fresh voices from the front lines of change







Leo W. Gerard: Tom, your new book, Up From Wall Street: The Responsible Investment Alternative, provides both cautionary tales for those responsible for investing workers’ pension funds and a field guide of practical assistance for institutional investors who want to use responsible investing (RI) techniques. Let’s start with the caution. Why should workers care how their pension funds are invested?

Thomas Croft: As we discovered when we pulled together the original Heartland Labor/Capital Working Group in 1995, it’s incredible how much we don’t know when it comes to the investment practices and trends that affect workers’ retirement assets and other institutional savings. Before the crash, workers owned over $9 trillion in pension trusts, and, if we added it all up, working families owned $24 trillion in all institutional savings. So, steelworkers, teachers, insurance holders, students and college endowments, and the vast majority of our population have an interest in how these funds are invested.

Since these funds control a majority of public stocks, we have an interest in how those corporations are governed. In terms of the general economy, we have an interest in the general direction of investment flows. The historian Kevin Phillips has written about the growing power of the financial services industry. In the 1970s, manufacturing led financial services by a two-to-one margin. By 2006, goods production had shrunk to just 12% of GDP while financial services jumped to a “swollen 20-21% of GDP.” So, financial sector profits, as a percent of domestic corporate profits, rose from 16% in 1973 to 41% in 2000s. That means that vast waves of our savings and assets—our money—has increasingly disappeared into a dark hole called financialization. I’ll come back to financialization.

So, what it means in terms of the economy is that the country doesn’t build things anymore. Remember Allentown, and the song by Billy Joel that described the shutdown of Beth Steel? Bethlehem Steel was originally constructed to build the nation’s rail systems. And those workers helped build the skyscrapers in New York City, and they helped win WWII. After the Beth Plant was closed, a new Las Vegas Casino was to be built on the former steel site. Well, the casino couldn’t find the structural steel, at first, to build the casino. Kind of ironic, but also tragic.

If we can’t find enough steel to build casinos today, how in the world will we build the green jobs industries of the future? We need steel to build the Obama administration’s proposed new high-speed rail system, right? And how will the Allentowns and Homesteads and Youngstowns and Flints of this country, and all of our other rust-towns ever fully recover? We can’t depend on casino jobs, eds and meds, tourist and service jobs alone to replace the lost manufacturing jobs. We need a robust domestic manufacturing economy if we are going to benefit from the green jobs boom.

As Lynn Williams once said, “The pension savings of American workers should not only guarantee good pensions. They should guarantee American workers jobs to retire from.” Beyond that, pension trusts were collectively bargained benefits that are long-term promises to workers so that they can retire with comfort and dignity. People gave up wage increases and other current benefits to pay for that promise. Before pensions, and before FDR created Social Security, older workers might be found scrounging through trash bins in the alley or living in poor houses. Along with Social Security, pension funds are part of a three-legged stool, as it’s called, so that workers can retire without the constant fear of deprivation. Do we want to go back to the days of the poor house?

Gerard: You documented here, and in your earlier work, Working Capital: The Power of Labor’s Pensions, that workers’ pension money could cruelly be used to injure them. Isn’t that investment practice perverse?

Croft: It’s not only perverse, it should be illegal. First, as our colleagues put it, there is a gigantic pension industrial complex that is centered on Wall Street that takes hundreds of billions of dollars in fees out of pension funds just to manage our pension funds. Then, time after time, our money have been sucked and suckered into risky financial schemes that are unsustainable, and eventually crash, destroying the hard-earned savings of tens of millions of workers and their families. As you have pointed out, before this crash, the country suffered through the savings and loans debacle and the dot-com bust, and similar made-on-Wall-Street catastrophes. When we come to learn that the CEOs and other financial geniuses who devised these crash schemes all made off with billions in CEO compensation and bonuses, then it’s apparent that we are putting the wrong kind of people in jail.

