Tag: naked capitalism

Bloomberg, Other Publications Criticize CalPERS’ Leverage on Leverage Plan to Boost Returns While Missing Additional Types of Borrowing

Mary Pat Campbell

Link:https://www.nakedcapitalism.com/2021/12/bloomberg-other-publications-criticize-calpers-leverage-on-leverage-plan-to-boost-returns-while-missing-additional-types-of-borrowing.html

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The financial press has gone into a round of hand-wringing over CalPERS’ efforts to chase higher returns in a systematically low-return market, now by planning to borrow at the CalPERS level on top of the leverage employed in many of its investment strategies, in particular private equity and real estate.

These normally deferential publications are correct to be worried. Not only is this sort of leverage on leverage dangerous because it can generate meltdowns and fire sales, amplifying damage and potentially creating systemic stresses, but the debt picture at CalPERS is even worse than these accounts they depicted. They failed to factor in yet another layer of borrowing at private equity funds and some real estate funds called subscription line financing, which we’ll describe shortly.

…..

CalPERS tells other less obvious fibs, such as trying to depict private equity as so critical to success that it need to put more money on that number on the roulette wheel. Remember, the name of the game in investment-land isn’t absolute performance but risk adjusted performance. Not only has private equity not generated the additional returns to compensate for its extra risk at least as long as we’ve been kicking those tires (since 2012), academic experts such as Ludovic Phalippou, Richard Ennis and Eileen Appelbaum have concluded private equity has not even beaten stocks since the financial crisis.

Let us stress that unlike German investors, who have a pretty good handle on all the leverage bets in their investment portfolios and thus can make a solid estimate of how much risk they are adding via borrowing across all their investments, CalPERS is flying blind with respect to private equity. It does not have access to the balance sheets of the portfolio companies in its various private equity funds.

And while having balance sheet would be a considerable improvement over what is has now, it doesn’t give the whole picture. CalPERS would also need to factor in operating leverage. When I was a kid at Goldman, whenever we analyzed leverage (as in all the time), we had to dig into the footnotes of financial statements, find out the amount of operating lease payments, and capitalize them, as in gross up the annual lease payments to an equivalent amount of borrowing so we could look at different companies on a more comparable basis.

Author(s): Yves Smith

Publication Date: 10 Dec 2021

Publication Site: naked capitalism

Finance Group Fails To Deliver at COP26

Mary Pat Campbell

Link:https://www.nakedcapitalism.com/2021/11/finance-group-fails-to-deliver-at-cop26.html

Excerpt:

Not One of 60 Major Commercial Banks Has ‘Leadership Position on Decarbonizing’

Yet the trend line of bank finance for fossil fuels is rising not declining, and not a single big commercial bank has released a plan to stop financing new fossil fuels.

It’s striking that unlike any of other sectors implicated in speeding global warming, not a single one of the 60 major commercial banks has staked out a leadership position on decarbonizing.

On the other labelled days of COP, there were all kinds of interesting mash-ups of governments, private sector actors, and think tanks offering a web of creative announcements about their determination to set ambition on one thing or another. By contrast, on Private Finance Day, the one and only announcement was relating to GFANZ. Banks and investors didn’t even try to push out additional good ideas. Everyone covered themselves in the GFANZ penumbra and then went quiet.

Author(s): Michael Northrop

Publication Date: 30 Nov 2021

Publication Site: naked capitalism

Is It Time for Eurozone Banks to Start Worrying About Turkey Again?

Mary Pat Campbell

Link:https://www.nakedcapitalism.com/2021/11/is-it-time-for-european-banks-to-start-worrying-about-turkey-again.html

Excerpt:

At the height of the last big wave of Turkey’s ongoing crisis, in August 2018, the European Central Bank issued a warning about the potential impact the plummeting lira could have on Euro Area banks heavily exposed to Turkey’s economy via large amounts in loans — much of them in euros — through banks they acquired in Turkey. The central bank was worried that Turkish borrowers might not be hedged against the lira’s weakness and would begin to default on foreign currency loans, which accounted for 40% of the Turkish banking sector’s assets.

