One of the most important revelations to emerge in 2014 to-date, is the fact that public pensions are taking on an increasing amount of irresponsible risk in order to meet return targets. The primary way they are doing this is by investing a larger and larger percentage of assets with “alternative investment” managers such as hedge funds and private equity firms.
Specifically, states have increased allocations to alternatives to $460 billion, or 15.3%, from only 3.3 percent in 2001, according to the National Association of State Retirement Administrators. However, this is just the tip of the iceberg. What is really shocking, and extraordinarily disturbing, is the fact that the deals these public pensions enter into, and associated fees paid, are intentionally kept secret from the public, and the people’s whose assets are at stake have absolutely no idea how their money is being invested.
I first became aware of the extent of this problem earlier this year, and wrote about it in the post: Leaked Documents Show How Blackstone Fleeces Taxpayers via Public Pension Funds. I started out that post with the following paragraph:
The following story by David Sirota at PandoDaily is simply excellent. It zeros in on the secretive and rapidly expanding relationship between private equity firms and the public pensions that invest in them. It shows a crony capitalist love affair greased by lobbyist influence peddlers known as “placement agents,” as well as non-public agreements between PE firms and public pensions chock full of conflicts of interest, extremely high fees and underperformance. Unbelievably, in many instances the trustees of the public pensions are not allowed to know what funds the “fund of funds” invest in. This makes due diligence impossible, and in one particularly egregious example it led the Kentucky Retirement Systems to unknowingly invest in SAC Capital despite the fact it was under SEC investigation at the time.
That post was followed up with the article, SEC Official Claims Over 50% of Private Equity Audits Reveal Criminal Behavior, which highlighted a very important article from Naked Capitalism.
Given the exposure of the Pando and Naked Capitalism articles, people started asking questions, something the folks running these public pensions clearly do not want happening. Some of those folks happen to reside at the State Employees Association in North Carolina, which has helped introduce a bill to require more disclosure about deals with Wall Street firms hired to manage alternatives to stocks and bonds. Seems reasonable enough, right? After all, this is a public pension.
So how does Janet Cowell, the North Carolina Treasurer who controls the $87 billion pension react? Naturally, she throws her support behind a bill that would conceal details for five years after a contract is completed. Why five years you ask? Well, the employees association’s general counsel, Tom Harris, notes that “the five-year period of secrecy the treasurer supports would mean the statute of limitations for securities fraud claims would expire before documents are made public.”
As expected, she has close ties to the financial services industry, and nearly 20% of her campaign contributions in 2012 came from such donors. She received more money from folks in New York City, than she did from Charlottle, North Carolina’s largest city. You can’t make this stuff up.
More from Bloomberg:
A legislative fight between North Carolina Treasurer Janet Cowell and a state employee association is signaling growing tension over disclosure practices as public pensions seek to improve returns with alternative investments.
Cowell, a 45-year-old Democrat, opposed a bill by the State Employees Association of North Carolina to require more disclosure about deals with Wall Street firms hired to manage alternatives to stocks and bonds for the $87 billion pension she controls. Cowell warned that giving out more information would cost more than $1.8 billion for violating secrecy agreements, and instead supported a bill that would conceal details for five years after a contract is completed.
Can this be right? What kind of criminal moron risks $1.8 billion to keep details about how a public pension operates secret?
“Our pensions get huge amounts of money to invest from the employees,” said Representative Nathan Baskerville, a Henderson Democrat who co-sponsored legislation requiring immediate disclosure. “I need to be able to tell my constituents that we’re protecting their money. I need to know how much we’re paying.”
Since 2001 states have increased allocations to alternatives to $460 billion, or 15.3 percent, from $66 billion, or 3.3 percent in 2001, according to the National Association of State Retirement Administrators.
Most private-equity and hedge-fund investments come with agreements that prevent pensions from disclosing certain information, including details on fees, investment strategy and other “trade secrets.”
Sorry, but if you can’t disclose what you are doing in public pension funds, you probably shouldn’t be doing it.
Without that, taxpayers and employees have no way to know whether an investment is a good deal, said Andrew Biggs, resident scholar of the American Enterprise Institute, a Washington research group that studies politics, government and policy.
North Carolina has about $18.7 billion of alternative investments, or 21.5 percent of its assets. In 2007 it was 3 percent and the state has authority to increase it to 35 percent. The pension lagged behind both of its benchmarks for private equity and hedge funds for the past 10 years, according to its financial report.
Still, the state paid $416.2 million to firms hired to manage pension money last fiscal year, according to its annual report. A footnote says that it didn’t disclose all fees, such as those for fund-of-fund investments.
In May, U.S. Securities and Exchange Commission Chairwoman Mary Jo White told Congress that hedge funds and private-equity firms have created bogus service providers to boost fees from portfolio companies and investors. More than half of about 400 private-equity firms that the SEC staff examined charged unjustified expenses, Bloomberg reported in April, citing an unnamed person familiar with the findings.
So the Treasurer of North Carolina’s response is to make sure these fees are kept hidden?
In January, North Carolina’s state employees association hired Edward Siedle, a former SEC attorney and now president of Benchmark Financial Services, to investigate the fund’s investments. Siedle found what he said are hundreds of millions of dollars of undisclosed fees. That led the association to push for legislation that would require information about alternative investments to be disclosed as soon as July.
The five-year period of secrecy the treasurer supports would mean the statute of limitations for securities fraud claims would expire before documents are made public, said the employees association’s general counsel, Tom Harris.
“This bill is bad,” Ardis Watkins, a lobbyist for the association said at a committee hearing June 18. “It’s going to enshrine bad practices. For a generation it’s going to keep the public from knowing what they have a right know.”
North Carolina, New York, Connecticut and Michigan are the only states that have a single person overseeing their pensions, and Cowell has close ties with the financial services industry. She has taken campaign contributions from some companies that have won contracts to manage alternative investments.
Of the $1.1 million Cowell received for her 2012 campaign, $196,710 came from the financial industry, according to the National Institute on Money in State Politics in Helena, Montana. People in New York City donated $133,300, more than came from Charlotte, North Carolina’s biggest city.
“The performance of the pension fund is paramount,” he said in an e-mail. “Transparency is strongly valued by the department of State Treasurer, and key to confidence in the investment process. Treasurer Cowell has implemented numerous ethics and disclosure reforms which make North Carolina’s investment program one of the most transparent in the nation.”
The shady and incestuous relationship detailed above between public pension fund managers and the private equity and hedge fund industries is likely to ruin the lives of millions of Americans when all is said and done. I believe this issue will be at the core of the next devastating financial crisis, likely to begin sometime in 2015.
This time, people are going to need to go to jail. In droves.
Full article here.
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