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Unions Muffle Wall Street Support of Private Accounts
By Jeffrey H. Birnbaum and Ben White, Washington Post
March 8, 2005
Yesterday, Waddell & Reed Financial Inc., a large money-management company, abruptly withdrew from a major business coalition that backs the president's effort, making it the second financial services firm to depart in less than a month.
President Bush's Social Security plan could create new business for brokerages. Wall Street is pushing quietly for the changes.
(Kevin Lamarque -- Reuters)
Other resignations are expected as well. "This is a target-rich environment," said Bill Patterson, director of a campaign by organized labor against financial companies that back Bush's plan. "We think that there are other defections likely to occur soon."
The AFL-CIO and several of its member unions have been sending angry letters to companies that manage union pension funds and staging demonstrations outside their offices. One office of the Kansas-based Waddell & Reed was scheduled for protests this week.
Last month, the Missouri-based brokerage Edward D. Jones & Co. was the first financial company to resign from the Alliance for Worker Retirement Security in the wake of labor's drive. The organization, which is based at the National Association of Manufacturers, is a coalition of corporations and trade associations that has long pressed for the creation of private accounts as part of Social Security.
"I'm sorry [Waddell & Reed] are not renewing their membership," said Derrick A. Max, the organization's director. He predicted: "This effort is going to backfire on the unions."
Under the president's plan, 4 percent of an employee's wages subject to the payroll tax could go into private investment accounts. That could pour an estimated $100 billion a year into stocks and bonds, boosting the markets' overall value and creating new business for brokerages, experts agree.
So Wall Street companies have been pushing quietly for the proposal. The chief fundraisers for the largest private-accounts lobbying group -- the $20 million Coalition for the Modernization and Protection of America's Social Security -- are the Securities Industry Association, the Financial Services Roundtable and the Business Roundtable, which includes several major Wall Street firms.
The Alliance for Worker Retirement Security also has several brokerage members, including Charles Schwab Corp., Wachovia Corp., and the Securities Industry Association. Additional Wall Street trade groups, including the Bond Market Association and the Financial Services Forum, support private accounts as well.
Financial services companies are making their points mostly behind the scenes, partly because some of them doubt that they can make much money from the initially tiny accounts. A bigger reason: They all fear that opponents will use their eagerness for change as a weapon against them -- and against the president's plan.
"We're happy to be helpful, but we're not going to be leading the parade," said Marc E. Lackritz, president of the Securities Industry Association. Edward L. Yingling, incoming president of the American Bankers Association, added: "Maybe we're not the best ones to go out front and make the case; it could be wrongly used against advocates of reform."
Wall Streeters generally refuse to publicly discuss Social Security, other than to say they want the program to remain solvent. The question of how to approach the issue was hotly debated at a Securities Industry Association board meeting in New York recently. One executive who attended the meeting said several participants complained that the SIA was too visible in its support for private accounts.
Unions accuse financial companies involved in the debate of attempting to profiteer at customers' expense. True or not, the tactic has worked for years to deter Wall Street from rooting too loudly for something it dearly wants. Now that Waddell & Reed and Edward Jones have succumbed, the AFL-CIO is stepping up pressure on Schwab and insurance companies, said Patterson, the labor campaign director.
For example, three union trustees of the New York City Employees' Retirement System have written to more than a half-dozen investment banking companies seeking a meeting to discuss the firms' Social Security policies.
So far, none of the companies has changed its position on the issue, but most are distancing themselves in at least one respect: They have told union representatives that they don't back any particular Social Security plan, including the president's.
State Street Corp. has staged the biggest retreat. In 1996, two of the company's top executives, Marshall N. Carter and William G. Shipman, wrote a book that supported private accounts, "Promises to Keep: Saving Social Security's Dream." The stance drew angry comments from AFL-CIO officials at the time. Both executives have since left the firm. Nowadays, State Street professes neutrality on the issue.
Fees for managing the private accounts and for guiding their investment could be substantial. What's more, market prices overall would probably advance. The more money that flows into the market, the better brokerages and investment banks tend to do, Wall Street executives say.
A study by University of Chicago economist Austan D. Goolsbee last September concluded that Wall Street firms would reap "the largest windfall gain in American financial history" from private Social Security accounts -- about $940 billion in fees in constant dollars over the next 75 years. The SIA responded to Goolsbee with its own study in December, arguing that Wall Street firms would earn much less -- from $39 billion to $279 billion in constant dollars over the same period.
Some in the industry assert that the accounts initially will be so small they wouldn't represent a profitable business. But most experts say the firms would accrue all sorts of benefits a little at a time. Financial services companies "will see a surge of liquidity into the market over time and the creation of a new investor class who could open additional accounts," said Greg Valliere, chief political strategist at the Stanford Washington Research Group.
There are also political implications. A senior member of the Coalition for the Modernization and Protection of America's Social Security said many groups and companies are contributing to the cause to demonstrate fealty to Bush and to help the Republicans win the Social Security issue. "We want a pro-business Congress, and this could be key," the member said.
Wall Street firms would benefit differently depending on the type of services they offer. Immediate beneficiaries of private accounts are likely to include firms such as Vanguard Group, Barclays and State Street that charge low fees and specialize in managing large pools of money.
In addition, analysts expect that companies that manage index and life-cycle mutual funds would also get a boost. Those are the types of funds that likely would be part of the menu of the new program's investment options. Barclays and Vanguard Group are major players in those investment vehicles.
Full-service brokerages such as Morgan Stanley and Merrill Lynch that specialize in managing money for wealthy investors might not see a big initial benefit from small, low-fee accounts. But executives at such firms say privately that they support the accounts and expect to benefit from them in the longer run as their size and investment options grow.
In the meantime, financial services associations and companies are keeping close tabs on the debate and hoping, if legislation gets more serious, to bend the final result in ways that benefit them. Bond traders are providing "technical" advice to decision-makers. Bankers would like to see certificates of deposit, which they oversee, added to the menu of acceptable investments.
"It's important for us to be engaged," SIA's Lackritz said. "We have a strong interest to make sure that the outcome gets it right."
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