Mitch McConnell, master of ceremonies in the United States Senate, and devoted Davos Man collaborator, had not recently evinced grave concern over the mounting federal budget deficit.
Three years earlier, when Trump’s tax cuts were on the table, McConnell dutifully rounded up the votes while perpetuating the Cosmic Lie.
“There are a whole lot of economists1 who think that it will pay for itself,” he told the television anchor George Stephanopoulous, who graciously declined to press him to name any of these economists. “It’s very likely to be a revenue producer.”
That claim proved false. Less than two years after the tax cuts, the federal budget deficit had increased by more than one-fourth, reaching nearly $1 trillion.
Yet now, in April 2020, just as millions of Americans faced unrelenting hardship, McConnell was suddenly expressing horror over the runaway federal debt. Spending had to be reined in, he warned, as he opposed the latest pandemic relief bill. The wealthiest country on earth supposedly could not afford to spend more to aid a populace ensnared in a once-in-a-lifetime disaster.
“My goal from the beginning of this2, given the extraordinary numbers that we’re racking up to the national debt, is that we need to be as cautious as we can be,” McConnell said. “We can’t borrow enough money to solve the problem indefinitely.”
McConnell was a legend in Washington—a dedicated practitioner of constituent service, with the caveat that his constituents were energy companies, financial institutions, defense contractors, and pharmaceutical concerns. Over a Senate career that was well into its fourth decade, he had catered relentlessly to the interests of Davos Man while extracting the lifeblood of American democracy—campaign cash.
His success is owed to his mastery of Senate procedures and his ability to instill fear within his caucus, holding the votes together above all. He is a rarity in the American capital—a career politician who appears to take pride in being liked by few. He had once been described as “a man with the natural charisma of an oyster.”3 He wore it as a badge of honor, a sign that he was too busy worrying about the mechanics of lawmaking to press flesh.
In the give-and-take of McConnell’s world, the virtues of any proposed expenditure had to be assessed through a pragmatic calculation of who wound up with the money. If the cash flowed to an industry that shared the bounty via campaign contributions, then the spending represented a prudent investment in pro-growth policies for the middle class. But if the funds went to people in no position to increase McConnell’s power, then here was a reckless squandering of taxpayer dollars.
The relief bill at issue aimed to help people who were squarely in the latter camp. Democrats were proposing to send $1 trillion in federal aid to beleaguered state and local governments to prevent the layoffs of teachers, cops, and firefighters—groups that generally did not raise significant money for Republicans.
No doubt, the budget deficit was enormous. The federal government was on pace to spend almost $4 trillion more4 over the course of 2020 than it expected to receive in tax revenues, yielding a gap nearly twice as large as in any year since World War II. But most economists saw this as appropriate, and even imperative in the face of a colossal threat to public health and livelihoods.
Just outside San Francisco, William Gonzalez had recently written his landlord to beg for mercy. He had lost his job as an attendant at an employee cafeteria inside a hotel that was suddenly devoid of guests. His $700-a-week paycheck had become a $414 unemployment check. His wife, Sonia Bautista, had just worked her last shift as a maid at another hotel. The landlord had taken pity on his family, allowing them to pay only half of their $2,800 monthly rent, but how long would his generosity last? And how long would it take them to find new jobs? The virus appeared to have staying power.
Gonzalez and his family were foregoing heat to limit their costs. They had no money for movies or other entertainment for their fourteen-year-old son, Ricardo. They had always been careful with their bills, avoiding debt, but now they were running up credit card balances just to pay for groceries. They had recently shelled out $10 to buy masks so they could visit the unemployment office. And they were terrified by the looming loss of their health insurance benefits, which came as part of his wife’s job.
“That’s our biggest concern,” Gonzalez told me. “We are very worried about this. What if we get sick? We can’t even pay out of our pocket.”
Similar fears tore at tens of millions of other American households. The government and its assortment of relief programs was the only thing preventing a full-on collapse. This was a hard truth that went back to the Depression and the seminal economist John Maynard Keynes. When the economy shut down, destroying the capacity for people to earn a living, the government had to unleash money to create demand for goods and services.