I’d like to return to the concept of financialization. A large driver of financialization is the shadow bank system. The shadow banks include the large banks and investment houses that utilize un-regulated trading and derivative schemes to make immense profits. They also include the largely unregulated investment funds that invest in the private economy, such as real estate funds, the mega-private equity funds and hedge funds. These systems became so inter-related that the collapse of one sector then brought down many others. For instance, when Lehman Brothers went under, the credit default insurance plans that theoretically insured the hedge funds vanished, and the hedge fund market tanked. After AIG was nationalized, its business continued cratering due to its business selling these default swaps to Lehman and others. And the pension funds that had invested in these massive hedge funds and the AIGs, etc., then lost tons.

Our pension funds were siphoned into these shadow bank markets. When pensions invest in alternative investments—not stocks and bonds—there is a term for the ancillary benefits that might result from the investment. For instance, if a pension fund invests in affordable or workforce housing, the main reason is to achieve a good return on the investment. But the housing that is also built might be called a collateral benefit. In Working Capital, Dean Baker and a co-author discovered how hundreds of billions of our trust funds were invested in schemes that caused “collateral damages” for pension beneficiaries, other workers and our society. For example, our pensions were invested in off-shore sweat-shop corporations—many American owned — that not only exploited third-world workers but also then shipped cheap products back into the country, causing jobs to be ultimately lost here. And the lure of investing in the dot-coms that never had realistic business plans contributed to the last crash.

There’s lots of examples, but collateral damage investing continued after the crash. We all know about the sub-prime mortgage and the housing bubble disasters. Well, CalPERS, the California public employees pension fund, along with many other state pensions, lost $1 trillion in one case alone by investing in securities backed by sub-prime mortgages.

A lot of my research went into hedge funds and mega-buyout funds. Hedge funds were originally designed as an investment program for wealthy investors. Then hedge assets boomed over the last decade, growing ten-fold from 1998 to 2008 (to over $2 trillion). From 2002 to 2007, the share of dollars in hedge assets coughed up by institutional investors—including pensions, university endowments, foundations, and insurance funds, etc.–jumped from 2% to 50%. That’s a lot of money for what became, in essence, a Wall Street game to short markets and firms.

And the money pouring into private equity, climbing by 2006-2007 to $301 billion, came disproportionately from institutional investors. In the case of the mega-private equity funds—which in reality looked like the large LBO funds in the 1980s—there’s ample evidence that many of the funds over-leveraged their portfolio firms, leading to firm failures and bankruptcies. Or worse, they stripped and flipped their acquisitions. That includes Simmons Bedding, a Steelworker-represented company that just filed for bankruptcy and closed plants. That includes Mervyn’s, Linens ‘n Things, and many others. The money that the Boston mega-fund used to destroy Simmons came from pension funds. Why?

In addition, they have been privatizing many our longest-standing companies—firms that often had good labor relations. These new Wall Street barons—like KKR, Blackstone Partners and Apollo Partners–now own many of the largest employers in America and Europe; in essence, they have achieved a new stage in corporate ownership. What does that mean for those workers, communities and our economies? We should be investing our money to build up companies, not tear them down.

They’ve also damaged many of our civic institutions. I don’t have to look far to see the damage. Here in Pittsburgh, CMU and the University of Pittsburgh recently filed fraud lawsuits against Westwood Capital —ostensibly a hedge fund– after their $114 million investment vanished. And the Pennsylvania public pension fund lost an additional $2.5 billion (than they would have otherwise, according to some estimates) by betting on an extremely large hedge fund gamble (almost 1/3 of total portfolio). Colleges, states and municipal pension funds are cash-strapped. That’s no reason to bet the farm.

Worse, Congress and the White House have not passed meaningful financial reforms that might have prevented or moderated the 2008 crash and the ones before it. The author Tom Wolfe dubbed these new corporate owners the “New Masters of the Universe.” I call them the Shadow Bank Robbers. Not only should government and institutional investors force transparency, reasonable fees and prohibitions against practices that harm workers, companies and communities, we should re-regulate, bring back the New Deal protections that were discarded. And it wouldn’t hurt if we put the shadow bank robbers behind bars. Bernie Madoff got caught running what he called a hedge fund; thousands of uber-financiers are making off with billions running an even larger ponzi scheme that is perfectly legal. It’s crack finance, and it should be illegal.

