Saturday, August 26, 2023

"How Asset Managers Took Over Your Life"

From Compact Magazine, August 9:

"It’s OK,” the title of Bernie Sanders’ new book informs us, “to be angry about capitalism.” But of course, we already knew that. The background noise of our time is of resentment toward the neoliberal order—the insecurity it has foisted on the poor and increasingly on the middle class, the destruction it has wreaked on the environment, its hollowing-out of families, communities, and traditions. What we need isn’t permission to be angry, but a better comprehension of a system so complex that both admirers and critics struggle to get their heads around it.

That, I think, is why more and more readers—from big-name academics like Adam Tooze and Mariana Mazzucato to ordinary citizens trying to make sense of the world—are enthralled by the work of the economic geographer Brett Christophers, a professor at the University of Uppsala. Nobody could accuse Christophers of ignorantly ranting against a half-understood enemy: His books resemble vast excavation projects, in which the author drills through mile after mile of granite-like material—balance sheets, annual reports, parliamentary-committee minutes, documents from the National Infrastructure Commission, and at one point (he writes with a self-deprecating twinkle) a “fascinating if dry 2016 review of taxation of the UK water companies.”

From these subterranean expeditions, Christophers usually emerges with some outrageous claim that seems both shocking and appropriate to our disorienting era. In 2018, he published a book explaining that the largest privatization in modern British history had gone unnoticed. (See if you can guess: The answer is below.) Then, in 2020, Christophers’s Rentier Capitalism argued that the heart of the British economy wasn’t entrepreneurship or innovation or anything like that, but rent: that is, the ability to make money by controlling assets such as land or intellectual property in an uncompetitive environment. Christophers’ new book, meanwhile, states its audacious thesis in the title, Our Lives in Their Portfolios: Why Asset Managers Own the World.

From these three books a story emerges: of a great disempowerment, a steady transfer of ownership and control away from the citizen, the consumer, the employee, the community, and the democratically elected government, toward institutions whose workings are often invisible to public view. Or as Christophers put it when we spoke over the phone last month: “arguably the main narrative” suggested by his recent work “is the disempowerment of all major constituencies in contemporary capitalism, apart from big rentier capital.”

Like Christophers’s previous work, Our Lives in Their Portfolios functions first of all as an intriguing explanation of a mostly hidden part of the economy. The averagely curious reader may have heard of asset-management firms such as, say, Blackstone, and may even be able to distinguish it from BlackRock. He may have noted that Blackstone’s founder, Stephen Schwarzman, is worth $30 billion—enough to bankroll the sprawling new Schwarzman Centre for the Humanities at Oxford University—and idly wondered where all that cash came from. The average reader, moreover, may have already noted such major projects as the $5.5 billion Thames “super sewer,” presently under construction by a company with four shareholders—all of them asset managers.

Not many, though, will have realized the scale of the industry and how deeply it reaches into everyday life. The sector manages an estimated $100 trillion or so, about two-fifths of the world’s wealth. Already at least $4 trillion of that is in housing and infrastructure; and the CEO of Brookfield, one of the biggest asset managers, predicts that over the next 40 years, the share of infrastructure in private hands will increase tenfold. In a bravura passage, Christophers takes us through a single English county, Kent. The entire water supply is controlled by Australian asset managers. So is the sewage system. Every gas pipe that goes into a Kentish home belongs to Canadian and US asset managers. And that’s before you get to their presence in hospitals, schools, rental properties, student housing, solar farms, parking spaces, electric-car charging ports, trains, and broadband cables. Yes, Christophers tells me, “asset-manager society” is an emerging phenomenon more than an established one. But “the trend is only in one direction.”

Essentially, asset managers set up investment funds—individual projects, often with a time limit—and seek money from institutions that have piles of cash lying around, like pension funds and insurance companies. The fund invests that money, sometimes in equities, bonds, and so on, and sometimes—here is Christophers’s main focus—in housing and infrastructure. The “super sewer” gets built, the gas pipelines keep running, the apartment block gets a new landlord. The profits go to the pension funds or insurance companies, with a healthy performance-related fee for the asset manager. Who could object to so efficient an arrangement?

One answer is the tenants of Invitation Homes, a property company owned by Blackstone. Between 2014 and 2016, rents rose while the amount spent on maintenance fell; Reuters reported widespread allegations (disputed by Blackstone) of “slumlord-like” conditions. But thanks to the cost-cutting, the profit margin jumped 61 percent, up from 52 percent, and when Blackstone sold the company, it had made a total profit of $3.5 billion.

For Christophers, this story represents more than an unfortunate series of events: It is the essence of a system which takes the familiar downsides of privatization to another level. First, because asset managers depend on performance fees—which rise if the fund makes a speedy profit—the incentives encourage them to pay workers less and treat customers worse. Second, because the investment funds for infrastructure and housing tend to have a time limit, their focus will usually be on selling the asset for the best price—so short-termism takes precedence over long-term stewardship.

Third, because asset managers are wary of risk, that risk ends up being transferred to the state and to taxpayers. In 2016, the people of Bayonne, NJ, found that their water bills had gone up 13 percent—making a splendid windfall for the private-equity fund KKR, to whom the contract had been sold in 2011. The increase, it turned out, was because Bayonne’s residents weren’t using enough water: As part of the deal, Bayonne’s city officials had promised a guaranteed level of income, so less water usage meant higher charges.

No brief summary can do justice to the detail and precision of Christophers’ account, or the tenacity with which he debunks the asset managers’ defense that the real beneficiaries are the teachers and firefighters whose pensions are ultimately being invested. Like all of Christophers’ books, Our Lives raises several questions, the most immediate of which is: How on earth does he know all this stuff? As it turns out, there is a straightforward biographical answer....