Wall Street Takes Workers’ Retirement Money and Uses It Against Them
jacobinmag.com
jacobinmag.com
"monocled, mustache-twirling oligarch", "secret control panel", "faceless", "takeover of Oz"
"fleeced", "skimmed", "self-enriching", "waging a class war", "bankrolling", "profiteering", "wage a war"
And on for every subsequent paragraph.
Retirement funds are huge because a compulsory 10% of all wages must be invested in a retirement ("superannuation") fund, not able to be spent until retirement age. The total savings is over $3 trillion, and annual fees each year amount of ~2% of GDP (twice what Australia spends on electricity each year, and nearly as much as the military budget).
Oddly enough, it's unions and the Labor party themselves who set up this arrangement, during a neoliberal phase in the 90s.
Ostensibly, it was supposed to give workers secure retirements, but it's simply replicated the inequality of the labor market, and left the poorest people with the lowest balances (elderly women are now the most impoverished demographic in Australia, mostly due to these privatized pensions).
So it's failed to fix poverty, failed to provide secure retirements, lowered spendable wages for every working age Australian - not to mention invested in anti-worker companies and participated in privatization as discussed in the article above.
Sadly, the Labor party still defends the scheme, due to being unwilling to admit that one of their flagship projects was a mistake.
Superannuation is one of the best piece of gov't policy ever conceived, with the exception of probably free public education.
It has made australians one of the richest in the world. It has allowed people who would otherwise squander their savings to have investments that they can live off in their retirement.
I do agree that some superannuation providers are price gauging on unsuspecting customers - but realistically, these people should have known better, and shop around. Good industry-run super providers are very cheap and cost effective, and generate at least market returns.
The problem of inequality or poverty for people with low balances in their super is not something that this policy aims to solve. There will always be people in situations where they are unable to contribute. That's why the pension system exists - a final safety net.
Super is not a mistake at all, and I'm very glad that this policy is instituted for australians. They would've been very much poorer over all, had it not been done.
> It has made australians one of the richest in the world.
Which Australians? It's certainly helped already rich Australians dodge taxes, if that's what you mean?
> It has allowed people who would otherwise squander their savings to have investments that they can live off in their retirement.
Why not force people to save 100% of their incomes, if all spending is simply squandering? If you want to increase savings, there are much better ways to do it (Norway's SWF for instance). The idea that a minimum wage worker would be saving 10% of their income instead of putting food on the table is crazy. Lowering the spendable wages of already low paid workers by a further 10% is a terrible thing to do.
> Good industry-run super providers are very cheap and cost effective, and generate at least market returns.
Even "good" industry funds have fees ~20x higher per invested dollar than Norway's SWF, and performance no better than a basic index-following approach with a fraction of the fees.
> The problem of inequality or poverty for people with low balances in their super is not something that this policy aims to solve.
Wrong - Labor and the union movement claim it's about security and dignity in retirement. Of course, Keating's real goal was to privatize a core function of the welfare state, and provide a tax dodge for the rich.
> There will always be people in situations where they are unable to contribute. That's why the pension system exists - a final safety net.
That would make sense if the pension was anywhere near the poverty line - it isn't. And if the pension is there to provide security in retirement... what is super for?
> They would've been very much poorer over all, had it not been done.
Ask elderly women living in homeless shelters how rich they feel thanks to super and a pension that isn't enough to afford food and shelter.
Keating could have set up super to create a Norway-style SWF that funded above-poverty-line pensions for all. But he chose not to because his goal was privatization and the gutting the welfare state.
Unfortunately and unsurprisingly the industry is fleecing everyone, but the idea itself isn't bad.
I agree that rather than a blanket 10% for everyone, it would be better if there was some redistribution involved, such that parts of the super from higher earners was redistributed to lower earners and helped grow their balance.
Economists universally agree that super gains shouldn't be taxed at all, for very good reason. If you want to tax rich people, tax rich people. Don't harm everyone else by imposing taxes on them (which, as you point out, disproportionately affect them vs the already wealthy)
Whether they are good or not depends what you do with the money after it is collected.