The United States was in control of its own currency, and investors were displaying an insatiable appetite for the rock-bottom stability of American government debt, supplying the Treasury carte blanche to finance whatever spending was necessary.
Still, McConnell held firm against aid for states and local governments. This risked a repeat of the Great Recession more than a decade earlier, when the loss of housing wealth combined with the stock market rout had prompted a severe pullback in consumer spending, diminishing tax receipts. Local governments responded by slashing the ranks of teachers, cops, and other public sector workers, at once diminishing public services and further weakening their economies.
Beyond accepting joblessness and the erosion of public services in the midst of a national emergency, McConnell was blaming the victim. He claimed that cities and states were in trouble not because of the pandemic, but because of extravagant generosity toward the very people threatened with joblessness—cops, public school teachers, and other government employees.
“There’s not going to be any desire on the Republican side to bail out state pensions by borrowing money from future generations,” McConnell said.
If states could not manage their bills, he added, perhaps they could make use of the legal machinations frequently employed by the casino operator residing at the White House.
“I would certainly be in favor5 of allowing states to use the bankruptcy route,” McConnell said.
That would enable state pension systems to stiff public sector workers.
In McConnell’s world there was plenty of money to rescue Davos Man, but nothing left for regular working people.
In blaming rank-and-file employees for the budget problems of state and local governments, McConnell was indulging a level of cynicism that was remarkable even by his standards.
For years, so-called alternative asset managers—the benign argot for hedge funds, private equity shops, and the other pirates sailing the high seas of finance—had sought to colonize an alluring frontier strewn with diamonds: pension systems stocked with the retirement savings of state and municipal employees.
The industry had pursued this goal with flotillas laden with campaign cash and armies of lobbyists. It had carried the day by arguing that financial geniuses wielding algorithms would generate higher returns than simply putting pension money into low-cost, boring investments like index funds and government bonds.
The private equity industry had in recent years persuaded American public pension funds to entrust it with enormous sums of money. The total had climbed6 from $320 billion to $638 billion between 2015 and 2018.
Led by savvy opportunists like Steve Schwarzman, the industry sold itself to clients as a wealth-generating machine while exploiting the opacity of its business to impose an unending array of fees7—for managing money, for looking out for risks, for monitoring positions, and for a host of ill-defined advisory services.
Davos Man courted credulous pension managers with a smorgasbord of inducements—tickets to sporting events, expensive wines, and junkets to destinations far and wide. In 2010, a manager for California’s pension system—one of the largest on earth—had testified in a corruption probe that investment firms had flown him around the world on private jets, taking him to Shanghai, Mumbai, and New York for what were billed as “one on one” strategic meetings8. (Nothing like a bottle of Château Margaux to focus the mind on fiduciary responsibility.)
A decade later, the ties between Schwarzman’s company and the man who managed the holdings of California’s pension system raised fresh questions about the propriety of their dealings. Ben Meng, the chief investment officer of the California system—by then stocked with nearly $400 billion in assets—personally owned stock9 in Blackstone, according to a June 2020 financial disclosure form. Three months earlier, the California pension system had entrusted $1 billion to a Blackstone fund. It was reasonable to wonder whether this transaction had been influenced by Meng’s personal stake in Blackstone’s performance, as opposed to the best interests of California taxpayers. Meng had also been paid between $10,000 and $100,000 for a teaching gig at the Schwarzman Scholars program at China’s Tsinghua University. In August 2020, as these disclosures were excavated by the financial blog Naked Capitalism, Meng abruptly resigned. A state ethics probe10 was ongoing.
Over a fifteen-year period, private equity had sucked up $230 billion in fees from the pension funds and university endowments whose money it was managing, concluded a study by Oxford University’s Said Business School. Yet the industry’s returns had failed to match11 traditional options like index funds, which were characterized by ultra-low fees.
“This wealth transfer12 might be one of the largest in the history of modern finance: from a few hundred million pension scheme members to a few thousand people working in private equity,” the study concluded.
No one ran a more efficient dollar-extracting machine than Schwarzman.
In recent years, Blackstone had turned itself from a methodically growing financial player into the darling of Wall Street, its share price nearly doubling over the course of 2019.
Its performance had been boosted by a gift from Schwarzman’s Florida neighbor, Donald Trump.