Gerard: What struck me in your book is these two sentences:
“This book tells the story of a group of responsible enterprise and real estate investors who are profitably investing pension and similar assets in good jobs, affordable housing, and a green future. This book shows how workers’ capital, endowments, and other institutional investors, through responsible investment principles, can do well and do good at the same time.”
My emphasis added because I think most people would not believe you could do both. They would think that if you made socially-correct investments, you would lose money. What did your research show?

Croft: When I started writing the book, I traveled to towns and cities all over North America. I came to know some remarkable and innovative stewards of our capital…worker-friendly investors who have built projects and invested in ventures and companies in ways that make you proud. These investors were managing about $35 billion. And, in fund after fund, investment after investment, these responsible fund managers have been—for the most part–financially successful.

None of the real estate funds that I surveyed in this field guide were investing in sub-prime scams. And none of the private enterprise investors were investing, as far as I know, in the LBO over-leveraging strategies that failed so dramatically. So, the book shows you can do well and do good. How? They’re making honest profits (for our pension funds) but also treating workers with respect, investing in affordable and multi-family housing, advanced manufacturing and green jobs.

In Pittsburgh, for example, pensions invested some $3/4 billion in worker-friendly real estate funds that successfully built multi-family housing, revitalized brownfields and re-built new commercial workplaces all over the region. And worker-friendly enterprise funds have, in fact, saved steelworker jobs of two manufacturing firms that were bankrupt. So, thousands of jobs were created or saved just in this area. And these investments were the tip of the iceberg, as I’m sure many of the large redevelopment investors in the region were capitalized by institutional investors.

So, my book shows that worker-friendly investment funds have indeed had singular and significant impacts on the regions, economic sectors, companies and projects in which they invest. Most of the funds met or bested their respective investment benchmarks. The portfolio investments showcased in the field guide yielded not just good returns-on-investment, but also collateral benefits for working people and the environment.

Gerard: So that is terrific news for workers. You’ve given me the big numbers. In the book, though, you provide specific examples where these investments worked out both for the investors and workers. Would you give one here?

Croft: There are so many important examples. The AFL-CIO Investment Trusts worked on efforts to rebuild New Orleans, including a factory making sustainable manufactured housing. The MEPT Fund rebuilt a burned down hospital on the north tip of Roosevelt Island, New York, and converted it into an award-winning green housing community with 500 units, plus a daycare center and essential amenities. The KPS Capital Partners Fund restructured a bankrupt transportation company with factories in towns like St. Cloud and Crookston, Minnesota, and Winnipeg, Manitoba, now employing 1,800 union workers making hybrid busses.

And, let’s take a really big case that helped Steelworkers. On May 14, 1999, in the largest union-led buyout in the country since 1994, KPS Special Situations Fund partnered with other investors and a minority ESOP formed by employees to buy a pulp and paper mill, an extruding plant, and five converting plants from Champion International (for $200 million), which was distressed. The new company, Blue Ridge Paper Products, was launched with 2,200 new employee owners. Blue Ridge is a leading integrated manufacturer of liquid packaging, envelope paper and coated bleachboard used in food service packaging. The Company also produces specialty uncoated and extrusion coated papers.

The Company had eight manufacturing facilities located in seven states, including the paper mill in Canton, North Carolina, the extruding mill in Waynesville, North Carolina, and in five Dairy Pak converting plants in Georgia, Iowa, Texas, New Jersey & Olmsted Falls, Ohio. Blue Ridge subsequently acquired another Dairy Pak plant in Richmond, Virginia from MeadWestvaco.

And, this company became greener. The Canton mill became a charter member of the EPA National Achievement Track Program in 1999. Due to a $400 million investment in new technology over a decade, the facility is one of the most efficient and environmentally-friendly pulp mills in the world.

In July 2007, Blue Ridge was sold to Packaging Holdings Corp. KPS returned approximately 2.5 times its invested capital to its investors—including pension funds– and employee-stockholders had approximately $30 million of cash deposited into their ESOP accounts. What a huge success!