In the case of super it's "put it in a special account for an individual where they can't spend it until retirement".
Much better would be "put it in a massive Norway-style fund, and use it to fund above-poverty-line welfare for all".
Skeptical that super gains shouldn't be taxed highly - a broad, universal welfare state means everybody needs to be contributing, not just the rich (of course, those at the bottom of the pyramid net benefit through the consequent redistribution).
Isn't the whole point that it's not a payroll tax? Ie instead of the government getting and using the super money to fund its activities (whether they be welfare or what have you), the money remains the individuals own, just forcibly saved in what should be cheap or free index funds, but in many cases unfortunately isn't.
I guess a halfway point would be for government to get the money, but rather than using it to fund its activities, the money is pooled and invested and then that money is given out to fund retirement according to need down the track? Is that what you're referring to?
> Skeptical that super gains shouldn't be taxed highly - a broad, universal welfare state means everybody needs to be contributing
But that's the thing, it kind of doesn't and economists have been pointing that out for decades. Economists across the political spectrum agree that pretty much all taxes, including payroll, capital gains, stamp duty etc etc be completely abolished for everyone and replaced with taxes on wealth, carbon, consumption etc etc instead. But that will never happen, because people don't get it and neither do politicians.
I am not sure about specific ETFs, but some of them will lend out their shares to make up for the no fees though.
Additionally from a cooperate governance point of view the ETFs will generally vote for whatever management recommends. If the majority shareholder of a company is an ETF then management doesn't have meaningful oversight.
If you don't want to follow a bunch of companies than Vanguard funds are probably a good choice though.
My point is it doesn't matter what Jacobin says on anything because they have exactly one take on everything. It doesn't make the story not true, it just makes it not worth listening to their take on it.
Jacobin is Breitbart on the other side of the spectrum. They don't deserve to be validated with discussion. That's my subjective opinion.
My guess, knowing nothing about the subject, is that "alternative investment" funds wine and dine the pension managers a lot more than a boring index fund will.
Because they are not the ones paying the cost of mismanagement, and they have a captive audience that is both legally prohibited to go elsewhere, and practically ignorant of how mich they are getting screwed.
I think when it comes to preventing money from being made available to short sellers probably wouldn't improve the financial system long-term, but i see how this could be interpreted as a frustrating facet of our current system.
short selling doesn't lower the price of a stock. Short selling is one of the actions which may reveal the true price, which may be lower than the current market price. Or the short seller may be wrong, in which case they paid a fee for a loss (or at best, for nothing in return).
Like yes there is a tiny fee to compensate but it's no where near proportional to the damage done.
Only a small portion of shares of any given company are ever actually available to trade. So even a small number of stocks sold short can overwhelm the market and drive the price down far, far more than the fees collected make up for.
Even if the short sellers aren't successful in driving down the price, the stock is still not gaining as much as it otherwise would have due to the added selling pressure that otherwise wouldn't have been there.
Do short sellers really do that much damage? Surely they're just part of the price-discovery mechanism for a stock?
If you're holding a stock for the long term, what do you care if its price is temporarily a bit low? Just wait it out.
Suppose a tsunami destroys your factory and the insurance company weasels out of paying the claim. Now you've got an otherwise-profitable business with knowledge of the industry and an existing supply chain, but you have to raise capital to build a new factory or you're out of business.
An obvious way to raise the money is to issue some new shares. But if short sellers lower the share price right at the moment you're trying to raise the money, you may not be able to raise enough to build a new factory. Then the company goes bankrupt, the long-term investors lose everything and the short sellers make a lot of money.
Companies in precarious positions where the ability to raise capital to continue operating could be make or break are the sort that tend to attract heavy interest from short sellers.
It’s a good way to lose tons of money.
Where this happens is under conditions of uncertainty. Your factory is gone. It will be a year before you can build another one even if you can raise the money. Will your customers still be there by then? Maybe a 50/50 chance.
If you rebuild the factory and they are, you're back in business, and the returns would more than justify the cost. If they're not, you rebuild the factory and still go out of business because the customers couldn't wait that long. So once you account for the risk, the expected value of investing in the rebuild is effectively at the market rate of return.
