The AFTRA - JP Morgan Chase Lawsuit Explained

Inside Television 557

Publication Date: 6-10-11

By: Hubert O’Hearn





If this story was less complicated, it could serve as a perfect parable for the financial crises that continue to erupt around the globe following the near-Krakatoa explosion on 2008. This is a story about actors, a lawsuit and the structural errors of the American banking system.



The American Federation of Television and Radio Artists (AFTRA) is the performers’ union representing some 80,000 actors, voiceover artists, recording artists and stunt persons. So you have included in that number everyone from Jennifer Lopez to Jon Bon Jovi to the guy who falls put of the building in a Jason Statham picture. Some names you know - most you never will.



Dues range from $63.90 per month, just to keep your card alive, to slightly over .73 % of earnings US per year if you’re really raking in the dough at over $100,000 per year. So that may not sound onerous, although I do remind the reader that at the lower end of the golfer Lee Trevino’s dictate that a pressure putt is one to win or lose a $5 bet when you have $2 in your pocket.



Besides negotiating day rates and worker safety with producers, what AFTRA does with the dues is build a pension fund - a bit of security for old age. As of November 2010, the AFTRA defined benefit pension fund had an asset value of slightly more than $1.7 billion. To give the reader something to compare this with, the Ontario Teachers’ Pension Plan (the majority owner of perennial loser and cash cow the Toronto Maple Leafs) has a total membership of some 173,000, roughly double that of AFTRA, and net assets of $107C billion, or 62 times the value of the AFTRA fund. Go Leafs go.



Put simply, were the total net assets of each to be divvied up in a pension sell-off, each AFTRA member would get $21,250. Each Ontario Teacher would get $618,500. Kids, this is why your parents tell you to get an education instead of going into acting.



AFTRA is currently involved in a lawsuit against J.P. Morgan Chase, one of the largest banks in the U.S. with whom the union placed $500 million of pension assets in 2007. At the end of 2007, the AFTRA fund had slightly over $2 billion in assets and was able to fund its benefits. At present, it is under-funded by approximately $600 million. What went wrong?



One can argue that the AFTRA administrators should have known better. Go buy hockey teams instead of trusting an investment bank; but wait, isn’t that counter-intuitive? Does the bank not have the responsibility to act in the best interests of its client? Well, you might like to think that, but you would be so wrong.



The bank serves many masters, but none more so than its owners - the stockholders who like their yummy quarterly dividends. It was that motivation that led J.P. Morgan Chase to invest that $500 million into Sigma, a repo fund. Unfortunately, I have to over-simplify here. A repo fund essentially works as follows. I am a bank. I will form an arm’s length company which I will sell a bunch of assets to on the promise that I will buy them back at a fixed price. The arm’s length company will make money by issuing bonds based on the bunch of assets sold to it. Every transaction reaps transaction fees, reaping profits.



In a reasonable world, say that of a well-regulated mutual fund, the bank would be expected to make some money for its work. Let’s say the bank gets 5% for its trouble. That $500 million under those terms would earn it $25 million and the bank would be expected to invest the money to make that money bank and more for AFTRA. Instead, because of a series of transactions and loans propping up the original dubious assets, J.P. Morgan Chase made - wait for it - $1.9 billion in fees for itself.



There are two sad parts to all this. First, this same bank under a different name then did virtually the same thing in the 1920s. Supposedly the practice was legislated out of existence in 1933 as part of teh New Deal reforms following the Pecota Commission (see the fine book: The Hellhound of Wall Street). Supposedly. And sadder yet: many poor men and women who followed the rules and tried to live a dream now wonder what the hell becomes of them?



Be seeing you.