LACERS Board Member Lambastes Lousy Private Equity Returns as More Studies Confirm Poor Performance for Decades

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CEM, using a simple mix of small-cap indexes, found that even though private equity funds deliver what looks to be outsized raw returns, they fall short of CEM’s benchmark since 1996. However, as we’ve also said for some time, the big exception is investing in house, which CEM calls “internal direct”. And the worst, natch, is fund of funds, which have an extra layer of fees.

There are two additional reasons the CEM findings are deadly. First, the time period they look at, going back to 1996, includes a substantial portion of the 1994-1999 “glory years” where private equity firms were coming back from a period of disfavor after the late 1980s leveraged buyout crash. Less competition for deals meant better buying prices and better returns. Alan Greenspan dropping interest rates for a full nine quarters after the dot-com collapse was the first episode of the Fed driving money into high risk investment strategies by creating negative real returns for a sustained period, and the rush of money into private equity elevated deal prices.

Author(s): Yves Smith

Publication Date: 1 April 2021

Publication Site: naked capitalism

FBI Investigating Reporting Fraud at $62 Billion Pennsylvania Public Pension Fund, PSERS; Returns Allegedly Falsified to Avoid Increased Worker Contributions

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PSERS is trying to depict the performance overstatement as an error but its body language says otherwise. It has launched an investigation of its three top staff members and has gone from denying that PSERS has any information that anything criminal had taken place to ducking the question.

The Inquirer described how three of PSERS’ 15 board members voted against a staff effort to say the return numbers were fine after some sort of not fully disclosed brouhaha with an outside consultant.

…..

The “impact on PSERS tax exempt status” is alarming, and it’s frustrating that the article does not probe what the issue might be.

Needless to say, expect more shoes to drop as the FBI keeps digging. A friend who was the DA for Bridgeport, the most corrupt city in Connecticut, said the FBI aren’t the brightest bulbs but are relentless and as a result generally take down their targets.

Author(s): Yves Smith

Publication Date: 6 April 2021

Publication Site: naked capitalism

CalPERS Shoots Itself in the Foot: Undermines Its Position in Insolent Letter Demanding JJ Jelincic Drop His Case Against Secrecy Abuses

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As you can see below, CalPERS issued more ultimatums: drop the suit and provide what amounts to a document retention request to the board member that provided his notes to Jelincic.

And why should Jelincic withdraw his case? The argument is the legal version of a pratfall. Jelincic told he is liable for “aiding and abetting” an alleged breach of fiduciary duty by a a board member and interfering with CalPERS’ contract with said board member.

First “aiding and abetting” exists only in a criminal context. Even if there were actually a there there, please tell me what universe a prosecutor is going to saddle up to go after a CalPERS board member over a dispute over a clearly improperly noticed board meeting….and charge Jelincic too?

Second, the only fiduciary duty the board has is to beneficiaries. The reason California has such strong transparency laws is that its default is that secrecy is bad for the public and is not allowed unless there are compelling arguments on the other side.

Author(s): Yves Smith

Publication Date: 25 March 2021

Publication Site: naked capitalism

Former Board Member JJ Jelincic Sues CalPERS Over Illegal Secret Board Discussion After CIO Ben Meng’s Abrupt Departure and Hiding of Records Related to $583 Million Overstatement of Real Estate Assets

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We seem to be returning to a semblance of the old normal, including CalPERS getting well-deserved public attention for its bad behavior, highlighted in a new lawsuit filed by former board member JJ Jelicic, which we’ve embedded at the end of this post. It’s short and very readable; slightly more than half the pages of the PDF are exhibits.

CalPERS under its general counsel Matt Jacobs has more and more openly been taking the position that it is above the law. A slapdown is long overdue.

Both of the matters the lawsuit targets are strong on legal and public interest grounds. We’ll get into a bit more detail below. The short overview is that they come out of sweeping and highly dubious denials of two different Public Records Act requests that Jelinicic submitted. One focuses on to impermissible secret board discussions shortly after then Chief Investment Officer Ben Meng’s sudden resignation last August. The second involves CalPERS’ continuing efforts to hide records showing how it came to overvalue real estate assets 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.

Author(s): Yves Smith

Publication Date: 10 March 2021

Publication Site: naked capitalism

Mayberry v. KKR: Pitched Battle as Attorney General and Defendants Try to Block “Tier 3 Plaintiffs” Pursuing Claims Aggressively

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One noteworthy feature of these filings is that they are regularly shrill, ranging from pissy to screechy (the Attorney General’s filing is a bit different in instead adopting the tone of royalty having to stoop to dismiss an annoying subject).

And the reason for the all too evident frustration among the various opponents is that the legal team targeting the hedge fund abuses was supposed to have gone away by now.