Until the short sellers lower the share price. Then the company would have to issue more shares and find more investors each willing to invest despite being more diluted. Can't raise the money, no factory, failure immediately instead of a 50% chance of success in time.
First, companies with strong fundamentals and short term liquidity issues rarely go bankrupt, because there are plenty of entities willing to lend them money to smooth out their cash demands. This is basically the entire reason that commercial lines of credit exist.
Second, believe it or not companies can go bankrupt without wiping out their stock price. Bankruptcy courts are smart enough to not give away the entire company to the debtors when they owe $1 today but will receive $2 tomorrow.
Third, attempting to actively drive down a stock’s price with short sales is a pretty bad strategy. First of all, the Downtick Rule is a thing that exists. Second of all, and more importantly, if the stock is illiquid enough that (Downtick Rule notwithstanding) a short-seller can manipulate the price downward, that means the stock is illiquid enough to manipulate in the other direction when a buyer decides to execute the same strategy in reverse (and buyers have no stock borrow requirement and no equivalent to the Downtick Rule to worry about - you can absolutely drive up stock prices perfectly legally, provided that act isn’t part of some other illegal scheme like a pump and dump).
Finally, the discussion around short selling almost always focuses on a few high profile speculators and never acknowledges that the vast majority of shorting is for passive hedging (e.g. of options trades) where the “desired outcome” of the short seller probably isn’t for the price to fall. E.g. if you buy a call option and hedge the delta by shorting stock, you are indifferent to whether the stock goes up or down - you are betting on volatility, not price movement.
Think about it this way: if short selling were the act that it is often made out to be we would see every stock driven to zero by these all-powerful short sellers. We don’t, because short sellers don’t have the power people think they do and also aren’t (mostly) interested in seeing prices fall.
A company in a precarious position has trouble finding new creditors. Not many banks will give you a loan if there is only a 50% chance you'll be able to pay it back.
> Second, believe it or not companies can go bankrupt without wiping out their stock price. Bankruptcy courts are smart enough to not give away the entire company to the debtors when they are short $1 today but will receive $2 tomorrow.
Failure to raise capital can make a company worthless when it wouldn't be otherwise. You have customers willing to buy products but no equipment to make products, so without capital the customer demand can't be turned into money. But customer demand can't be sold to a competitor in bankruptcy court.
> Second of all, and more importantly, if the stock is illiquid enough that (Downtick Rule notwithstanding) a short-seller can manipulate the price downward, that means the stock is illiquid enough to manipulate in the other direction when a buyer decides to execute the same strategy in reverse (and buyers have no stock borrow requirement and no equivalent to the Downtick Rule to worry about - you can absolutely drive up stock prices perfectly legally, provided that act isn’t part of some other illegal scheme like a pump and dump).
But then how does the buyer make money? They buy a ton of stock of a company that still might go out of business. It's less likely to go out of business that way, but you don't get to find that out for another year, and it's not so much less likely that this strategy would have the same level of profit as short selling a company that then goes to zero right away because they couldn't raise the capital immediately required to continue operations.
> Think about it this way: if short selling were the act that it is often made out to be we would see every stock driven to zero by these all-powerful short sellers.
You can't just go short Apple and expect it to drive them out of business. It only works for a company which is already at risk, to push them over the precipice.
And it's a high risk strategy. If you fail to drive them out of business you could lose a lot of money. But if you succeed, you make a lot of money at the expense of the people who lose it to you.
But then how does the short-seller make money? They short a ton of stock of a company that still might not go out of business.
See how it works both ways?
As for everything else, I don’t know what to tell you - there is no basis in reality for your extremely narrow hypothetical construction, so there is nothing to argue with. As someone with some expertise in finance and investing I am telling you that you don’t understand what you are talking about, and I don’t mean that in an insulting way - this is complicated stuff. You can choose to ignore me as an a-hole on the internet, or you can choose to take the feedback and accept that there is more for you to learn on this subject before you offer opinions. It’s entirely your call.
