SS: Wall Street ratchets up the lobbying effort

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http://www.nytimes.com/2004/12/21/business/21lobby.html
December 21, 2004
Wall St. Lobby Quietly Tackles Social Security
By LANDON THOMAS Jr.

As President Bush prepares to disclose the details of his plan to funnel
hundreds of billions of dollars of future Social Security funds into
privately held investment accounts, Wall Street has begun a muted lobbying
campaign, chastened by bolder forays that failed in years past.

So far, the chief executives of most financial firms have refused to take
a public stand in support of private accounts, wary of being seen as too
eager to embrace a potential new revenue stream.

At last week's White House economic meeting in Washington, they were
conspicuous in their absence from the Social Security panel. Even in
direct meetings with President Bush, who actively campaigned on the issue
of Social Security, executives have shied away.

There are signs, however, that the industry is becoming a little more
aggressive in pushing for private accounts, through a loose assemblage of
trade associations, business coalitions and conservative research centers.
These groups have lately begun trying to raise money from business
interests and to marshal support on Capitol Hill, while also seeking to
deflect criticism that Wall Street is behind the move simply to reap rich
rewards for administering the accounts.

The first salvo was fired by the Securities Industry Association, which
recently issued a research report arguing that the private accounts would
not be a financial bonanza for Wall Street.

In the paper, the association calculated that firms would collect at least
$39 billion in fees, and perhaps considerably more, from managing such
accounts over the next 75 years.

But the group noted that the fees charged would be significantly below the
fees that investment firms receive these days from low-cost mutual funds.

And even if the fees rose significantly as more people chose actively
managed accounts, the association's report argued, they would still pale
in comparison with the $3.3 trillion in revenues Wall Street firms are
projected to earn from their core securities business over that period.

The Investment Company Institute, the lobbying arm for the mutual fund
industry, has not endorsed private accounts nor has it lobbied Congress on
the matter. But while its members are reluctant to speak out publicly on
the topic, the institute recently hired as its communications director F.
Gregory Ahern, a former executive at State Street Corporation in Boston
who was involved in that firm's aggressive lobbying effort for private
accounts during the late 1990's.

Behind the scenes, the Alliance for Worker Retirement Security, a business
coalition advocating private accounts, has begun meeting with
Congressional and White House staff members, pushing the idea that private
accounts are not only good for the country but also good for business.

In November, Derrick A. Max, the alliance's executive director, met with
Charles P. Blahous, a special assistant to the president who has been at
the forefront in the White House on Social Security. They have a strong
connection, because Mr. Blahous preceded Mr. Max at the alliance.

At the meeting were representatives from the Securities Industry
Association, Charles Schwab & Company, and the United States Chamber of
Commerce, all members of the alliance.

The Club for Growth, a group financed largely by conservative business
leaders that supports like-minded Congressional candidates, has also been
active in the drive for privately held Social Security accounts. Members
include Richard Gilder of Gilder Gagnon Howe & Company, a private
investment firm, and Charles H. Brunie, the founder of Oppenheimer
Capital.

The club, which is run by Stephen Moore, who once served as economic
adviser to the former House Republican Leader Dick Armey, recently sent
out a memorandum to its backers proposing a $15 million public relations
and grassroots campaign in favor of private accounts.

This increase in activity is occurring against the backdrop of a
long-running campaign by the Cato Institute, a Washington policy research
and lobbying organization with libertarian leanings that has received
financial support from, among others, American Express and the American
International Group, the large insurance company. State Street also
provided funds in the past to support the institute's efforts to persuade
Congress of the merits of personal accounts.

Opponents of personal accounts, led by labor unions and some state pension
funds, accuse these groups of acting as a stalking horse for the financial
industry.

"Our sense is there is a lot of activity behind the curtain," said Bill
Patterson, the director of the office of investment at the A.F.L.-C.I.O.
"There is a dangerous confluence between the industry and the ideologues
of the right. These groups can't do it by themselves - they need the
covert and overt support of the financial services industry."

Faced with such criticism, the financial industry has become particularly
sensitive about how it approaches the issue of allowing individuals to
invest some of their Social Security contributions in private accounts.

Unlike dividend and capital-gains tax cuts - White House policies that
were loudly applauded by Wall Street - personal accounts are expected to
come with strings attached, requiring an industry that has always been
skeptical of intervention in the markets to work under the supervision of
government- appointed trustees.