Gerard: Let me press you a little bit, though, because everyone will be asking this question when pension funds have suffered so badly during this downturn in the economy. Would responsible investing have made a difference?

Croft: In my travels, I watched as great states and communities buckled from the weight of the Great Recession: Downstate New York. The auto towns of the Great Lakes states. The strapped communities of California. From years of working in Pennsylvania, I’ve come to understand what happens when investment markets red-line communities. Boom towns go bust, and rust towns take their place. When the economy falls as rapidly as it did, most sectors of the economy get dragged down.

This was the largest market crash and recession since the 1930s. So, many of the investments by even good investors were bound to be weighed down. But my point has been that irresponsible investment practices—using our money—were a large factor in the crash, as they have been over and over.

Some of the worker-friendly investors will inevitably suffer because the firms they’ve invested in are now having a hard time. Some of the real estate funds have suffered redemptions from pension funds having to re-balance their assets (since pension funds lost so much in the general markets). But as I said, the responsible funds did more due diligence, so their investments were not as risky. If they’ve had trouble, they’ll likely recover quickly. And some funds have actually done pretty well since the downturn started.

So, we also know that it’s time that our assets are put to work for the long-term, and not in ways to destroy our economy. With the Obama Administration’s help and guarantees, for instance, we could co-invest real money to re-build our cities and towns, and re-grow and re-shape this economy. And our money should be invested so that markets serve society—community, in other words– and not the other way around. We indeed have the capacity to construct infrastructure, reinvigorate our cities, and create those highly-anticipated green jobs for our children. We just have to re-claim control of our money.

Gerard: Well, let’s talk for a minute about California Public Employees Retirement System, then, the nation’s largest pension fund. CalPERS did engage in some responsible investing, as noted in your book. But it has suffered terribly and is expected to fire some of its real estate investment managers. Is that simply a result of the market and could not have been avoided? Or should they really, in your estimation, have been doing something else?

Croft: For all the things that CalPERS did right in terms of double-bottom line investing, as it’s called—investing in green housing and buildings, urban investments, and clean technology– it may have been overly aggressive in alternative investments. And CalPERS was caught up in the sub-prime and real estate bubble markets. CalPERS is, in fact, suing Moody’s and other ratings agencies because the pension fund claims that it did not know that a $1 trillion investment in securities (that I mentioned earlier) were in fact backed by sub-prime mortgages. And some of their high profile investments in large real estate projects and overly-risky private equity have been slammed. But CalPERS has recovered to the $200 billion level, and, given the fiscal crisis in California, we’re all hopeful that recovery will continue. Some of my labor friends are now concerned that CalPERS is going back into the “dark pool,” doubling down in hedge funds and the mega-LBO funds to make up for the losses.

Gerard: What kind of response have you gotten to the book and what do you hope will happen as a result?

Croft: It’s really been great. We’ve started to get a lot of coverage, and the book is making the rounds. I’d like to see Heartland be able to create an ongoing “Center for Responsible Capital” so that we can continue to push responsible investments and act as a watchdog for union members and communities against investment abuses.

Your earlier support and that of the union has allowed me to write this book. And, your leadership in capital strategies, rebuilding manufacturing, and kicking off the green economy has provided a lot of inspiration for the book, and we actually quoted you a couple of times—simply because it could not have been stated better. We’ve now come to understand that responsible investors have been, profitably, creating hundreds of thousands of good jobs, building hundreds of thousands of living spaces, and helping to rebuild cities and communities. So, as you said, our capital stewards can indeed invest in a responsible future—our future, and that of our children—and invest in a vision of the economy that’s more humane and sustainable.


Thomas Croft is an international expert on innovative capital strategies and jobs-oriented economic revitalization policies. He serves as executive director of the Steel Valley Authority, a regional economic development organization for Pittsburgh and 11 municipalities in the Mon Valley. The authority uses creative techniques to preserve and revitalize companies in crisis. Croft also is director of the Heartland Network, a working group of responsible pension investment advocates in the U.S. and Canada. Croft was commissioned by the Heinz Endowments to write Up From Wall Street.

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