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Charles Schwab and Social Security Privatization
Putting Its Own Interests First

The Charles Schwab Corp. stands out as a leading booster of privatized Social Security accounts. Schwab has been part of the inner circle of business groups consulting with the administration on the initiative, has supported key lobby groups and has lent its voice prominently to the push for private accounts. Schwab's support for Social Security privatization creates a serious potential conflict of interest between the firm's own economic interests in capturing part of a new market of private accounts and the interest of the general investing public in preserving Social Security.

Schwab's Backing for Privatization
The company's chairman and CEO, Charles "Chuck" Schwab, is a longtime supporter of diverting Social Security funds into private accounts. He endorsed a book on the subject in 1999 and the following year noted approvingly that "personalizing a portion of the Social Security program" had made its way into the presidential campaign.

In November, Schwab officials were part of a select group of business advocates of privatiza-tion that met with White House officials about business support for the initiative. Unlike rival Edward D. Jones & Co., Schwab remains a member and funder of the Alliance for Worker Retirement Security (AWRS), the leading business-backed coalition set up to promote Social Security privatization. Edward Jones withdrew from the Alliance on Feb. 10 after the AFL-CIO organized a demonstration and e-mail and letter-writing campaign to protest the firm's pro-privatization stance.

Schwab has funded the Cato Institute, a think tank that is among the most extreme advocates of privatization. A 1983 article in the Cato Journal, "Achieving a Leninist Strategy," recommended waging "guerrilla warfare" against Social Security and said financial institutions that stood to benefit would be an "obvious element" in a pro-privatization constituency. Cato's Handbook for Congress advocated that a larger proportion of revenues be diverted to private accounts, saying, "you don't cut out half a cancer." Cato's Michael Tanner proclaimed that Social Security faces a $26 trillion shortfall-a figure he arrived at, according to The New York Times, by counting "only the bad years, and only the bad numbers."

A Schwab representative also sits on the board of the Securities Industry Association (SIA), which has backed privatization for years and itself has channeled financial industry support to groups such as Cato and the AWRS. Sources inside the SIA cite Schwab as a leading propo-nent of the pro-privatization policy of the SIA.

In December, Liz Ann Sonders, Schwab's chief investment strategist, played a prominent role in President Bush's economic summit, which focused on Social Security privatization. Sonders said she was a "big believer" in such accounts. She claimed privatization was "abso-lutely what the market wants to see" and that the "fees are structured to be so minimal that, in fact, even the studies have shown that under any set of proposals Wall Street doesn't make any money on this for another seven or eight years." A month after Sonders participated in the summit, Bush named her to a nine-member Advisory Panel on Federal Tax Reform.

On Feb. 1, CEO Charles Schwab attended a fundraiser for Citizens to Save California, which is raising money to promote Gov. Arnold Schwarzenegger's (R) political agenda. His agenda includes a plan to convert California's public pension funds into 401(k)-style plans, which would end traditional guaranteed pensions for the state's public employees and pull the plug on pension funds that have been at the forefront of corporate governance reforms.

Schwab's Profit Squeeze
The Charles Schwab Corp. is the world's largest discount broker, offering financial services rang-ing from online trading to mutual funds. Schwab's profits plummeted last quarter, despite an increase in trading that brought record earn-ings to rival Ameritrade, a company gaining market share at Schwab's expense.

In recent years, Schwab has tried to become a full-service Wall Street firm able to compete for institutional and high-income clients. Instead, it has found itself burdened with higher overhead costs than other discount brokers, which stream-lined their operations after the dot-com crash reduced the number of online traders.

Schwab stock, which once traded as high as $50, dropped as low as $8 in 2004. Through layoffs and attrition, the company has slashed its work-force from 26,300 in 2000 to about 14,200 today. Although a champion of 401(k) plans, in 2003 Schwab stopped making matching contributions for employees in its own plan. Schwab recently announced it was halving the minimum asset requirement for avoiding account fees and slashing the price of online trades, which account for 80 percent of its trading business. However, Schwab's competi-tors also have cut prices to compete for a dwindling client base.

Privatization May Boost Schwab's Ailing Business
CIBC Oppenheimer analyst Ken Worthington notes Schwab is a potential beneficiary of Social Security privatization because of its experience managing 401(k) plans and other retirement funds. In the most often cited proposal coming out of Bush's 2001 Social Security commission, as private accounts grow bigger they could be transferred from government-administered index funds to 401(k)-style accounts administered by firms such as Schwab, Fidelity, Vanguard and T. Rowe Price. As a brand associated with mom-and-pop investors, Schwab may be positioned to take advantage of any new interest in stock market investing sparked by private accounts.

Following the November 2004 election, the president signaled Social Security privatization would be central to his second term agenda. During this period, Schwab's long-suffering share price rallied, showing a gain of approx-imately 30 percent.

A Conflict of Interest for Charles Schwab
Charles Schwab promotes itself as an ethical decision maker that takes care to avoid conflicts of interest and that can be trusted to put its cli-ents first. Privatization of Social Security will saddle working Americans and the investing public with likely benefit cuts, increased risk and economic instability from enormous new government debt. In its support for privatization, Schwab appears to put its own financial gain first. Furthermore, Schwab's ties to organiza-tions such as Cato compromise Schwab's pro-fessed commitment to "unbiased guidance and advice" and "fact-based" research. The Los Angeles Times recently said Schwab and other financial firms are "laying low" in their support for privatization, perhaps to minimize public outrage that financial firms could gain while Social Security benefits are cut. Rather than try to hide its activity, the only way for Charles Schwab to act in accordance with its own principles is to transparently disclose its past activity and withdraw its private and public support for Social Security privatization.