As the Background describes in more detail, they were supposed to be over after their initial case was dismissed by the Kentucky Supreme Court on standing grounds. Recall that the defeat came as a result of rulings in Kentucky and by the US Supreme Court that found that Federal Article 3 standing rules (which Kentucky has adopted but not other states such as California) means that defined benefit plan participants have to have suffered an actual (“particularlized”) loss, as in not be getting benefits or only be receiving reduced benefits, to be able to lodge a claim. Since the Kentucky Retirement System, even at its stunningly depleted 13% funding level, is still anticipated to pay out until 2027 (and we are supposed to believe the State of Kentucky will step up and make good on the pensions until it turns out otherwise), the defined benefit pensioners can take no action until then.

Author(s): Yves Smith

Publication Date: 12 March 2021

Publication Site: naked capitalism

RIP Gold. Killed by Bitcoin

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Can the store of value argument hold up for BTC without it being a medium of exchange? It has for gold for thousands of years so quite possibly. Gold is money but it’s not readily usable currency. BTC could be considered in the same light.

The artificiality of BTC’s value is a problem. It can be argued using cultural relativism that gold is no more intrinsically valuable than BTC. But it does have a long history, especially as a reserve currency, that must be worth something. Can we see central banks buying BTC? Certainly not if it develops as a parallel medium of currency that undermines them.

Likewise, gold is the outcome of production. BTC consumes resources to produce nothing. Not that that is necessarily a problem in a virtual world but it again weighs against the perception of BTC as a store of value. So does the fact that BTC is a truly useless item if some kind catastrophe befalls society which does underping the value of gold in some measure.

Author(s): David Llewellyn-Smith, Yves Smith

Publication Date: 4 March 2021

Publication Site: naked capitalism

Covid Baby Bust Has Governments Rattled

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Of course, there’s a case to be made that fewer people in advanced economies is a good thing. But arrayed against that are all the “because groaf” forces. The two drivers of growth are demographic growth, as in more people, and productivity increases. National leaders are afraid of becoming the new Japan, having an aging population and falling in the “size of economy” pecking order, when Japan has weathered a financial system crisis and implosion of real estate prices with remarkable grace. And the demographic time bomb? The feared dependency ratio? More older Japanese work. Japanese even more so than Westerners prize attachment to communities and organizations, so it would probably suit those who are able to handle it to remain in the saddle or get a part-time job.

But the big point is that the Covid impact on child-bearing is widespread and looks set to continue for quite a while. The old solution in advanced economies for low birth rates was immigration. But that’s now become fraught. First is that neoliberalism-induced widening income disparity means those on the bottom are extremely insecure. Bringing more people in to them sure looks like a mechanism for keeping their crappy wages down. Second is advanced economies now eschew assimilation as if it were racist. But what did you expect, say, when Germany brought in Syrian refugees, who skewed male and young, and didn’t even arrange to teach them German? The notion that there’s a public sphere, where citizens hew to national norms versus a private sphere seems to have been lost (having said that, I don’t understand the fuss about headscarves; Grace Kelly wore them, so why should a religious intent matter?).

Author(s): Yves Smith

Publication Date: 5 March 2021

Publication Site: naked capitalism

Recent Judge Rakoff Decision May Curb Private Equity Leverage Abuses By Pinning Liability on Directors of Selling Company

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For decades, authorities and experts have tried restricting excessive borrowing by private equity investors, since it’s been repeatedly shown that they leave lots of bankruptcies in their wake. And these abuses continue because private equity looting fee structures result in general partners making out handsomely whether or not the business does well. In 1987 (no typo), the Treasury proposed limiting the deduction of interest on highly leveraged transactions. That idea went by the wayside thanks to the 1987 crash. Other proposals to restrict debt levels have similarly not gone anywhere. Yet now an important ruling looks set to deliver where regulators and legislators have failed.

The decision is related to bankruptcy ruling, In re Nine West LBO Securities Litigation, in early December. I’m late to it; several readers called it to my attention via a William S. Cohan op ed in the New York Times, The Private Equity Party Might Be Ending. It’s About Time. I think Cohan is overstating its significance; investment bankers and lawyers are prone to howling loudly about anything that might reduce the size of their meal tickets while working full bore to preserve them. But Nine West does appear likely to restrict very highly leveraged deals by pinning the liability tail for likely insolvencies on the directors and officers of the selling company.

The very short version of this story is that the directors of the selling company approved a sale transaction that they knew would saddle the company, renamed Nine West, with more debt than its own bankers had said it could support while removing its best assets. They sat pat as the buyer revised the deal to load even more borrowings on the acquisition, despite having a fiduciary “out” clause.

