A Smarter Way to Occupy Wall Street

I love the concept of the "Occupy Wall Street" movement, if we can call it that. The middle class has had enough of Wall Street bankers, corporate executives, and the rich in general taking a disproportionate amount of the wealth while they themselves suffer with unemployment and stagnant wages.

But I find it ironic that the same middle-class people who are marching on Wall Street are the same people who are funding Wall Street's oversized paychecks. If change is what they want, they need to educate themselves on how they're actually feeding the Wall Street beast and find better ways to get the message across.

Problem 1: Rich bankers and investors
The "fat cats" on Wall Street have taken the brunt of the abuse after the financial meltdown in 2008 after complicated derivatives and mortgage securities helped take down our economy. At the same time, hedge fund managers, private equity managers, and investment bankers took home millions, if not billions, of dollars while the rest of us ended up unemployed (this Fool included) or at the very least without a raise.

But the truth is, there's a reason hedge funds make money, private equity deals are made, and Wall Street trading continues. They get funding from investors to do it.

And who is providing Wall Street with all of this money? Yep, it's you and me, and a lot of the same people occupying Wall Street and cities across the country today. In fact, public pension funds are some of the biggest investors in private equity firms, a gateway to Wall Street.

  • The 20 largest public pension funds in the U.S. have $224 billion allocated to private equity investments. That includes Wall Street buyout firms like Blackstone (NYSE: BX  ) , which alone has received investments from 61 different public pension funds.
  • Kohlberg Kravis Roberts (NYSE: KKR  ) gets 62% of its funding from public pension/sovereign wealth funds. Another 14% comes from funds of funds (where similar funds invest).

Another irony is that some of the same unions that demand pensions are now occupying Wall Street. Because of funding gaps, pension funds are increasing allocations in alternative investments like private equity and hedge funds. So these unions are supporting policies that actually benefit the same corporations that the protesters are angry with today.

Problem 2: Everything is intertwined
Say your problem with Wall Street is the bailed-out banks, not the private equity firms or hedge funds. It's Goldman Sachs (NYSE: GS  ) , JPMorgan Chase (NYSE: JPM  ) , and Citigroup (NYSE: C  ) that really get your blood boiling.

The problem with singling them out is that the whole system is so interconnected that no matter which investment vehicle you use, you're likely funding these big banks. Hedge funds use big banks as prime brokers, not only paying to trade but also paying for the analysts we chide so frequently at The Motley Fool. Private equity firms are buying and selling companies, usually with the help of an investment bank on one or both sides of the deal. One of these firms is likely involved in some way with a buyout and is making money off those buyout deals. And even most mutual funds are run either by big banks or by a company that uses one of the big banks as its prime broker.

Then there are credit cards, bank accounts, and mortgages that all help feed the Wall Street monster.

It seems like there's almost no way to escape the stranglehold Wall Street has on our money.

Bring the problem to the forefront
The funding to Wall Street from public pension funds is a large problem that Occupy Wall Street could call much-deserved attention to. For starters, public unions can make sure that their funds aren't going into hedge funds and private equity funds.

Below are three of the largest public pension funds in the U.S. and their percentage of assets allocated to private equity. (If you're so inclined, click on the links to see their complete list of asset allocations). In total, these three funds have $70.1 billion invested in private equity funds.

Hedge funds play a smaller role in public pension funds, but that's beginning to change. A report by Preqin says that public pension funds have increased allocation to hedge funds from 3.6% to 6.6% since 2007.

Do it yourself
The only way to truly escape Wall Street's grasp is to stop feeding the beast. Don't invest in hedge funds, private equity firms, or any of the million oddball products they sell. Do the research yourself and become a long-term investor -- that way, traders don't get rich off your buying and selling, a manager doesn't get rich by taking a percentage of your assets, and most of Wall Street's machine stays out of your pockets. (And of course, read my articles and all the other great free content here at the Fool.)

If you don't want to do your own research, you can still take charge of your own finances by moving into low-cost ETFs like SPDR S&P 500 (NYSE: SPY  ) , which follows the S&P 500, or the broader-based Vanguard Total Stock Market ETF (NYSE: VTI  ) . These funds are still run by investing giants, but over the long-term, they will outperform most actively managed mutual funds in the same asset class.

Stop feeding the beast
The bottom line is that millions of us who have pension funds, bank accounts, mortgages, and investment accounts are helping feed the excess that Wall Street has created. The only way to change it is to move our money to local banks, take responsibility of our own investments, and demand that our pension assets don't end up in big bonuses on Wall Street.

Otherwise, the protests won't do a thing to stop Wall Street excess.

Fool contributor Travis Hoium does not have a position in any investment mentioned, but he does have a pension fund through 3M. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Citigroup and JPMorgan Chase. The Fool has sold short shares of SPDR S&P 500. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (16)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 10, 2011, at 3:51 PM, garifolle wrote:

    After reading this article twice, I think that your first sentence: "I love the concept of the "Occupy Wall Street" movement" is not really honest.