Imagine a small or midcap company that is a solid, profitable business, just hanging out on the market, doing it's thing, not seeing that much trading activity, with only a tiny fraction of shares actually trading hands any given day.
Then, one day, there is a concerted attack by multiple parties who borrow and sell short far more stocks than is ever traded in a single day. The added selling pressure overwhelms the market and the price tanks. This catches the eye of media, who start publishing articles asking what's going on. Some articles are even paid for by the short sellers themselves. Prominent people start pulling opinions out of their ass about how the business has no future, the board and executives are incompetent etc etc. It's a vicious cycle and down the stock goes.
Now, why, if this is all just an artifact of shorting, and it is in fact a solid, profitable business with a bright future, can't this be easily countered by simply pointing that out and buying the shares at a discount until the market catches on and the price skyrockets back up?
Because, unfortunately, it's much easier to just go with the momentum and jump on the shorting bandwagon, betting the stock will go down even more. Even if you tried to stem the drop, the short sellers can just borrow even more stocks and continue to overwhelm you with selling pressure.
This dynamic plays out all the time in US stock markets, and this isn't even taking into account abusive naked shorting, which is actually kinda sorta illegal except even the rules against that aren't meaningfully enforced.
No doubt you can identify an example of this happening? Even once?
Can you list some companies?
https://www.biospace.com/article/releases/viragen-inc-multif...
They were forced to shutdown by short sellers: https://www.bizjournals.com/southflorida/stories/2002/04/08/...
Others have managed to stay alive by the skin of their teeth: https://marker.medium.com/i-run-a-public-company-5b6347fc0b1...
Short sellers didnt drive them to bankruptcy, they did it all by themselves.
So you can buy more shares on sale, clearly.
Pay attention to the thread. While that might be a valid argument, it's not what's being discussed in this comment chain.
That said, the "problems raising capital" argument has been argued enough elsewhere in this thread that I won't bother arguing it further.
If I’ve got that right, then you’re basically saying it is irrational for stock lending to exist at all, since all stock lenders are by definition owners of the stock. Do I have that right? I.E. do you believe that stock lending is an inherently irrational economic activity?
This is not how shorts work. This is not how any of this works
It is very difficult to short a stock into oblivion because there is an almost unlimited amount of money that will happily be the counter-party to an obviously stupid trade.
First, I don't disagree the market and price discovery can benefit from shorting. But here we're talking about retirement accounts that are already long the stocks in question. There's no world in which the owners of those stocks benefit from them being lent out to short sellers, despite creative rhetoric to the contrary. If the shorters are right and the company is a fraud, it's STILL not in the interest of owners of stock in that company to lend their shares out. If anything, it's even MORE in their interest to NOT lend them out to be sold short, instead, they need all the help they can get to keep the price up so they can make a controlled exit themselves.
Second, why, if a decrease in price is all just an artifact of shorting, and it is in fact a solid, profitable business with a bright future, can't this be easily countered by simply pointing that out and buying the shares at a discount until the market catches on and the price skyrockets back up?
Because, unfortunately, it's much easier to just go with the momentum and jump on the shorting bandwagon, betting the stock will go down even more. Even if you tried to stem the drop, the short sellers can just borrow even more stocks and continue to overwhelm you with selling pressure.
This dynamic plays out all the time in US stock markets, and this isn't even taking into account abusive naked shorting, which is actually kinda sorta illegal except even the rules against that aren't meaningfully enforced.
It's not a problem, it has no real impact, what impact it has is likely net positive, it is not a conflict of interest, and it's impossible to form a coherent argument for why it should be illegal.
There's a reason nobody who understands what's going on cares.
Wow, what a condescending finish. I care and I understand. If I invest in a company, I don't want my shares to be lent out for the purpose of lowering the price of my investment. I would never buy shares on margin for investments I really care about, because it's obviously a conflict of interest. Why would I want people to be able to work against my investment? You can't possibly understand and argue that short sellers have no incentive to tank the price, and that's what they are betting on happening. And you can't possibly understand and argue that people that invest in a company have no incentive for the price to go up, and that's what they are betting on happening. You don't see a conflict there?
