Saturday, December 31, 2011

CalPERS: A bunch of clowns or what? Part 2

Last post we looked at CalPERS sheer incompetence in investing as documented in a paper by Ang and Kjaer.  That paper briefly alluded to criminal activities but they deserve more than a passing glance.  The eye-popping criminal activities are far reaching and detailed in the 75 page report by Philip Khinda who was hired to investigate the scandal.  Highlights are summarized in the San Francisco Chronicle's article of March 20, 2011.

Here are some highlights:
"...CalPERS former CEO, Fred Buenrostro. While running the nation's largest pension fund for six years, until 2008, he was having his wedding paid for by a placement agent, getting free chips at a Las Vegas casino, allegedly forging documents and pressing investment staff "to pursue particular investments without evident regard for their financial merits." But with much regard to what his staff called "friends of Fred."

"Chief among them was former board member turned placement agent, Alfred Villalobos, whose now-bankrupt Nevada firm made $50 million as a middleman for investment firms looking to get a piece of CalPERS' business.  Villalobos ran the show, along with his "puppet," Buenrostro - as described by Buenrostro's wife and a former girlfriend - and other CalPERS board members. They included Chuck Valdes, an attorney with Caltrans, Kurato Shimada, who resigned from the board in August "to focus on personal matters," and Leon Shahinian, one of CalPERS' senior investment officers, who, "after years of apparently diligent performance ... seemed to lose his way."


"Citing the $800 million a year CalPERS was paying out in fees, the report concludes that "the excessive nature created an environment in which external managers were willing and able to pay fees at a level that bore little or no relationship to the services apparently provided by the placement agents."

These are some of the reasons we need to get the City of Sunnyvale and its employees out of CalPERS and onto a 401K like everyone in private industry.  CalPERS has since fired the CEO and cleaned up its act considerably. Nevertheless, as I will document later, these problems are endemic to the very nature of CalPERS and while periodically it can be cleaned up, ultimately it will fall into the same practices until the next big crash. 

I strongly urge that the City Council take whatever steps necessary to remove Sunnyvale from future dealings with CalPERS and put all new employees on a 401K.  Employees need to have a greater share in making up the CalPERS deficits since they are the ones most highly vested in preserving CalPERS.
Full Links:

SF Gate article:

Khinda report:

Ang and Kjaer:

CalPERS: A bunch of clowns or what?

California's CalPERS is the massive ($220B) pension investing and management organization that is supposedly wisely and safely investing public employees' pension money for their retirement.  A research paper, "Investing for the Long Run" by Andrew Ang and Knut N. Kjaer, 11/11/11 severely questions their competence.

CalPERS is used an example of investment strategies NOT to make, or in their words "its record over the past decade serves as a cautionary tale".  First, the authors point out that pension funds have several advantages in having long investment horizons.  Funds can ride out short term fluctuations, and can invest counter-cyclically (meaning they can buy when no one else is and hold for a long time).  CalPERS threw away all those advantages and blew about $70 BILLION (that's with a 'B') in 2008-2009 going from $240B to $170B.  Some of CalPERS' mistakes:
  1. Procyclical Investments: Instead of taking the long view and buying assets when they were cheap and waiting out the cycles, they bought when assets were expensive, following the crowd (procyclical).  To make matters worse, instead of maintaining some cash to ride out the fluctuations they actually borrowed to make their investments, with their borrowing peak matching the bubble's peak.  Then, when the asset prices dropped, they were forced to sell to pay those loans.  This meant that they were borrowing to buy at the highs, and selling at the lows to cover what were effectively margin calls.  You can't get stupider than this.
  2. Real Estate: Some people make money in real estate.  Several large hedge funds even made $Billions betting correctly on the collapse of the real estate bubble in 2008.  Not CalPERS.  In true lemming-like follow-the-crowd fashion they increased their real estate investments at the very height of the bubble, raising their real estate investments from 5% in 2005 to over 9% in 2008.  They didn't even make knowledgeable investments.  They just gave $Billions to real estate companies which never made clear what they were doing.  Those companies went bankrupt when the crash came.
  3. Corruption:  CalPERS investments were pursued by agents who gave expensive wines, private airplane trips, and other favors to successfully win investments from CalPERS.  Several are in jail now for that, but the damage has been done and $Billions are gone, to be made up by the taxpayers.

No sane person would want their investments handled by CalPERS.  The continuing failure to meet the unrealistic assumptions of 7.75% they need to meet the pension fund's liabilities means that CalPERS will need cash infusions of many $Billions more from taxpayers at the state and local level.  Sunnyvale can't afford it.  The recent trends around California municipalities is to make CalPERS members share the losses equally with their employers (the taxpayers).  Employees of the city of Sunnyvale can't afford this either.  Sunnyvale needs to get out of CalPERS by amending the City Charter if necessary, get back on Social Security and establish a 401K for the good of their employees and the taxpayers of Sunnyvale.

"Investing for the Long Run" is by Columbia University professor Dr. Andrew Ang and Knut N. Kjaer.  The paper is available on the Social Science Research Network as SSRN-id1958258.  Mr. Kjaer started and managed the Norwegian Sovereign Wealth Fund bringing it from inception at $300M to $370B by the time he left.