testimony from: Mineworkers President Cecil Roberts; a striking miner; economist Nomi Prins; two university professors; and Dr. Douglas Holz-Eakin, President of the American Action Forum. Only Holz-Eakin praised the operations of the private equity firms; Senator Tommy Tuberville of Alabama submitted testimony that simply stated that he believed the strike was not a proper matter for Congress to take up.

The hearing testimony concentrated on the extraordinary power held by three major private equity firms, BlackRock, Vanguard, and State Street, who currently exert outsized power over the economy. As reported by James Kwak, research fellow at the University of Connecticut School of Law, at the hearing, these three firms

have amassed significant ownership stakes in virtually every large corporation, which means that almost all corporations have the same major shareholders. Their influence over these corporations potentially gives them a breadth of economic power probably unrivaled since the age of J. P. Morgan at the beginning of the twentieth century.

Complementing Kwak’s testimony was Nomi Prins, a former Wall Street executive, who elaborated on the way that asset management and private equity firms are dominating the U.S. finance markets. In the course of her testimony, she noted the obvious, which should be shocking and unacceptable:

Asset management firms, with trillions of dollars at their disposal, have become more influential than governments and the regulatory entities responsible for keeping them in check. (emphasis added)

All combined, the testimony demonstrated unequivocally the danger that the current functioning of these huge financial management firms represents to both the welfare of the workforce, and the stability and security of the financial system. As such, these operations fly in the face of the principles elaborated by U.S. Treasury Secretary Alexander Hamilton, who strenuously opposed speculation, and insisted upon national sovereign control of the currency and a “general welfare” standard for the operations of the governmental system as a whole.[3]

A Hamilton painting

Under Hamilton’s American System principles, the purpose of banking was to provide a stable financial environment for the growth of the economy—its agriculture, commerce, and manufactures.  Once the banking system begins to act as detriment to prosperity, as the practices described in this hearing do, it is violating the most basic principles of sound management. Then it is the responsibility of the Federal government to protect the general welfare, as American System president Franklin Roosevelt, for example, did under similar circumstances.

The full opening statement by Prins is reprinted below.

Prins’ Testimony

Thank you for the privilege and opportunity to speak before you today.

My name is Nomi Prins. I am a former managing director of Goldman Sachs. Before that, I ran the international analytics group as a senior managing director at Bear Stearns in London. I’ve also held positions at Lehman Brothers and the Chase Manhattan Bank.

After years on Wall Street, the levels of greed, unparalleled influence and unethical practices in the industry caused me to step away. Since then, I have worked to uncover the manner in which the global economy and our financial system has become so unequal, unjust, and fractured.

Wall Street Firms More Powerful than Government!
Economist and former Wall Street executive Nomi Prins

In 2008, two of the investment banks that I had once worked went bankrupt and saw their risky bets and bad practices nearly tank the global economy. Those banks no longer exist. However, the economy remains on edge.

Today, nearly a decade and a half later, we sit at another precipice of grave risk. Asset management behemoths and private equity institutions have amplified the distortion in financial markets. The magnitude of their influence over securities and companies has no historical comparison. Their unfettered access to policymakers and major institutions spans the world. These new financial giants are leaving smaller market participants from all parts of the economic spectrum exposed to concentrated systemic risk and diminished representation.

Yes, it is true that Wall Street banks remain as powerful and influential as ever.

But now, asset management firms, with trillions of dollars at their disposal, have become more influential than governments and the regulatory entities responsible for keeping them in check.

It is important to understand that at the top of this financial hierarchy stands BlackRock. The financial goliath manages $10 trillion in assets. That’s more money than the size of any other country’s GDP besides China or the United States. BlackRock’s meteoric rise has seen its assets triple since 2012, and nearly double from only 5 years ago.

The world’s largest asset manager acts as a money manager, private equity fund, institutional investor, trading software platform, and government partner.

What’s truly made it untouchable is its ability to produce and attract capital to Exchange Traded Funds or ETFs. ETFs are attractive because they offer intraday liquidity for both buyers and sellers in financial markets. But what the shock from the early days of the pandemic in 2020 showed us was that frenetic ETF activity can intensify panic in the markets. Quick outflows executed in bulk can exacerbate a falling market, which can hurt those that can afford it least, the most.

Ultimately, leveraging its government connections, BlackRock was awarded a no-bid contract to manage the Federal Reserve’s corporate bond buying program. The contract allowed BlackRock the opportunity to essentially support its own investment grade bond ETFs in the midst of a pressurized environment.

BlackRock and its executives had access to confidential information and the ability to formulate business decisions for themselves and their large clients. No other institution in the world has or had such access during or since that crisis.

Currently, BlackRock, Vanguard, and State Street manage more than $22 trillion in global assets. For comparison U.S. GDP stands just shy of $24 trillion. The asset management industry has only grown more concentrated at the top over the last decade.

Wall Street Firms More Powerful than Government!
Private Equity’s control of Warrior Met was featured at this hearing.

These Big Three dominate the market. Their growing stranglehold on U.S. equity participation provides them greater chances to hold veto power or directly influence business strategies for nearly all major corporate decisions.

As these institutions expand further into the world of private equity, their ability to dictate corporate control and outright ownership in every sector of the economy will have a greater human cost. Private equity business practices are largely designed to extract capital, not build it. As a result, small businesses and communities caught in the private equity crossfire will come under greater control of big finance that puts cost and job cutting ahead of worker stability.

Today, BlackRock and these other institutions have expanded to such a magnitude that they effectively are the market. This represents a monopoly sort of influence over competition, assets, and transactions. It elevates the systemic risk that the global financial system faces.

This renders everyday people, retail investors, workers and anyone with a 401(k)-retirement plan exposed to the risk that these massive trillion-dollar institutions pose. These individual shareholders of ETFs or other funds, seeking to invest their hard-earned money in the markets and build for retirement, have had their ability to obtain a seat at the table reduced.

By creating a shareholder pass through structure, similar to the kind that Wall Street has used for decades, we can strive to even the playing field and reduce the immense power of mega money managers. This would enable participants invested in ETFs or other funds to hold shareholder rights with respect to the corporations in which these vehicles are invested. Currently, these rights are retained by the asset management companies themselves.

We should enact policies focused on reducing the sheer size and concentration of asset management institutions and private equity firms to establish a more efficient, transparent, and equitable marketplace. The risk of corporate wrong-doing, fiscal mishaps, unfair tax advantages, and conflicts of interest is too great to ignore. So is the possibility of extreme price movements due to the leverage and trading patterns of these mammoth asset management institutions. Our financial stability and security depend on addressing this.

Thank you

[1] Nancy Spannaus is the author of Hamilton Versus Wall Street: The Core Principles of the American System of Economics.

[2] One area of major concern that she does not mention is that of housing, where these firms are increasing crowding out private owners and buying up huge swaths of housing stock, raising rents, and adding to the scarcity of affordable housing. See recent testimony by Sen. Sherrod Brown.

[3] See Hamilton’s Report on Manufactures.

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