I'm not saying it should necessarily be illegal, but why not make it an option to opt-out for people who care?
I'm saying being forced to loan out all of your shares in a retirement fund with no option of opting-out is the problem. You should have the option to buy on margin or not. I consider this one of the most important factors when deciding which broker you want to use, and it's one of the many things Robinhood purposefully tries to drive their users away from because they make less money by making this transparent.
If somebody profits by keeping something a secret from you, you should ask yourself why.
It's in your interest for the price to be higher when you sell.
If the short sellers are wrong, the price will not being going down long term, whether you lend shares to them or not; might as well profit from it if you can.
Your mistake is in thinking your choice to lend shares to short sellers has any impact. If you're buying shares of Apple for your retirement account, the price when you go to retire will be whatever it is, regardless of whether your shares were lent to short sellers.
Some brokers let you opt out of lending shares out, but if you're ever long some shares and you're afraid that the company is actually doing some major fraud and the price might drop to zero if the short sellers are given an incentive to publicize it then why are you long this stock?! Conversely if you're confident the company is healthy, then clearly the short sellers will just lose a bunch of money; why not take a slice of that?
Your mistake is assuming predatory short sellers don't exist.
> If the short sellers are wrong, the price will not being going down long term, whether you lend shares to them or not; might as well profit from it if you can.
If people want to pay a premium to not loan out their shares, let them and adjust the price accordingly. That's how markets are supposed to work. Why do people buy Berkshire A instead of Berkshire B? I realize there is a subtle difference (apart from price), but I know people that pay the premium without knowing what it is. Shouldn't you be happy to profit from an investor's ignorance?
Make it an option and let people vote with their money. That's what markets are for.
In the sense you seem to mean, they literally don't. Short sellers cannot drive companies to bankruptcy.
> If people want to pay a premium to not loan out their shares, let them and adjust the price accordingly.
That's an option available to you. Some brokers do let you opt in and out of lending shares. Of course, it comes with a cost.
I'm aware of this, but it's not an option for a retirement account. That's the entire point we're debating, is it not?
> Short sellers cannot drive companies to bankruptcy.
I honestly don't know how you can believe this. If they drive the price so low that the company is unable to manage its debt they are forced to declare bankruptcy, the short sellers never have to close their positions and they keep all of the profit. So not only can they do it, they have a strong financial incentive to do so.
Well, it's actually pretty easy.
1) In theory, it can't happen.
2) And in practice, it doesn't happen.
It doesn't get much more cut and dried than that!
> If they drive the price so low that the company is unable to manage its debt
....that's a bit like saying short selling costs lives, because if short sellers drive the price so low that the headquarters catches fire, people might die in the flames.
See, the problem here is that driving a share price down doesn't stop you from managing your debt. Which is a key reason why there are no documented cases of short sellers driving healthy companies into bankruptcy.
Have a good night.
(Again, I say this because there is no theoretical mechanism by which selling stock short can realistically cause bankruptcy - contrived examples to the contrary. And we know they're contrived examples because it's never actually happened.)
First, I don't disagree the market and price discovery can benefit from shorting. But here we're talking about retirement accounts that are already long the stocks in question. There's no world in which the owners of those stocks benefit from them being lent out to short sellers, despite creative rhetoric to the contrary. If the shorters are right and the company is a fraud, it's STILL not in the interest of owners of stock in that company to lend their shares out. If anything, it's even MORE in their interest to NOT lend them out to be sold short, instead, they need all the help they can get to keep the price up so they can make a controlled exit themselves.
Second, why, if a decrease in price is all just an artifact of shorting, and it is in fact a solid, profitable business with a bright future, can't this be easily countered by simply pointing that out and buying the shares at a discount until the market catches on and the price skyrockets back up?
Because, unfortunately, it's much easier to just go with the momentum and jump on the shorting bandwagon, betting the stock will go down even more. Even if you tried to stem the drop, the short sellers can just borrow even more stocks and continue to overwhelm you with selling pressure.
