A Time to Reflect

For years the CalPERS was a beacon for moral investing. Then it got caught up in private-equity deals.

The California Public Employees’ Retirement System is struggling.
Over the last few months the press has been full of stories of troubles
at this financial behemoth, which manages pensions and other benefits
for more than 1.6 million California public employees, retirees, and
their families. The problems are saddening, as CalPERS has been a
beacon in the financial industry by promoting corporate responsibility
and considering the societal effects of different investment
strategies. Now it is a symbol of how all of us have been pawns in the
rapacious games of Wall Street. It is time for CalPERS to take a step
back and think about its future role.

Its recent problems occurred when it began getting involved with
complex real estate and private equity deals to juice up its investment
returns. In October, The Wall Street Journal reported
that CalPERS had been forced to sell stock at a severe loss to raise
cash to fund obligations that it had made to its real estate partners
and private equity firms. Then, in November, the paper reported that
CalPERS will take more than 100 percent loss on some of its gigantic
real estate investments. How do you lose more than 100 percent of your
money? You do it by borrowing money to invest in “surefire” deals that
later turn sour. The most famous bad deal is the now-bankrupt Land
Source venture, in which CalPERS is expected to lose $1 billion
speculating on 15,000 acres north of downtown Los Angeles. CalPERS also
still owns 288,000 vacant home sites in no less than twenty states, a
development sure to bring more pain for the state’s retirees. Pain is
already on the way for cash-strapped government agencies and their
employees, as CalPERS has announced plans to require additional pension
contributions of 2 to 4 percent of their payrolls.

The just desserts from our orgy of real estate speculation are there
for all to see, but the damage from private equity deals is still
masquerading behind concerted obfuscation. Private equity is simply
another name for leveraged buyouts, the deals that Michael Douglas’
character Gordon Gekko made famous in the movie Wall Street with
the line “Greed is good.” After that morality play, LBOs went into
hiding for a while, only to later reemerge as private equity deals with
the willing help of entities like CalPERS. Pension funds competed to
get into so-called “2 and 20” investments — deals in which the
private equity moguls keep 2 percent of the principal and 20 percent of
the earnings from the investment, thus making a king’s ransom in both
good times and bad. When the history of this financial period is
written, most of these private equity schemes will be seen for what
they are — attempts to make money for a few at the expense of the

In 2004, an embarrassed CalPERS had to settle a lawsuit brought by
the California First Amendment Coalition by agreeing to provide
information on the fees it had paid to these folks. Yet the retirement
system did not stop engaging in such risky investments; in fact, it
doubled down. Now, with the continuing liquidity crisis, the other shoe
is dropping. The result is as likely to be as ugly as the pension
fund’s forays into real estate. How is CalPERS reacting? With
incredible shortsightedness, the system has just announced new plans
for private equity’s latest flavor-of-the-month investments:
infrastructure and forestry. The “forestry” initiative is sure to run
up against environmental concerns. Meanwhile, “infrastructure
investing” is red-hot in the fast money crowd now, based on a hope that
large projects like roads, bridges, and other public transportation
projects can be privatized using pension money from CalPERS and others.
In other words, facing epic losses on its exotic investments, CalPERS
has decided to get even weirder.

If you read the financial press, the CalPERS story sounds like one
we are seeing in all sectors of the financial industry, with denials of
culpability by all. What is new here, the cynics ask? No one saw this
coming and everyone is suffering, they say. Even The Closer,
Kyra Sedgwick, lost money in the Madoff Ponzi scheme. If The Closer
can’t figure it out, who can? They argue that if there is any blame we
all share equally in it, from the Oakland homeowner, to the Fremont
autoworker, to the tycoons across the bay.

But the real story is that CalPERS has hitched the wagon pulling
California’s retirees to the worst parts of the system that caused the
financial crisis — and before it the decline of middle-class
America. The East Bay is fortunate in that it has a middle class of
creative jobs that will cushion, to some degree, the difficulties
ahead. For much of the rest of the country, the decline in unionized
manufacturing jobs has ended the ability of many to find a secure job
with benefits.

CalPERS told the press this week that it intends to review its
assets allocation decisions early this year, instead of waiting until
2010. It is time for the world’s most important pension fund to ponder
whether it should continue lending money to private equity barons who
destroy good jobs and then grotesquely claim that the profits from
these “rightsizings” are being used to secure the pensions of people
who gave their working lives to California. Money from the likes of
CalPERS is the oxygen for these private-equity moguls. It can be cut

The retirement system had a name much admired for its battles for
proper corporate governance. It was among the pioneers of the effective
use of large-scale proxy voting to attempt to corral ridiculous
corporate salaries and has named the offending corporations when others
were unwilling to do so. It has lost that positive image, but now it
has an opportunity to do more. It is time for the system to get off the
conveyor that eats good jobs so a small few can make a few more
dollars. CalPERS has the opportunity to once again lead in a positive
direction. It should consider this when searching for its next group of
leaders and investments.


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