Howard Marks came out with an explosive memo a few months ago where he declared this era of rate hikes and inflation a financial markets and investing sea change during Howard’s 50+ year investment career. The first sea change was the bond bull market we witnessed during the past 40 years which lead to interest rates going down. This led to the rise of finance and the decline of labor-intensive industries. This also gave rise to financial innovation, which ranges from derivatives, private equity, venture capital, and quantitative trading. This was the second sea change according to Marks, where institutions started chasing yield, thus leading to take high risks and investing in risky assets like growth equities, real assets, private equity, and venture capital. Now there is a third sea change. According to Marks, this third sea change is the Fed raising rates. This means that institutions are back to investing in risk-free assets as high rates mean higher returns. This will reduce institutional exposure to high-risk assets given that high returns can be achieved by investing in risk-free assets. But I guess local teachers’ pension funds did not get the memo.
Private equity behemoths like Blackstone were one of the biggest beneficiaries of the bond bubble. These companies especially boomed during the ZIRP and easy money era. Just look at founder Steve Schwartzman’s net worth over the 2010s (courtesy: Forbes).
Financiers like Schwartzman especially benefitted during the early 2020s thanks to zero % interest rates and excessive money printing. Let’s also not forget the CARES Act, the biggest upward wealth transfer in history, and the pandemic lockdowns, which benefitted financial asset holders like Blackstone. But now as Powell is trying to fight inflation, paper empires are collapsing.
We have witnessed how just a few basis points of Fed funds rate increases have already broken a fragile US economy. 5 banks have gone bust and one bank (First Republic Bank is collapsing right now), markets are collapsing, private investment valuations are falling, and commercial real estate values are plunging. This has affected shadow banks like Blackstone. Blackstone is seeing money flow out of its REIT. Investment firms like Blackstone, PIMCO, and Brookfield are seeing their CMBS holdings default. It has gotten bad that as I wrote before Blackstone is not allowing investors to redeem their funds from Blackstone’s REIT. But this hasn’t stopped money poring into Blackstone. This time the money is coming from YOU!!!
Blackstone recently raised more than $30 billion dollars. The largest LPs of the fund are some of the largest teacher’s pension funds. These funds include:
Teacher’s Retirement Fund of Louisiana
Arkansas Teacher’s Retirement System
The Oklahoma Teachers’ Retirement System
The Tennessee Consolidated Retirement System
The Minnesota State Board of Investment
The Teachers’ Retirement System of the State of Illinois
The New York State Common Retirement Fund
It is not just teachers’ pension funds. The University of California Endowment has become the latest limited partner of Blackstone. This is happening as 5% of UC students are homeless and housing affordability is a major issue for University students, in particular in the Bay Area. As Jacobin reports, Blackstone received $4.5 billion from the University of California Board of Regents. A public taxpayer-funded university is subsidizing one of the largest landlords in the nation.
As you can see, as the Fed is raising rates, Blackstone is losing money on its commercial real estate debt and investments. But don’t worry because the government is there for the rescue! And this time it’s coming out of your hard-earned pension money!!
This is not just a story about Blackstone. We have seen many bailouts happen since the era of financialization began. First, it was Long Term Capital Management, then the great financial crisis of 2008, then the great bailout of COVID where the Fed bought every paper piece it can (US Treasuries, corporate debt, junk debt, real estate debt, etc.). As I am writing this piece, JP Morgan, a too-big-to-fail banking institution, plans to buy First Republic Bank. In this latest bank bust, JP Morgan gets a sweetheart deal. With this bailout, JP Morgan received a loan of $50 billion from the FDIC while the FDIC absorbed $13 billion worth of losses. This is also not just about the Fed.
As you can see above Private Equity and Hedge Funds were one of the largest donors during the 2022 election. Blackstone was the largest contributor to the 2022 midterm election candidates. Wall Street lobbying extends to state governments as well. No doubt this funding affects state pension funds’ and university endowments’ decisions to allocate capital to PE giants like Blackstone. So I have one questions, who’s interests do these states have? Is it to their teachers’, state employees’, university students’ or Steve Schwartzman’s? Then again, how can Stevie afford another birhday bash which cost $5 million!!
This story is a must-read for every hard-working state employee. Especially if you are a teacher. For anyone who wants to retire, especially millennial and young employees, your hard-earned work is being gambled by our financial overlords. As I wrote before, in a financialized casino economy, the House always wins.
Thank you all for reading my Substack piece. If you love this, please follow me on Substack. As you can see from my linked articles, I am on Medium as well. Please follow me on Medium as well. Please share this article, especially if you know someone who is a teacher, student, or state employee. Leave a comment and like my article. Spread the word about Armchair Banker.
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