Friday, October 23, 2009

CalPERS Playing with Fire

In our July '09 post "CalPERS Clipped for $970 Mil. in Real Estate Fiasco" I said "It's called reaching for yield. And it's stupid, especially when a fiduciary does it."

We have dozens of posts on CalPERS. This outfit is going to cost the taxpayers of California billions over the next decade as markets refuse to accommodate the fund's requirement of 8.5% average annual returns. They have made promises to their public sector retirees that they won't be able to meet and are trying to make up the difference by engaging in behavior that no fiduciary should even contemplate, let alone execute.

If you recall, they were one of Goldman's* largest "long-only index investors" in oil and the GSCI, scaling back only after their commodity bets lost billions. They also engaged in loser hedge fund behavior, selling their most liquid investments at the bottom to prop up their non-trading investments.

If you are interested here are some of our previous CalPERS (and to a lesser extent, the better managed CalSTRS) posts.
From Reuters:
Russell Read, the former chief investment officer of Calpers, the largest pension fund in the United States, knows his trees.

Read owned a 500-acre Maine forest landscaped with the same mix of maples and oaks the colonists would have seen when they first arrived on the shores of America.

Bob Carlson, who was a board member at the California Public Employees' Retirement System for nearly half its history, recalls asking about commodities like timber during Read's interview for the position at Calpers.

"His eyes lit up," said Carlson. "That's what I wanted."

Read got the job in June 2006 at the age of 42 and quickly set out to turn Calpers into a modern, aggressive investor.

At the time, esoteric new markets were racking up huge, almost unimaginable gains. He and the board were in agreement -- Calpers should be part of it.

"I think the push for commodities and infrastructure and forestry and some of those other things was kind of a movement afoot," said Tony Oliveira, Supervisor of California's Kings County and one of the Calpers board members who helped choose the new investment chief.

A former senior executive at Deutsche Bank, who had once taught risk management, Read seemed to be the right person for the times.

Despite Read's background and the ever riskier bets he was making, Calpers still struggled with risk management. Carlson, who describes Read's risk management plans as "brilliant," said that Read left the fund before he could put them in place.

Red flags about the growing riskiness of Calpers' portfolio also went unheeded. A consultant warned Read in December 2007 about the size of the fund's commitment to private equity, but the push went on.

For a while, Calpers looked smart under Read, hitting a peak value of $260 billion in October 2007 as it borrowed money to boost returns and moved into sophisticated collateralized debt obligations, land for residential real estate, as well as commodities.

But as the financial crisis unfolded last year, Calpers lost $100 billion, more than a third of its value, tumbling to $160 billion a year and a half after the high. The other thing it lost was its gold plated reputation, founded on steady returns, pioneering new investments and policing public companies as an activist shareholder. Smaller rivals who were more conservative lost much less.

Calpers has not retreated, though -- just the opposite, in fact. As the entire pension industry questions what level of risk it should be taking in the aftermath of last year's financial meltdown, Calpers in June increased its target for venture capital and private equity -- what the fund's advisor itself called the highest risk, highest reward bet -- to 14 percent of overall investments, up from 10 percent.

Chief Investment Officer Joseph Dear, who declined to comment for this story, in a published internal interview called the changes "relatively minor". "We looked at the long term return assumption and basically said we don't see a significant reason to change," he said.

"Calpers has the reputation of being the gold standard of pension investing, largely by the virtue of its size. But the reality is very different," said Edward Siedle of Benchmark Financial Services, a pension fund investigator and investment consultant....MUCH MORE

1 | 2 | 3 | 4 | 5 | 6

For more on Goldman and the index investors start with the list of our previous posts in "Goldman, Morgan Stanley Threatened by CFTC Review (GS; MS)":

...Spokesmen for both banks declined to comment, as did one from Barclays Plc. Spokesmen from JPMorgan Chase & Co. and Citigroup Inc. didn’t immediately return calls for comment....MORE

On the other hand we've never been shy about commenting, see:

June 16, 2008: Goldman, Morgan Stanley Profits Conceal Reliance on Commodities

June 25, 2008: Which Former Goldman Sachs Chairman Should We Listen to on Oil Market Speculators?

August 19, 2008: Goldman’s Oil Thesis: Timing is Everything

October 7, 2008: Goldman: We Got Our Shorts On, Oil not Going to $200.00

October 27, 2008: The Goldman Commodities U-turn, again

November 20, 2008: It’s official, Goldman capitulates on oil

December 2, 2008: Oil speculation: It's back

December 12, 2008: Goldman Cuts Oil Forecast to $45 (vs original $200) Sees Bottom

June 4, 2009: Goldman Raises Year-End Crude Forecast by 31% to $85

Always, always be skeptical of anything Goldman says regarding commodities.*
J. Aron is one of the company's crown jewels and was the springboard for CEO Lloyd Blankfein.**...
...*From our November 20, 2008 post "It’s official, Goldman capitulates on oil":
...Now Goldman is left with the ignomy of summarily abandoning the investors who listen to its research calls, telling them effectively that they’re on their own. On Thursday, Goldman said it was ”closing” its recommendations for oil trades. Meaning that in a perilous time when the traders who pay attention to Goldman’s recommendations could use some guidance the most, Goldman has opted to give them the least. And some traders are furious about it, comparing the maneuver to then-strategist Abby Cohen’s decision to abandon her targets for equity indexes in the fall 2001, citing the uncertainties abounding in the market.

Goldman specifically talked about four trade recommendations it previously issued, and said clients shouldn’t put any stock in them any longer. One particular trade, a Nymex-WTI swap on the 2012 contract, issued in September, when crude already had declined to below $70, suggested that the contract would reflate to a range of $120 to $140. Obviously, that hasn’t happened....MORE

Goldman marketed the fact that CalPERS and other long-only index buying institutions could piggyback on GS's status as a 'commercial' to avoid position limits by entering into swaps with the bank. The institutions thought it was a sweet deal, until it wasn't. If it comes down to throwing customers under the bus or protecting the propritary trading, there's no decision.

**"When Blankfein asked about his title, a boss at J. Aron said,
'You can call yourself contessa if you want.'"
-Fortune, January, 2006