The Spark

“The emancipation of the working class will only be achieved by the working class itself.” — Karl Marx

Mutual fund scandal:
Wall Street gorges itself on your money

Jan 5, 2004

Many of the big companies that run mutual funds have been racked by scandal. These include Prudential Securities, Janus Capital, Strong Financial, Bank of America, Bank One, Putnam Investments, Morgan Stanley. Arthur Levitt, the former head of the Securities and Exchange Commission (SEC), calls the mutual fund scandal “the worst scandal we’ve seen in 50 years.” In other words, it is much bigger than Enron or WorldCom, the mammoth companies that shook the world of big investors when they went bankrupt a couple of years ago. Several congressmen have dubbed mutual funds “the biggest skimming operation in history.”

Many ordinary people have little choice but to put at least some of their savings in these very same mutual funds. After all, big companies are replacing regular pension funds with 401(k) individual retirement accounts which offer mutual funds of stocks or bonds as one of their few options. And interest rates are so low, you practically have to pay banks to keep your money in a savings account.

As a result, over 95 million people have put over seven trillion dollars in over 8,000 mutual funds. That is a lot of money, money that Wall Street, from the top managers on down, know what to do with – for themselves.

The big financial companies that run mutual funds profit by charging very large commissions and fees for their services. How much they charge is difficult to know, since they keep much of that information secret. But studies have shown that when these charges and commissions are compounded annually over a period of 20 years, almost half of a persons’ savings can wind up in the pocket of the mutual fund company.

Of course, mutual funds do not treat everyone equally. To attract the holdings of more wealthy investors, the mutual fund companies waive many of these fees and commissions. This is also done secretly.

As an added benefit, mutual funds also secretly provide their most valued (that is, very, very rich) clients with inside information, like what stocks and bonds they are about to purchase. Since these mutual funds deal in big sums, just the fact that they are about to make a purchase or sale will drive the price of a stock or bond up or down. This guarantees profits for the big investors if they buy or sell in advance.

Mutual fund companies also provide other services for the very wealthy. They “generously” allow certain privileged capitalist “investors” to use the money in the mutual funds for their own profit. Large investment companies for the very wealthy, called either hedge funds or private equity companies, secretly go in and bet the money in the mutual funds on their own investments. They then pocket the lions’ share of the profits, while the mutual fund companies get a kickback of a portion of the profits through bigger commissions and fees. So, whether the mutual fund goes up or down, the capitalists profit.

As for the expenses – as well as risk of potential losses – these are borne by the ordinary small mutual fund investor. The mutual fund managers pooh-pooh this by saying that it only costs each person a few pennies or dollars per day. But those expenses and losses tend to mount quickly.

Today, some self-annointed “crusading” district attorneys, like New York State’s Eliot Spitzer or William Galvin of the Commonwealth of Massachusetts, as well as a congressman here and there, promise to clean up the mutual fund industry. But no one should hold their breath. At most, the biggest financial companies are getting a fine – which happens to be tax deductible. A few underlings may risk some jail time in “Club Fed.” But at the same time, the careers of a few ambitious politicians are furthered while they ram a “clean-up” that is designed mainly to win back the trust from the public in institutions that are, by their very nature, rotten to their core.

The mutual fund industry is nothing but a classic example of how a few big fish feast off millions of small fish – or how the capitalists get richer by taking and using the life-savings of millions of people for their own profit.