In the end, the contagion risks were largely contained. Many Turkish banks ended up agreeing to restructure the debts of their corporate clients, particularly the large ones. At the same time, the Erdogan government used state-owned lenders to bail out millions of cash-strapped consumers by restructuring their consumer loans, many of them foreign denominated, and credit card debt.  

But concerns are once again on the rise about European banks’ exposure to Turkey. On Friday, as those concerns commingled with fears about the potential threat posed by the new omicron variant of Covid-19, Europe’s worst-affected stocks included the four banks most exposed to Turkey: Spain’s BBVA, whose shares fell 7.3% on the day, Italy’s Unicredit (-6.9%), France’s BNP Paribas (-5.9%) and the Dutch ING (-7.3%).

Author(s): Nick Corbishley

Publication Date: 30 Nov 2021

Publication Site: naked capitalism

The Supply Chain Crisis: How We Got Here

Mary Pat Campbell
The Supply Chain Crisis: How We Got Here

Link:https://www.nakedcapitalism.com/2021/10/the-supply-chain-crisis-how-we-got-here.html

Excerpt:

Nevertheless, the motivations for outsourcing IMHO are not properly understood. In the auto business, which is typical of a lot of US industry, direct factory labor cost is 11% to 13% of product cost. The offsets against that are greater supervisory and coordination costs (longer shipping times and financing costs, and with that, greater risk of being stuck with inventories related to products that aren’t selling well) and just plain old screw ups due to having more moving parts.

In other words, outsourcing is better understood as a transfer from factory labor to managers and executives, at the cost of greater operational risk.

Author(s): Yves Smith

Publication Date: 11 Oct 2021

Publication Site: naked capitalism

CalPERS Devises “Heads I Win, Tails You Lose” Gamble for Long-Term Care Policyholders in Settlement

Mary Pat Campbell
CalPERS Devises “Heads I Win, Tails You Lose” Gamble for Long-Term Care Policyholders in Settlement

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The graphic “Settlement Bet” shows options that policyholders have to choose from in the Settlement. The graphic “Settlement Happens??” shows the consequences of the “Settlement Bets” if the Settlement happens or not.

Policyholders not wanting to terminate their CalPERS policies will select not to participate (“opt out”) in the Settlement (as participation will end policyholders’ policies if the Settlement is approved).

Policyholders whose preference in light of announced rate increases would be to terminate because of the new CalPERS rate increases can be divided into two groups in light of the Settlement options: (1) those that wish simply to terminate and stop paying premiums; and (2) those who wish to terminate but are prepared to gamble with CalPERS to get a refund.

In making these choices, all policyholders are being forced to gamble a lot of money. Why the Settlement is structured as a gamble is unclear, but it is. That seems incredibly unfair to policyholders who can ill afford more financial losses after their losses already caused by CalPERS LTC.

Author(s): Yves Smith, Lawrence Grossman

Publication Date: 23 Sept 2021

Publication Site: naked capitalism

CalPERS’ Long-Term Care Fiasco: Private Burial to Hide Malfeasance, Failure to Implement Legislation

Mary Pat Campbell
CalPERS’ Long-Term Care Fiasco: Private Burial to Hide Malfeasance, Failure to Implement Legislation

Excerpt:

The ongoing CalPERS long-term care insurance program crisis continues to unravel. It is also  revealing overarching behavior which is both unethical and contrary to law.

CalPERS announced insurance premium increases of 52%-90% that become effective very shortly, at the same time that CalPERS has agreed to a class action lawsuit settlement over its last 85% rate increase.  (In my next article I will discuss why I suspect the settlement is another con job by CalPERS.)  But here I first must address a shocking revelation previously unreported about CalPERS long-term care insurance program (LTC) which needs to be recognized before moving on to the issues of the proposed settlement.

There is new and truly disturbing information about the CalPERS long-term care insurance program from a recent review of the enabling legislation prepared by a former California Deputy Attorney General and Court of Appeal Attorney, Linda J. Vogel.

According to Vogel’s analysis, the CalPERS long-term care insurance program  since inception in 1991 has operated contrary to law.