In slashing the corporate tax rate, President Trump had enabled private equity players to ditch their previous structures as so-called partnerships—which had been set up to shield earnings from the tax collector—while converting themselves into ordinary corporations13. This had unlocked a lucrative world of new investors such as mutual funds. They had previously been shut out of investing in private equity because of the complex tax filings involved in dealing with partnerships.
Blackstone’s conversion to a regular corporation had produced a surge of money. By the end of 2019, with Blackstone’s shares soaring, Schwarzman’s net worth14 had climbed to $19 billion, up from $13.2 billion only eight months earlier.
Schwarzman had shared the windfall with the Republican leadership who had enabled it. McConnell’s primary fund-raising vehicle, the Senate Leadership Fund, was brimming with $20 million in contributions from Schwarzman alone.
At about the same time that McConnell was blaming retired public sector workers for the perilous condition of state and local finances, a lawsuit in his home state of Kentucky offered a disturbing perspective on the seamy interactions of private equity with the pension system.
The suit was filed by Kentucky’s recently elected attorney general, Daniel Cameron, a Republican. He had filed it on behalf of the state’s retirees, arguing that they had been cheated by Blackstone and another giant private equity company, KKR. He dropped a complaint full of damning details about how they had allegedly exploited the naivete of the state’s pension overseers—a classic tale of big city bankers fleecing credulous bumpkins.
Over the previous two decades, the United States enjoyed one of the greatest bull markets in history, allowing regular people to invest in low-cost index funds and rack up terrific returns. Yet the Kentucky pension system was “grossly underfunded and facing collapse,” the complaint noted. It had lost more than $6 billion since 2000, sliding from a surplus toward insolvency.
Seeking to make up lost ground while cloaking the extent of its troubles, Kentucky’s pension managers bought into a pitch from Blackstone and KKR, according to the lawsuit. In 2011, the state pension system sunk more than $1.2 billion into a trio of funds comprised of slices of other hedge funds assembled by the two private equity giants.
Blackstone and KKR assured Kentucky officials that its funds would yield a positive return, though they were in fact engineered to generate exorbitant fees, the complaint alleged. When losses resulted, the state was forced to kick in more than $1 billion to bolster its teetering pension system. Lawmakers came up with the money in part by cutting support for public schools.
In its own legal filings, Blackstone asserted that the returns it produced for the Kentucky pension system exceeded the target.
One detail in the state’s complaint conveyed the sense that Schwarzman had rolled Kentucky like a rube in a sidewalk game of three-card monte: Schwarzman had allegedly used his private jet to transfer cash from the taxpayers of Kentucky into his own pockets. He had supposedly deployed the plane to fly Blackstone’s agents to Kentucky for meetings, and then billed the state for the cost of the flights. The tab had allegedly exceeded $5 million a year.
A Blackstone spokesman called that account “totally false.”
It was a devastating claim—an accusation that Schwarzman had pillaged Kentucky’s retired civil servants. He had used the proceeds to bankroll the Davos Man collaborator who ran the Senate, who was in turn applying his power to deny aid to the people of his own state in the middle of a catastrophe.
Meanwhile, Schwarzman was about to gain another dividend from the Trump administration.
With the country focused on the pandemic, the Labor Department quietly issued a fruitful directive: the government cleared the path for private equity and hedge funds to begin managing trillions of dollars’ worth of retirement savings beyond government pension systems—that is, accounts managed by companies and individuals.
Schwarzman had been seeking this change for years, correctly viewing private retirement savings as a frontier strewn with treasure.
The terse, jargon-filled directive from a little-watched arm of the federal government drew scant mention in the press. To the extent that it was covered at all, it was described in the same neutral terms that private equity companies favored—as an alternative made available for people planning for their golden years.
The regulation enabled Schwarzman and the rest of his industry to dip into a vast, as-yet-untapped reservoir of investment stocked with $8.7 trillion15.
Even for Davos Man, that was a hell of a lot of money.
But other members of the billionaire tribe were not satisfied with merely profiting from the opportunities presented by an epochal disaster. They sought to exploit the pandemic as a chance to demonstrate their moral underpinnings—a useful device in the reach for fresh gains.