CalPERS

FDIC Threatens Public Pensions

by Ivan Osorio on March 10, 2010

in Bailout Watch, Economy

The Federal Deposit Insurance Corporation (FDIC) is trying to get public pension funds to help prop up failed banks by buying into them, reports Bloomberg. Such a move would almost certainly run afoul of pension fund managers’ fiduciary duty, by investing in excessively risky assets. Indeed, the risks are obvious.

Oregon would invest in Community Bancorp LLC, a bank being formed by Sageview Capital LLC, according to the Oregon presentation. Sageview was founded by former Kohlberg Kravis Roberts & Co. executives Scott Stuart and Ned Gilhuly. Sageview is looking to raise about $1 billion from pension funds and similar investors, the presentation said.

While the structure makes sense, pension funds would be better off investing in existing banks, said Chris Whalen, managing director of Institutional Risk Analytics of Torrance, California. At those lenders, management will oversee details of buying failed lenders and save pension funds the time and effort needed to launch a new bank, he said.

“If they are really interested in playing this area, they should put their money into a larger bank that’s already playing here,” Whalen said. “If you look at the risk-reward and the distraction involved, it’s not worth it” to back a new bank, he said.

Investing in distressed banks doesn’t always pay off, as the U.S. Treasury Department learned with the Troubled Asset Relief Program. At least 60 lenders skipped some of their promised dividends to the TARP fund, according to SNL Financial, and a $2.33 billion stake in CIT Group Inc. was wiped out last year when the lender went bankrupt.

And who will then be on the hook when such investments go south?

FDIC guarantees may soften the risk of investing public pension money in distressed banks, Whalen said. When the FDIC sells a failed bank, it typically shares a portion of the loan losses.

This perfect storm of moral hazard and excessive risk cannot end well. Moreover, as former Labor Department official F. Vincent Vernuccio notes, some public pension funds already suffer from under-performance due to politicized investment strategies adopted by their managers.

[I]n June 2009, 41 signatories representing some of the nation’s largest public pension funds and others with approximately $1.4 trillion in assets wrote to the Securities and Exchange Commission, asking the agency “to improve disclosure of climate change-related risks, and material environmental, social and governance risks, in securities filings.” California State Treasurer Bill Lockyer, who serves on the governing boards of the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS), put climate change on par with protecting retirement funds, saying, “Pension fundsprotect workers’ retirement benefits, and they need to ensure their portfolios reflect the risks and benefits related to climate change.”

Lockyer’s endorsement of using pension funds for anything other than retirement security is particularly brazen considering the huge losses that CalPERS and CalSTRS have sustained in recent years due to PTI investments. In 2000, then-California State Treasurer Philip Angelides launched his “Double Bottom Line” initiative to adopt certain social and tobacco-free investment policies—including using the pension funds in CalPERS and CalSTRS for local economic investments. The divestment of tobacco was a costly mistake. CalSTRS revealed that its tobacco investment ban lost the plan $1 billion in gains, and in 2008 conceded that they “could no longer justify” avoiding tobacco stocks.

For more on public employee pensions, see here and here.

For more on pension fund activism, see here and here.

Eliot Spitzer Wants your Pension

by Ivan Osorio on October 14, 2009

in Economy, Labor, Politics as Usual, Regulation

Today, Slate features a rant by disgraced former New York Governor Eliot Spitzer that includes distortions and falsehoods so blatant that they wouldn’t merit a response if they didn’t come from so loud a megaphone.

Spitzer is miffed at the U.S. Chamber of Commerce for opposing the major expansions of government power currently being proposed in Washington.The Chamber, he says, has a “right to be wrong” (wrong in Spitzer’s universe apparently being anything that opposes the expansion of government), but it doesn’t have a right to do it with “our money.”

“Our” money? Yes, according to Spitzer, the publicly held companies that are members of the Chamber have an obligation to promote a liberal agenda — or at least not oppose it — because that’s what shareholders want. What he bases this belief on is hard to fathom. Has he polled a substantial sample of all (or a least a substantial majority of) America’s publicly held companies? Public company shareholders are a diverse lot; to ascribe uniform political views to them as whole is absurd, to put it mildly.

But even if a majority of shareholders of a majority of companies were left-leaning, all responsible shareholders share the same goal, independently of political views: Increasing shareholder value. Spitzer claims that, “It is corporate leadership, though its support of the chamber, that has injected politics into the corporations that we own.” Yet its not support of politics that seems to irk Spitzer so much, but support of policies he doesn’t favor.

“So what should be done?” he asks.  He wants “public pension funds [to] pressure the board to drop the chamber membership. If one activist state comptroller begins to build this coalition, the other state pension funds will follow.” Somehow, in Spitzer’s universe, this isn’t playing politics.

Moreover, Spitzer’s claim that institutional investors have shown a “passive, permissive attitude toward the management” is blatantly untrue, as a casual look at the board of the environmental activist investment fund Ceres makes clear. Ceres lists as Co-Chair none other than the CEO of the California Public Employee Retirement System. Ceres describes itself as “a national network of investors, environmental organizations and other public interest groups working with companies and investors to address sustainability challenges such as global climate change.”

This brazen hypocrisy is merely annoying, but it’s Spitzer’s substantive recommendation that is really harmful. California’s state employee retirement funds provide a good example. Last year, the California State Teachers’ Retirement System reversed its politically correct no-tobacco-stocks policy after it acknowledged that the tobacco ban had cost the plan $1 billion in lost gains.

In addition, many union pension funds today are severely underfunded, largely as a result of politicized investment strategies. The AFL-CIO’s 2008 Key Votes Survey actually boasts that, “The AFL-CIO and leading institutional investors continue to work with President Obama, Senate Banking Committee Chairman Chris Dodd, and House Committee Chairman Barney Frank to pass landmark ‘say on pay’ bill” and that, “in 2008, the AFL-CIO Office of Investment, working with leaders of the Interfarith Council on Corporate Responsibility (ICCR), successfully drafted and presented a new shareholder proposal on health care reform.”

The only logical connection either of these efforts could have to the AFL-CIO fulfilling its fiduciary duty in ensuring that the companies in which its pension funds own shares are being well run is that the AFL-CIO’s fund managers believe themselves to be so incompetent to the task that they simply cannot do it without a federal law helping them along.

And it is that kind of activism that Spitzer wants more of. Responsible shareholders should be thankful that he no longer has the power to force it on them.

For more on the politicization of pension funds, see here and here.