Author(s): Lawrence Grossman

Publication Date: 15 Sept 2021

Publication Site: naked capitalism

EXPOSED: How CalPERS Tried and Continues to Try to Cover Up Former Chief Investment Officer Ben Meng’s Misconduct

Mary Pat Campbell
EXPOSED: How CalPERS Tried and Continues to Try to Cover Up Former Chief Investment Officer Ben Meng’s Misconduct

Excerpt:

But we also have Meng’s unreported stock trades. And Meng’s arrival happened to coincide with a big spike in personal trading violations, which CalPERS attempted to minimize by saying they came mainly from one person.

What if it turns out that the Olson report showed that Meng was a very active trader the entire time he was there? There is no way CalPERS could suppress this information, since it was required to have been reported on the Forms 700.

This would be hugely embarrassing to CalPERS, in that it would show it had hired a CIO who didn’t have his full attention on his very big ticket say job. And it would be vastly worse if Meng as head of the investment operation had been routinely violating SEC requirements for trade pre-approvals to prevent insider trading.

This possibility seems even more likely when you look at the board transcript below. Marlene Timberlake D’Adamo droned on and on and on trying to justify CalPERS not having reviewed Meng’s Form 700 to see if it looked internally consistent and/or matched up with his trading records. At first I thought this was to exhaust the board and dissipate their energy so they’d not be as persistent about their issues when they finally got the mike. But it may also be that the compliance department was clearly remiss in not reviewing Meng’s Form 700 by virtue of him being an active trader. And if he indeed was the person who’d made the big personal trading violations, that would almost mandate reviewing his Form 700.

Author(s): Yves Smith

Publication Date: 31 August 2021

Publication Site: naked capitalism

EXPOSED: CalPERS’ Brainwashed Board in Denial that CIO Meng Caused His Own Downfall with Information He Himself Provided

Mary Pat Campbell
EXPOSED: CalPERS’ Brainwashed Board in Denial that CIO Meng Caused His Own Downfall with Information He Himself Provided

Excerpt:

 In fact, all of the damaging  information that got Meng so upset that he quit was public, and it all came directly from or was generated by Meng.

Yet the CalPERS board acts as if it’s the victim of internal saboteurs. As the transcript shows, CEO Marcie Frost and her key allies on the board, Board President Henry Jones and board member Rob Feckner repeatedly and falsely present Meng as a victim of secrets having been tossed over the transom to the press. Not only was everything that embarrassed Meng out in the open for competent reporters to write up, but in at least one and arguably two cases, Meng’s defensiveness made his situation much worse.

As we’ll show, Frost used the bogus idea that CalPERS is full of traitors as an excuse for continuing to keep the board in the dark about crucial matters like Meng being investigated for his financial conflict of interest. Frost and Feckner also claim that Meng believed that his bad press was due to saboteurs. That suggests that Frost and other senior staffers stoked Meng’s paranoia and helped precipitate his departure.

Author(s): Yves Smith

Publication Date: 26 August 2021

Publication Site: naked capitalism

CalPERS Comes Dead Last of 34 Public Pension Returns Despite Having Biggest, Best Paid Investment Office

Mary Pat Campbell
CalPERS Comes Dead Last of 34 Public Pension Returns Despite Having Biggest, Best Paid Investment Office

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Despite having the most heavily staffed and luxuriously paid investment office of any public pension fund, CalPERS scored the worst investment returns of any of 34 funds tracked by Pensions & Investments.

As you can see at the Pensions & Investments site, CalPERS return for fiscal year 2020-2021 was 21.3%. The next lowest was tiny Kern County, more than two and a half points higher, at 23.9%. CalPERS’ Sacramento sister CalSTRS delivered 27.8%. The stars were Texas County, at 33.7&. New York Common, at 33.6%. San Bernardino County, at 33.3%, Oklahoma Teachers, at 33%, and Oklahoma Firefighters at 31.8%. Mississippi PERS came it at 32.7%, but that was gross of fees. Nevertheless, five funds earned a full 10% in investment returns more than CalPERS, and the pension fund arguably the most similar to CalPERS in terms of scale did more that 6% better.

That extreme laggard result also fell short of CalPERS benchmark of 21.7%. Recall that investment expert Richard Ennis explained at length that public pension funds and their consultants devise their own benchmarks, and they not surprisingly wind up being unduly forgiving

An earlier paper by Ennis found that even though nearly all public pension funds generated negative alpha, as in they actively destroyed value, CalPERS was one of the worst, coming in at number 43 out of 46, with a stunning negative alpha of 2.4%.

