This page has been archived and commenting is disabled.
Public Pensions Falsifying Investment Returns?
Submitted by Leo Kolivakis, publisher of Pension Pulse.
Stocks tumbled on Thursday as President Obama took on the banks:
Mohamed El-Erian, chief executive of Pimco, told the Financial Times: “Today’s announcement is part of the broader phenomenon of de-risking banks, and moving the sector more towards the ‘utilities’ end of the operating spectrum.
“This reflects post-crisis governments reaction to both systemic risk and political realities. It comes at a time of increasing structural inconsistencies in advanced economies, including the conflict between the de-risking banks and expecting them to lend more to the struggling real economy.
“After a liquidity and stimulus driven rally, stocks are starting to reflect the realities of structural imbalances in both the economy and the policy responses.”
The Dow Jones was down 213 points, its fourth consecutive day of triple-digit moves. The volatility saw the Vix index, known as Wall Street’s fear gauge, jump 19.2 per cent to move back above 22.
Investors rushed into the perceived haven of government bonds. The yield on 10-year US benchmark Treasuries reversed an early rise to drop 5 basis points to 3.59 per cent, with a worse than expected US weekly initial claims number and a disappointingly soft Philly Fed business survey providing further support.
The dollar initially lurched higher to fresh 15-month peaks as the President’s plans were revealed. However, it swiftly fell back into losses as traders baulked at the belligerent tone of Mr Obama’s remarks and the impact his proposals may have on US financial sector competitiveness. The buck was 0.1 stronger at $1.4091 versus the euro but fell 0.9 per cent to Y90.41 against the yen.
With all due respect to Mohamed El-Erian, if he thinks today's action reflects the "de-risking" of banks, then he's sorely mistaken. President Obama can huff & puff all he wants publicly, but privately he knows he's going to have a hard time passing a fraction of those proposals.
This is just political smoke because as was mentioned by someone on the Zero Hedge blog, Big Banks Have Already Figured Out The Loophole In Obama’s New Rules. But the bears are growling now, led by guys like Bob Prechter, who is convinced the bear market is back.
I remain optimistic that equities will grind higher and will accumulate more shares (in specific sectors like solar) from now until the next US employment report.The best line I heard on Thursday came from Warren Buffett who stated on Fox news that bank failures should destroy CEOs:
“There ought to be a huge downside,” said Buffett, whose Berkshire Hathaway Inc. is the largest shareholder in Wells Fargo & Co. “Make it so that the CEO of an institution that fails, or goes to the government and needs help, really gets destroyed himself financially. Why should he come out any better than somebody that gets laid off as an auto worker at General Motors?”
Buffett, who collects a $100,000 salary as Omaha, Nebraska- based Berkshire’s leader, said CEOs must act as the “chief risk officer” of their companies. He has repeatedly criticized bankers for failing to realize that housing prices could fall and said they exacerbated their mistakes by borrowing to increase the size of their failed bets.
“I think you have to change the incentives,” Buffett said on the cable news channel.
“It’s nice to have carrots but you need sticks. The idea that some guy is worth $500 million and leaves and only has $50 million, that’s not much of a stick. There ought to be a huge downside.”
You certainly need more sticks. Soros talked about alignment of interests and that's exactly what Buffett is hinting at. These banking "prima donnas" have no skin in the game. All upside, hardly any downside. No wonder they take reckless risks to maximize profits.
And if you think bankers' incentives are bad, let me introduce you to Canadian public pension fund managers. They too have no skin in the game and if the shit hits the fan, like it did in 2008, they just fall back on their four-year rolling returns to collect multi-million bonuses.
One senior vice-president in private equity once told me "it's a great gig". It sure is, especially if you have incompetent board of directors who do not know how to properly compensate pension fund managers using benchmarks that accurately reflect the risk being taken.
As if that's not bad enough, I was skimming through some articles on Jack Dean's Pension Tsunami, and noticed an article in Forbes from Edward Siedle, Public Pensions, Managers Falsify Investment Returns:
The Ohio Bureau of Workers' Compensation fund provides coverage for workplace injuries to two-thirds of its state's workforce and has $22 billion in funds to back it up. In April 2005 this then little-known organization reported investment returns that seemingly made it a star of the financial world--16.5% per year in a decade when the S&P 500 had earned only 10.6% annually.
Later that year, however, those returns came under suspicion when the BWC burst into the headlines as the focus of a massive investment fraud. It involved unconventional investments that had been managed by people closely connected to financial backers of the Ohio Republican Party. Have you ever heard of a state investment fund investing in gold coins or Beanie Babies? This one did.
Upon further review, it turned out that the BWC's reported investment returns were fictitious. "We are unable to establish any basis whatsoever for the 16.5% figure," an outside performance review concluded. The fund had actually earned 7.3% annually--less than half of what it had previously claimed.
In other words, the largest state-operated workers comp fund in the country had massively misrepresented its performance. Subsequent revelations showed that sloppy mathematical calculations weren't the problem. There had been a deliberate, concerted effort involving BWC's investment staff and vendors to inflate the performance.
If a Securities and Exchange Commission-registered money manager had committed similar fraud, it would have been shut down. But governmental investment funds, including hundreds of public pension plans, are generally not subject to SEC regulation.
This brings into question not only their overall performance claims but also those of the outside managers they hire. Given that such outsiders are often paid based on the returns they report, and thus have a huge incentive to cook the books, I suspect that many of the numbers issued by public pension funds are wrong. What's more, in my experience, many public funds fail to submit their reported rates of return to the sorts of audits and verification money managers in the private sector regard as mandatory. It's just too politically fraught. I call this politicization of the investment process.
