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Leaked Documents Show How Blackstone Fleeces Taxpayers Via Public Pension Funds

Tyler Durden's picture




 

Submitted by Mike Krieger of Liberty Blitzkrieg blog,

The following story by David Sirota at PandoDaily is simply excellent. It zeros in on the secretive and rapidly expanding relationship between private equity firms and the public pensions that invest in them. It shows a crony capitalist love affair greased by lobbyist influence peddlers known as “placement agents”, as well as non-public agreements between PE firms and public pensions chock full of conflicts of interest, extremely high fees and underperformance. Unbelievably, in many instances the trustees of the public pensions are not allowed to know what funds the “fund of funds” invest in. This makes due diligence impossible, and in one particularly egregious example it led the Kentucky Retirement Systems to unknowingly invest in SAC Capital despite the fact it was under SEC investigation at the time.

Furthermore, with the Wall Street Journal reporting back in 2011 that $37 of every $100 dollars invested in Blackstone’s investment pool comes from state and local pension plans, it appears that taxpayers are once again being fleeced by the financial oligarch class. Additionally, it appears to answer a recent question I posed in my piece: Is the Credit Bubble Popping? Carlyle Group Warns on Frothiness and Junk Bond Deals Get Pulled. After reading about a growing pool of insane “dividend deals” and payment-in-kind” notes being issued, I wondered who in their right mind was buying these deals. Well, based on the complete lack of competence and due diligence happening at public pension funds, I think we have solved part of the mystery. 

The chief villain in this article will be no stranger to readers of this site. It is Blackstone, the private equity giant who I have criticized many times on these pages for buying up homes all across America in “all cash” deals, making homes unaffordable to average American peasants. Of course, Blackstone is just one of many, but given its size and influence, highlighting its practices is probably quite representative.

Here are some excerpts from the article. Read it and weep:

When you think of the term “public pension fund,” you probably imagine hyper-cautious investment strategies kept in check by no-nonsense fiduciary laws.

 

But you probably shouldn’t.

 

An increasing number of those pension funds are being stealthily diverted into high-fee, high-risk “alternative investments” that deliver spectacular rewards for the Wall Street firms paid to manage them – but not such great returns for pensioners and taxpayers.

 

And yet… despite the fact that they deal with the expenditure of taxpayer money, the agreements between public pension systems and alternative investment firms are almost entirely secret.

 

Until now.

 

Thanks to confidential documents exclusively obtained by Pando, we can now see some of the language and fee structures in the agreements between the “alternative investment” industry and major public pension funds. Taken together, the documents raise serious questions about whether the government employees, trustees and politicians overseeing major public pension funds are shirking their fiduciary responsibilities under the law when they are cementing “alternative” investment deals.

 

The documents, which were involved in a recent SEC inquiry into the $14.5 billion Kentucky Retirement Systems (KRS), were handed to us by SEC whistleblower Chris Tobe, an investment consultant and former trustee of the KRS. Tobe has also written a book — “Kentucky Fried Pensions” — about the scandalous state of the Kentucky public pensions system.

 

The documents provided by Tobe (embedded below) specifically detail Kentucky’s dealings with Blackstone – a giant Wall Street investment firm which has deployed a platoon of registered lobbyists in Kentucky and whose employees are major financial backers of Kentucky U.S. Sen. Mitch McConnell (R).

 

The Blackstone-related documents, though, don’t just tell a story about public pensions in Kentucky. The firm, which just reported record earnings, does business with states and localities across the country. The Wall Street Journal reports that “about $37 of every $100 of Blackstone’s $111 billion investment pool comes from state and local pension plans.”

 

In other documents, public pension money is exempted from some of the most basic protections usually guaranteed under federal law. Other contract language appears to license Blackstone to engage in financial conflicts of interests that could harm investors.

 

Despite the documents involving government agencies, and taxpayer money, they are all marked confidential. The public is not allowed to see them.

 

One of those documents given to Pando by Tobe is a confidential memo to KRS investment committee members from August 2011. In the memo, KRS staff outlines their desire to invest roughly $400 million in Blackstone’s Alternative Asset Management Fund (BAAM), which is a so-called “fund of hedge funds.”