Author(s): Yves Smith

Publication Date: 19 August 2021

Publication Site: naked capitalism

CalPERS Desperate Response to Suit Over Illegal Secret Board Discussions and Other Abuses Seeks to Drag Case Out as Long As Possible

Mary Pat Campbell
CalPERS Desperate Response to Suit Over Illegal Secret Board Discussions and Other Abuses Seeks to Drag Case Out as Long As Possible

Excerpt:

Jelincic is challenging CalPERS’ dubious denials of two different Public Records Act requests he made. One focuses on impermissible secret board discussions shortly after Chief Investment Officer Ben Meng’s sudden resignation last August. The filing not only calls for these records to be made public but also demands that board members be released to discuss all the matters that CalPERS impermissibly covered in the August “closed session”. The second involves CalPERS’ continuing efforts to hide records showing how it overvalued real estate investments by $583 million. Yet CalPERS not only has said nary a peep about bogus valuations are larger than the total amount it was slotted to invest in a mothballed solo development project, 301 Capitol Mall, but it continues to publish balance sheets that include the inflated results.

We predicted that CalPERS would be be even more inclined than usual to fight these Public Records Act requests because the filing seeks remedies beyond release of the records. First, it requests that CalPERS be found to have violated the Bagley-Keene Open Meeting Act. Second, to the extent that the judge rules that the board discussed items in closed session that should have been agendized for and deliberated in open session, the suit asks that board members be permitted to disclose the contents of those particular discussions in public. Third, the filing calls on the court to require that CalPERS make video and audio recordings of all closed sessions and keep them for five years (this is something that CalPERS currently does but this obligation is meant to shut the door to “the dog ate my disk” pretenses down the road.)

Author(s): Yves Smith

Publication Date: 3 June 2021

Publication Site: naked capitalism

Decisions Finally Coming in Long-Running Battle with Hedge Fund Titans in Kentucky Pension Case, Mayberry v. KKR

Mary Pat Campbell
Decisions Finally Coming in Long-Running Battle with Hedge Fund Titans in Kentucky Pension Case, Mayberry v. KKR

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You can find all the major filings at Kentucky Pension Case. The two below are over the most heated current issue: whether the Tier 3 Plaintiffs can move forward. Judge Shepherd said effectively that he needed to see what the attorney general planned to do before he decided that.

Given that the justification for the attorney general repeated extension requests was to wrap his mind around the case, and the Calcaterra report looked like Kentucky Retirement Systems hiring an outside firm to brief the attorney general, the new filing is entirely old hat. It has not only has no new arguments, it is even more openly cribbed from older plaintiff filings that the original attorney general intervention, where his office at least re-wrote a fair bit of the material into white shoe tall building lawyer style. Here, nearly all of the filing is a cut and paste, including the charts.

Author(s): Yves Smith

Publication Date: 4 June 2021

Publication Site: naked capitalism

CalPERS Long Term Care Program Bleeds Policyholders Dry via 10X Higher Premiums, Gross Mismanagement, Bad Faith Dealing

Mary Pat Campbell
CalPERS Long Term Care Program Bleeds Policyholders Dry via 10X Higher Premiums, Gross Mismanagement, Bad Faith Dealing

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To justify the rate increases, CalPERS asserts that there is nothing problematic with the program, other than the usual suspects of low interest rates and unexpected policyholder behavior, issues that all long-term care providers have faced. But that is, at best, a half-truth.

While all other long-term care providers have faced the same challenges, there is no evidence that any other insurer in the nation has responded with premium increases like CalPERS. For example, the Federal Long Term Care Insurance Program has raised rates as much as 150%. For commercial policies, premiums rose up to 75% for UNUM Group in some states, while in California premiums for Mutual of Omaha policy premiums rose 20%, Transamerica premiums rose 25%, and Thrivent premiums rose about 37%.

During the past two decades, roughly the timeframe of the policies subject to the lawsuit, inflation has risen 49% and the cost of long-term care services about 120%. The chart below shows actual policy rates and the initial policy rate along with inflation and long-term care trends.

Author(s): Yves Smith, Lawrence Grossman

Publication Date: 14 May 2021

Publication Site: naked capitalism