    I think that to the opposite, you do NOT like it at all.

    In your last paragraph:

    Stop feeding the beast

    you use very often the word "us".

    Have you once joined the protesting crowds?

    Or are you afraid to use the word that is really in your mind: "they"!

  • Report this Comment On October 10, 2011, at 4:50 PM, DonkeyJunk wrote:

    I disagree, garifolie. I think Travis is simply speaking to the general lack of understanding about how things work and how protesters may be (unwittingly) funding the type behavior they detest. On the other hand, perhaps people do understand how the machine works and are frustrated by the fact that its function is seems completely out of their control, making their current situation all but unavoidable.

  • Report this Comment On October 10, 2011, at 5:41 PM, garifolle wrote:

    DunkeyJunk,

    I was not judging Mr Travis as a single person, but simply in so far as he repeats what so many opponents to the movement say to rationalize their opposition.

    In a crowd, there are always people who do not understand ALL what they are marching for.

    But if they are "funding the type behavior they detest" , it is certainly not because they have the choice. Their pension funds have lost so much value, if ever somewhat is left over, and they have no way to "hedge" like the big players on Wall Street.

    One thing that they know for sure, it is that no government will listen to them, the unlimited "right" to give money to the political candidates makes it so that almost no average citizen could "pay" the elected governement enough to have it change against Wall Street united will.

    How many good projects have been totally transformed or reduce to a minimal wishful thinking by the big corporations, mainly the big banks, by their lobbying activities, the politically correct word for corruption?

    It is the rule, and "donations" have totally lost the sense. When one donates, it is free of conditions: "I give, you give back".

    The big corporation do not "donate", they trade again!

    When Americans really walk out, and do not simply protest on social media, this means there is something there that one should consider seriously.

    Deny will only precipitate still greater division between "the classes" in America.

  • Report this Comment On October 10, 2011, at 8:14 PM, Dudebro1 wrote:

    T$ - good article. The issues you laid out are real, and supported by facts. However, what is the real solution? "stop feeding the beast" is fictional. Excluding complex securities etc, there is no way the general public can be trusted to invest in "long-term" assets. Yes, there is serious fat to be cut, and poor ethical behavior should be harshly punished. But whether you like it or not, bankers and other advisers are needed to keep the squeaky wheels moving. (disclosure - I am a investment banker).

    PS Garifolle, to your first comment, its called sarcasm. A noun from greek origin. http://en.wikipedia.org/wiki/Sarcasm

    Travis uses it occasionally.

  • Report this Comment On October 10, 2011, at 10:00 PM, TMFFlushDraw wrote:

    @garifolle

    I think the point is that I don't like people protesting something they are in fact supporting. If the protestors were more aware of how they're supporting Wall Street maybe they would act differently in their investments/pensions/401Ks, etc.

    @Dudebro1

    Helping the general public make decisions about long-term assets is what The Motley Fool is all about. Of course, not everyone is equipped to plan their own retirement, or pick stocks, but for those willing to take some initiative this forum is here for them.

    As for the "need" for investment bankers and other advisors to keep the squeaky wheels moving... We can agree to disagree on that.

    Travis

    aka T$

  • Report this Comment On October 11, 2011, at 12:37 AM, sliderw wrote:

    Wall Street banks are the next tobacco companies. Or at least that should be the case if people want to "stop feeding the beast." Divest, regulate, quit.

  • Report this Comment On October 11, 2011, at 5:22 AM, NoName37846 wrote:

    Politics have become too corrupt. Protesting in Wall Street is not about rage at, for example, Citigroup as a business, it is about the criminal corruption. The occupation started in Wall Street because that is an obvious concentration of criminals that are corrupting the political system.

    Giving up pension funds will not reverse the lack of criminal investigations, it will not fix the SEC.

    Investing differently will not change political priorities to addressing the record unemployment.

    On a larger scale, a fair market economy would not be generating the vast salaries of American CEOs and financiers (compare with any other country). The outlier-like quantity of compensation indicates, as experimental data, that the rules & regulations of the American market economy have become "rigged". On a long timescale market forces ought to correct this inefficient overcompensation -- the protesters are part of the correction mechanism.

    Both "the player" and the "the game" are being, correctly, hated. The players need criminal investigation and the game needs correcting.

  • Report this Comment On October 15, 2011, at 5:30 PM, TimothyVR wrote:

    The protests have now turned violent around the world.

    Do any of you who smugly and happily support and promote these protests care about this? Do you really thunk anything positive will come from violence?

    Do any of you have any plans or anything constructive to say - or is it just destruction of capitalism alone?

  • Report this Comment On October 15, 2011, at 6:42 PM, ETFsRule wrote:

    One easy step is to switch to small, local banks. Usually they are a better deal anyway... no ATM fees, no minimum balance, etc. I recently did this because Bank of America has announced a bunch of new fees that will go into effect soon.

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