 

As documented on page seven of that memo, Blackstone was guaranteed whopping fees of 50 basis points plus 10 percent of any overall profits on retirees’ money. In addition, the memo estimates 1.62 percent management fees and 19.78% incentive fees to be paid on top of the Blackstone fees to the underlying (and undisclosed) individual hedge fund managers in the “fund of funds.”

 

In 2013, according to KRS data, BAAM earned an 11.54 percent return for the pension system. That was 20 percent below the S&P 500 that year, meaning, Tobe says, that Kentucky taxpayers would have earned $78 million more in an almost fee-less S&P index fund. Those figures are consistent with a recent study from the Maryland Public Policy Institute showing “that state pension systems that pay the most for Wall Street money management get some of the worst investment returns.”

 

Fees, says Tobe, are a driver of the underperformance. Using the secret memo’s figures, Tobe estimates that 33 percent of that stunning one-year underperformance - or about $25 million – was in the form of fees paid to Blackstone and the other managers in its “fund of funds.”

 

According to data from the investment research firm Prequin, 20 others public pension funds are also invested in BAAM. Assuming those funds invested in BAAM under roughly the same terms as Kentucky, Tobe estimates that Blackstone and underlying managers in BAAM raked in well over $200 million in fees in 2013 on just that one fund of funds.

 

Absent from the memo to the trustees are any details about which particular hedge funds are in the BAAM fund. In an interview with Pando, Tobe argues that was by design because, he says, Kentucky officials wanted trustees to vote on the investment without being able to do due diligence. Tobe says that meant trustees were not made aware that BAAM invested in SAC Capital – the firm whose executives recently pled guilty to insider trading charges, and who at the time of the Kentucky investment were already under SEC investigation.

 

Amazingly, while asking public pension trustees to invest money in the fund, the Blackstone document also says that “none of the Partnership’s investments have been identified,” meaning trustees could not even evaluate the underlying investments before they decided to invest retirees’ nest eggs.

 

In terms of legal protections, the document says investments made by the private equity fund could be illiquid “for a number of years.” In a section marked “absence of regulatory oversight,” the document also says investors “are not afforded the protections of the 1940 (Investment Advisers) Act.” It also says that in the event of litigation brought against the managers of the fund, those costs “would be payable from the assets” of the investors.

 

Another section declares that “Blackstone may have conflicting loyalties” between the different funds it operates, and that “actions may be taken for the Other Blackstone Funds that are adverse” to investors.

These people have zero shame.

According to former SEC investigator Ted Siedle, who served as counsel to Tobe during the SEC investigation, the conflict-of-interest section marked “Fees for Services” is particularly problematic. He says it permits private equity managers to assess fees on companies the private equity fund owns, but then not compensate the fund investors (like public pensions) for those fees. This stealth fee-inflating practice, which is attracting SEC scrutiny, has been called the “crack cocaine of the private equity industry.”

 

In recent months, questions have been raised about why pension funds are investing so heavily in  high-fee, high-risk alternative investments. For example, a New York Times report recently noted that “a number of retirement systems that have stuck with more traditional investments in stocks and bonds have performed better” than those investing heavily in alternatives. Similarly, Bloomberg News reported that “more than half of about 400 private-equity firms that SEC staff have examined have charged unjustified fees and expenses without notifying investors” of such fees.

 

When Pando asked for specific comment on whether agreements between Wall Street firms and taxpayer-backed public pensions should be available to the public, Rose said: “We are going to decline to comment on this.” Likewise, the Private Equity Growth Capital Council and KRS did not respond to questions about secrecy.

 

That response – or lack thereof – highlights how public pension transactions with Wall Street remain shrouded in secrecy in states throughout the country. As Susan Webber has written, despite the astronomical sums of taxpayer money and retirement income at stake, “public pension funds routinely turn down requests” for such basic information in hopes of shielding the fee bonanza from scrutiny.

 

For example, following SEC warnings of fee abuse in private equity investments, the New York state’s Teachers’ Retirement System flatly rejected Reuters’ open-records request for information about its private equity holdings.

 

In Rhode Island, the financial industry is a major donor to the election campaigns of State Treasurer Gina Raimondo (D), who has used her power to move more pension money into high-fee alternative investments. Many of those investments subsequently underperformed and hurt pension earnings, all while generating big Wall Street fees. When transparency and good-government groups asked for the full details of the alternative investments in question, Raimondo refused.

