From the Los Angeles Times:...The security packages were so opaque that only the hedge funds that put them together — Sigma S.I.V. and Cheyne Capital Management in London, and Stanfield Capital Partners in New York — and the ratings agencies knew what the packages contained. Information about the securities in these packages was considered proprietary and not provided to the investors who bought them....MOREGot that? We have a FIDUCIARY saying they bought stuff they didn't understand.
And weren't allowed to see."Hey Mister, I've got a magic box that will turn your dollar bills into C-notes!"I'm pretty sure a smart young paralegal could draft the brief against CalPERS in about fifteen minutes.
The California Public Employees' Retirement System played along as three credit rating firms it blames in a suit gave three mortgage funds AAA ratings. Its investment in them led to a $1-billion loss.
Students of the fine art of pointing fingers know that the key thing is to not make yourself look like an idiot in the process.HT: Infectious Greed
By that standard, the California Public Employees’ Retirement System just flunked.
In a lawsuit filed this month in state court, CalPERS blamed the three major credit rating agencies, Moody's Investors Service, Standard & Poor's and Fitch Ratings, for its recent billion-dollar investment loss in three complex mortgage funds. The pension system says it got rooked because the firms gave the funds inflated AAA ratings.
The funds subsequently got liquidated at a fraction of their original value. CalPERS' share of the red ink could be more than $1 billion, the lawsuit says. (The rating firms all say the lawsuit is without merit.)
Winning this case requires CalPERS to paint itself as an innocent victim bobbing in a sea of Wall Street sharks, reliant for its investment judgments on the sagacity and integrity of Moody's and its brethren.
I know the feeling. I never invest in a stock before spending an edifying hour watching Jim Cramer on CNBC, equipped with a notebook and fortified with a bowl of Skittles.
But I'm not CalPERS, the biggest institutional investor in the country. In February 2006, when it plunged into these mortgage funds, its assets came to more than $200 billion. (It's considerably poorer now, but aren't we all?)
CalPERS has 2,300 employees, some of whom are financial professionals. It's big enough to pressure corporate boards (sometimes) to improve shareholder rights, knock off dishonest behavior and cut ties with oppressive governments.
But in the case of these investments, its excuse is: Moody's made us do it.
Before we examine this claim, let's recall why every California taxpayer should care about CalPERS, not just the employees whose retirement assets are in its hands.
A loss in the CalPERS portfolio has to be made up by public employers such as cities, counties and the state. For example, the 23.4% decline in its portfolio for the year that ended June 30 will necessitate an increase in public employer contributions to 19.7% of their payrolls, up from last year's 16.9%. That's a sizable hit for taxpayers.
So the pension fund's desire to stick the blame for its mortgage fiasco on someone else is understandable. Let's see if its argument holds water.
The investments at issue were "structured investment vehicles," or SIVs. As CalPERS describes them in its complaint, they were elaborately contrived pools of mortgages that made regular interest and principal distributions. The pools were supposed to comprise high-quality assets, CalPERS says, though it also says they held subprime mortgages, which are hardly the same thing....MORE