This dynamic plays out all the time in US stock markets, and this isn't even taking into account abusive naked shorting, which is actually kinda sorta illegal except even the rules against that aren't meaningfully enforced.
The problem with this kind of reasoning is that it applies even more strongly in reverse, because herds of long-oriented speculators aren’t bound by the need to borrow stock or sell on an uptick, etc. Short-oriented speculators need capital, stock borrow, and upticks to sell stock. Long-oriented speculators just need capital.
Hell, even in cases where long oriented speculators really do bite back, and in even in the fraction of those cases where they're able to have any success, they still get ridiculed in the media and in the industry.
Not true - many mutual funds pay out securities lending revenue to investors. For example, VTSAX had ~$170M in net lending revenue in 2020, about 1% of fund total income (nearly all of overall income is from dividends).
what would be their motivation for harming their compensation?
If the borrow fee was enough to compensate the stock owners for the damage done by the short sellers, why would any short seller ever pay to borrow the stocks to sell them short?
you're making wild claims, and cannot offer a coherent theory that explains what you think is happening. not a good look.
> If the borrow fee was enough to compensate the stock owners for the damage done by the short sellers, why would any short seller ever pay to borrow the stocks to sell them short?
for the same reason that heaping piles of shares of stock trade hands every single day, at a price agreed upon by both parties.
And no, it's not at a price agreed upon by both parties. The owners of the stocks have zero say in any of it. Even if they did, most people aren't able to make an informed decision that allowing their stocks to be lent out to short sellers for a small fee is in their interest. (and, despite creative rhetoric to the contrary, there's no world in which doing so is in their best interest)
If I could lend out any shares I own (and shares that I plan on owning for longer than the short seller will) for 1% interest per month to short sellers, I would! I certainly wouldn’t lend out any share for 2% per year or less. There’s a balance to be struck. This might only be 0-2 stocks in your portfolio at any given time.
I also wouldn’t ever lend out dividend paying stocks (until the tax laws are updated) because the stock lender receives payment “in lieu of dividend”. It can’t ever be a qualified dividend so instead of paying 15% qualified dividends tax, you pay about 28% earned income tax on it instead.
If I was not earning income for shares I was lending out, the optimal play is to never lend out shares for any reason because you’re right it’s a direct conflict of interest.
short selling (not naked short selling) doesn't "do damage". It is part of the set of actions in the market which reveals the "true" price of a share.
Lending out shares for short sellers for a fee is just a fund's way of getting extra income from their assets. If the short seller turns out to be right (and the stock is over-valued), then at least they would've gained the lending fees. The fund's share position is still the same, and their losses (if any) is still the same.
Can't they withdraw their money and use some other instrument? Or just keep it in a savings account? Or just bury it in their backyard?
Furthermore, not all short sellers are evil. While some short sellers may have ill intentions, short sell have researched and exposed many fraudulent companies effectively embezzling funds.
I don't agree short selling should be banned, but I agree the already illegal practice of naked shorting should be enforced in a more meaningful manner.
If people can lend out dollars for interest, than I think lending out shares should be allowed as well. If banks can lend out deposits and collect fees that seems to be the same thing as lending out equities as well. Do you see some delineation between these practices?
I agree shares shouldn't be lent out the holder permission, but if you want a consistent amount of money every month, no matter what, then those small fees really add up. This is what most retirement funds are obligated to provide, and they can no longer get it in government debt.
This might also be a perspective thing. I have a very different view on the function of markets than you seem to have. A market primary job is to allocate resources effectively, not provide entitlements to passive participants. The market doesn't exist to pump what ever positions you might be long, its meant to reward effective use of capital while preventing ineffective use.
If this sounds familiar, that’s because — in the spirit of Biden’s promise that “nothing will fundamentally change” — the proposal is a recycled asset from President Donald Trump’s kleptocratic White House. And indeed, Trump’s infrastructure adviser — who worked at infrastructure investment firm Macquarie — is talking up Biden’s proposal as a way to help Wall Street firms buy up and profit off everything from federally owned dams to airports.”
Wups