Many top Wall Street executives are strong supporters of President Bush
and are philosophically in agreement with the idea of applying the
independence of the capital markets to the Social Security program. They
have raised millions of dollars in campaign contributions: Morgan Stanley
and Merrill Lynch were among the top corporate supporters of the
president's re-election campaign, raising over $1 million combined,
according to the Center for Responsive Politics, a nonpartisan group that
tracks political contributions and campaign spending.

Yet as executives of large and visible institutions, they are leery of
attracting political criticism from opponents of the private accounts, and
also are concerned that administering millions of small accounts may well
be a money-losing proposition.

Indeed, when asked whether they support private accounts, officials from
Morgan Stanley, Merrill Lynch, Vanguard and Fidelity all declined to
discuss the issue.

Under the most widely discussed plans under consideration, personal
accounts would be created by allowing workers to divert a portion of their
payroll taxes into investment accounts set aside in their name. At first,
individuals would be offered a limited range of investment vehicles,
mostly low-cost indexed funds. After a time, account holders would be
given the option to upgrade to actively managed funds, which would invest
in a more diverse range of assets with higher risk and potentially larger
fees.

Because Social Security taxes are used to pay benefits to current
retirees, nearly all the plans envision the government borrowing as much
as $2 trillion to fill the gap created by diversion of some payroll taxes.
Proponents argue that the borrowing would pay for itself over the long run
because the accounts, if they generated a higher return, would help reduce
or eliminate the future obligations of the Social Security system.

Some specialists on Wall Street, however, are worried that adding to the
budget deficit by such a large amount over the next couple of decades
might put upward pressure on interest rates, a move that would not be
helpful to the stock market. And with tens of millions of small accounts
to handle, industry executives say they see little room for profit after
administrative costs are subtracted.

Whatever the ultimate benefit, Wall Street's top executives worry that any
visible lobbying campaign on their part could well do more harm than good
for President Bush's cause.

"There has been no lobbying because the industry knows it will be accused
of making windfall profits," said Robert C. Pozen, the chairman of MFS
Investment Management and a member of the White House-sponsored commission
in 2001, led by the New York Senator Daniel P. Moynihan and Richard
Parsons, chief executive of Time Warner, that developed several
alternative plans for establishing private Social Security accounts.

Despite that accusation, Mr. Pozen argued, the program will not be the
windfall its critics claim.

"The accounts are so small," he said, "that the vast majority of firms
would not want to touch them. It's just not a bonanza for the industry."
There are already signs that political opponents are lining up to tar the
White House proposal by linking it to Wall Street greed. Last week, John
J. Sweeney, the A.F.L.-C.I.O. president, sent a letter to 46 financial
companies, including Morgan Stanley, Merrill Lynch and Fidelity, asking
them to publicly disavow the creation of personal accounts.

In the letter, Mr. Sweeney cited the example of State Street, which in
2002, under pressure from the A.F.L.-C.I.O., reversed a position it long
held that private accounts were the best means to address the long-run
financing squeeze on Social Security. The firm changed its position after
its former chief executive, Marshall Carter, retired. Mr. Carter had set
himself apart from his peers by advocating the accounts through speeches
and by co-writing a book supporting them with William G. Shipman, another
former State Street executive.

State Street's experience and the unsuccessful effort in 2002 by an
industry group, the Coalition for American Financial Security, are among
the main reasons Wall Street has been so reluctant to assume a bolder
approach in pushing for the accounts.

"I think the backlash occurred at two levels," said Sylvester Scheiber of
Watson Wyatt, a corporate benefits and financial consulting firm that was
a member of the coalition. "There was pressure from clients and the press
has been negative toward them. These folks are very image conscious and
they don't want to be branded as 'make a buck at any price.' "

Still, while refraining from pushing the issue directly, firms like
Merrill Lynch have taken a more oblique tack. For years now, Merrill Lynch
has run ads about the virtues of retirement saving (with no mention of
private accounts) in the back pages of Roll Call, a small newspaper that
closely follows Congressional activities and is read avidly by members of
Congress.

In keeping with their low profile, Wall Street executives have been wary
about discussing the issue even in private. Last month, at a meeting with
President Bush at the White House, Philip J. Purcell, Morgan Stanley's
chief executive, and his counterparts, E. Stanley O'Neal of Merrill Lynch
and Henry M. Paulson Jr. of Goldman Sachs, were among a group that
discussed the state of the economy and the markets.

But none of the participants, according to a person who was briefed on the
session, opened the topic of private Social Security accounts.