For a look at just how averse outsiders can be to reporting bad numbers, see the Alaska Retirement Management Board. In 2007 the state agency filed suit against Mercer, a unit of Marsh & McLennan ( MMC). Mercer, the agency contends, made multiple errors as the state's actuarial consultant when it estimated the amounts that two of the state's retirement plans needed to set aside for health care and pension benefits. The agency is seeking damages of $2.8 billion. Now it seems the financial health of these systems is far different from what investors were told, perhaps dire. Liabilities were grossly understated. Again, if an SEC-registered money manager had committed these errors, they'd be held accountable.
This article highlights the need for external performance audits conducted by independent industry experts. It's not just about benchmarks; it's also about making sure the investment returns reported by internal and external managers are being reported accurately, verified internally by the finance department, and by external, independent experts to see if they pass the highest industry standards.
And annual financial audits are simply not enough. Accounting firms are notorious for letting things go and they are not trained experts in hedge funds or private equity funds so they will not know what to look for. Moreover, there are potential conflicts of interests since accounting firms want future business from the public pension funds they're auditing and will not dare piss off their senior managers.
The more I think about it, the more I like Buffett's idea. Let's go after the personal assets of Canadian public pension fund managers who invested in ABCP, shady real estate, private equity and hedge fund investments. If they lose billions, they should feel the pain too.
»
- advertisements -
Aren't most of these pensions "unfunded" too? I thought I have read about this in the past. If they are funded and mistated for returns what does that say about how they are being paid out? Have they been robbed too?
so,
can we identify and label banks/pensions that don't do this crap?
maybe put a decal on the door that says 'integrity inside'...
seriously, there's a market for any bank(s)/investment vehicles that can clearly show they don't play these games.
i'm not averse to risk, i just want to know what it really is, and transparent markets have a pretty good history of identifying risk (and no, the current markets do not qualify as transparent...)
while it's tough for the honest banks when the various investment vehicles are labelled "aaa+++" by the ratings guys when they're really rubbish, those lies can be prosecuted and damages awarded in a lawful system (different conversation)...
the only place to 'hide' is where the real risk is known (transparency), and the risk taker has more ability to self-direct if they want to. pensions are great, but the ability to work outside those mega-messes has become painfully clear to anyone watching. have the no-brainer 'A' plan, but always have the self-directed 'B' plan by law, so we don't all get stuck on the pension Titanic... Even if it means i can buy beanies and gold coins... i'll sign the waiver.
sadly, like real bank reform, it's all hot air.
(BTW - good read, Leo, thanks).
Canada has underestimated the liabilities for Public Sector Pensions. This "error" is over 50-Billion Dollars and has to be added to the public debt (it hasn't been shown yet).. Then you have the craziest guys on the planet running Ontario - they just pieced off 7 billion to Samsung for solar energy in a place that has a lot of winter and cloudy days. The auto worker jobs "saved" in the last go cost the province over $1 million each. I wonder how much green a "green energy" job will cost. Add to all this - the giant provincial public sector pension liabilities and whoopee - they're in a NY or CA kind of ride but in Ontario they keep their eyes closed so can't see the train coming.
Taxpayer to Uncle Sam, "JUST SHOW ME THE MONEY."
In other news, Corporations are now entitled to 2nd amendment rights and can bare arms. With zero accountability and new Constitutional protections they can kill you but ill bet you can't kill them!
A piece of paper properly filed can now create an individual out of thin air. Soon we will be watching ads selling the right to life movement applies to corporations.
http://www.cnbc.com/id/34996485
"We're Doomed!!!"
Go to 5:55 for his Pension Fund thoughts.
Marc Faber rules.
"Obama makes Bush look like a genius."
http://www.cnbc.com/id/15840232/?video=1392732640&play=1
Nice catch! While the bonuses get people up in arms should the fact that they are basically committing fraud be a bigger deal? Really a big gap can't be explained by "We made a mistake" or "Our internal controls were not sufficient" this is the kind of thing where heads should roll and managers fed to the lions. After all if they are committing fraud I'm pretty sure that's still technically a crime even if most govs are willing to look the other way.
Did you read Wells Fargo latest financial statements?
Yup. WFC basically flipped the bird to FAS 166/7. A $2 trillion off balance sheet exposure got boiled down into $ 10 billion coming on. But I believe they are in a voluntary compliance period for now.
Leo, good thoughts on performance misrepresentations in pension funds. As with WFC, it's anybody's guess what their true performance really is until they are independently evaluated.
Leo - we're so lucky that you don't mind reading these pension articles and summarizing them for us who are not so inclined. However, you always want to adjust 'incentives'. Why can't people be employed for a wage - in other words, a disincentive would be to lose the damned job. All 'incentive' employment comes when bilkers are running other people's money - and their only incentive is to falsify accounts and take as much as possible out of the pots before them.
Good point, a very close friend of mine who is a professor of economics at McGill thinks we should abolish all bonuses in the financial sector and just pay salaries. "If they fuck up, fire them". But abolishing bonuses is blasphemy in finance and it will never happen. One thing is for sure, the CEOs need to feel the pain too. And not just banking or pension CEOs, all corporate CEOs who deliver poor results should feel the pain too!!!!
Jyske Bank, the 2nd largest bank in Denmark, has had a long history of paying no bonuses. The average client stays with the bank for 10+ years, which is an amazing statistic by Wall Street standards.
I take the comment about investing in gold coins as a sarcastic one when combined with investing in beanie babies. Do I misunderstand it?