Author(s): Yves Smith

Publication Date:

Publication Site: naked capitalism

Eviction Moratorium Deemed Unconstitutional by Federal Judge in Texas

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Judge J. Campbell Barker of the Eastern District of Texas, sided with plaintiffs who challenged the CDC’s eviction moratorium on Constitutional grounds. We’ve embedded the opinion for Terkel v. Centers for Disease Control and Prevention at the end of this post. Even though some will be inclined to dismiss the ruling as politically-motivated (Barker was a Trump nominee), recall that it was the Trump Administration that first launched the eviction freeze. It initially ran through December 31, and covered tenants who gave their landlord a declaration attesting that the made less than $100,000 a year, had suffered a large hit to their income, were seeking assistance and would pay as much rent as they could. The Biden Administration planned to extend the moratorium to the end of March.

Bear in mind that the eviction halt dumped the cost of keeping coronavirus-whacked workers housed on landlords, rather than having the government provide income or rental subsidies.

Before we turn to the reasoning of the ruling, keep in mind that Judge Barker did not issue an injunction against the CDC’s moratorium, since the CDC apparently made noises at trial that they’d withdraw the moratorium if they lost. However, Barker told the plaintiffs they could come back and seek an injunction if the CDC didn’t play nice. There is no indication yet as to whether the Administration will appeal.

Author(s): Yves Smith

Publication Date: 26 February 2021

Publication Site: naked capitalism

Chief GameStop Tout and Registered Representative Keith Gill, Target of Class Action Suit, at Congressional Hearings Today

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The filing argues that Gill’s Roaring Kitty/DeepFuckingValue persona was a ruse, intended to hide his status as an industry professional who’d bought GameStop at prices averaging $5. The filing curiously doesn’t include Gill’s (presumably not faked) E*Trade account shots as part of the ruse, since any registered rep is normally required to trade only though his employer.1

The tricky part is that securities fraud, and this is a securities fraud case, requires establishing intent, which the lawyers call scienter, as in knowing in advance that what they were doing was wrong. The fact that Gill has so many securities licenses will make it pretty much impossible for him to pretend that he didn’t know what the relevant rules were. So his defense is likely to rest on “Gee, I thought this was a great trade. How was I to know so many people would agree and make the same bet?”

The filing makes a good go at pre-rebutting that. Even though Gill initially depicted his YouTube channel as being about general financial education, it became more and more fixated on GameStop, with “at least” 56 of 80 presentations devoted to it, and many of them discussing its vulnerability to a short squeeze. Virtually all of his tweets from July 2020 were about GameStop.

Author(s): Yves Smith

Publication Date: 18 February 2021

Publication Site: naked capitalism

Criminal Tax Cheat Robert Smith of Private Equity Firm Vista Gets a Pass for Conduct Worse Than Apollo’s Leon Black, Now in Epstein Doghouse

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Smith, who has a $7 billion net worth and is best known for having paid off the student debt of the 2019 graduates of Morehouse College, paid $139 million, admitted to guilt, and agreed to cooperate in the criminal tax fraud case against Texas software billionaire Robert T. Brockman, where the Feds allege $2 billion in tax evasion over 20 years. Brockman put Smith’s Vista in business as the sole investor in its first fund, via a $1 billion capital commitment.

Before we get to the details of the aggressive influence-peddling deployed to keep Smith from being indicted, bear in mind why it’s certain Smith got off easy.

First, the IRS unearthed that Smith’s hidden income, estimated at $200 million, via external means, in this case, being accused by his former wife. That lead probably led to other digging, say probing with Suspicious Activity Reports from Smith’s banks. That means that “more than $200 million” is pretty certain to be the minimum amount of money Smith stashed away from the taxman’s eyes. If Smith had been indicted, prosecutors would have done discovery on Smith’s accounts and probably on those of individuals and companies whose dealings with Smith could possibly have been part of his schemes.

Author(s): Yves Smith

Publication Date: 10 February 2021

Publication Site: naked capitalism

As Pandemic Surged, Contact Tracing Struggled; Biden Looks to Boost It

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Contact tracing, a critical part of efforts to slow the spread of the coronavirus, has fallen behind in recent months as covid-19 cases have soared. President Joe Biden had pledged to change that.

Biden proposes hiring 100,000 people nationwide as part of a new public health jobs corps. They would help with contact tracing and facilitate vaccination. Experts said it’s not clear that would be enough tracers to keep up with another surge in covid cases, even if the vaccination rate increases at the same time.

As with everything covid right now — testing, vaccinations and hospital capacity — ramping up contact tracing has become a race against time as new, more contagious variants of the virus threaten to accelerate transmission of the disease.

Author(s): Yves Smith and Steve Findlay

Publication Date: 11 February 2021

Publication Site: naked capitalism