When the SHTF again, probably some time next year, the private equity industry will emerge as one of the biggest villains, and rightly so.

For the full article and the embedded leaked documents, go to PandoDaily.

Additionally, I also suggest reading this article from today’s Wall Street Journal, Borrowing Cash to Buy Complex Assets Is In Vogue Again, showing how banks are increasingly offering massive leverage to hedge funds so that they will invest in risky assets the banks are no longer able to hold. Ultimately, public pension funds will turn around and invest in these hedge funds and the typical cycle of putting all the risk on the taxpayer and total muppet fleecing will have once run full circle. Incredible.

 

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Mon, 05/05/2014 - 22:20 | 4730666 Newsboy
Newsboy's picture

Why am I shivering?

Baaaaa....

Mon, 05/05/2014 - 22:29 | 4730682 aVileRat
aVileRat's picture

Want to shut up a US endowment fund when they start talking down to you on fees or your corp. ROAC? Ask them how much they lost on US structured finance in 2008. Now ask them how much of their current portfolio is in SIF's and how has their policy changed or mark-to-market adapted post 2008.

Nothing changed. Seriously. Nothing. They have so much obligations and cash outflows that 10%+ AA bonds are the only thing many are qualified to invest in.

 

Mon, 05/05/2014 - 22:42 | 4730715 Greenskeeper_Carl
Greenskeeper_Carl's picture

This article by Obama sycophant David sirrota misses the point. Would any of this happen, would any of these wealth transfers exist without the fed?

Mon, 05/05/2014 - 23:16 | 4730803 knukles
knukles's picture

1.)  This is nothing new.  Been business as normal with Public Pension Funds forever.
They're milk cows for everybody at the expense of the taxpayers.
2.)  This is another "reason" the Government will make to Nationalize Pension Funds.
3.)  Note the author is  Liberal/Progressive ref. above point #2

Mon, 05/05/2014 - 23:22 | 4730815 Groundhog Day
Groundhog Day's picture

After these squids suck the life out of the pensions (police, fire .gov etc) and the riots begin.....the retarded police will actually protect these scumbags.

Tue, 05/06/2014 - 00:55 | 4730946 RafterManFMJ
RafterManFMJ's picture

Nothing to be seeing here! Please to be moving along! All is well!

It's beginning to border on hilarity how EVERYTHING in this Nation is a fraud and a lie.

I believe it all goes back to unsound currency; all flows from that basic abhorrent aberration.

Tue, 05/06/2014 - 00:09 | 4730895 ghostfaceinvestah
ghostfaceinvestah's picture

What else is new, this has been going on for decades.  Most of these pension funds, endowments, etc are run by dummies.

Tue, 05/06/2014 - 14:14 | 4732697 Monty Burns
Monty Burns's picture

They most certainly are not run by dummies.  These people know exactly what they're at - to trouser millions and scarper just before the SHTF.

Mon, 05/05/2014 - 22:21 | 4730668 TeamDepends
TeamDepends's picture

Not to be confused with Blackwater, whose agents would just as soon cut you in half with a 50 cal. than look at you.

Mon, 05/05/2014 - 22:46 | 4730720 Greenskeeper_Carl
Greenskeeper_Carl's picture

I spent a few weeks of CQB training there a few years back, and those guys have some good training. I'm not defending everything they've done, but there are a lot of oath keepers there. There is no reason to fear some army of mercenaries like them. If therr ever was a real SHTF scenario, those guys are going to be defending their homes and families, same as the rest of us. And what does any of that have to do with this article?

Mon, 05/05/2014 - 23:13 | 4730793 TeamDepends
TeamDepends's picture

Greened you Carl, "but there is no reason to fear some army of mercenaries like them."  Perhaps you were only allowed to meet the Ned Flanders' of the organization?  Over?

Tue, 05/06/2014 - 01:01 | 4730954 RafterManFMJ
RafterManFMJ's picture

Carl makes absolute sense; there is no need to fear a man who takes silver to kill and maim other human beings. Stuttering carbines, grenade blasts, the acrid smoke from cordite and burning flesh - hey, they've a job to do just like you.

Salt of the Earth, really.

If you cannot count on the loyalty, humanity and compassion of men who would convert you and everyone you love into small piles of smoking meat for a pile of fiat, what is there left to believe in?

Tue, 05/06/2014 - 01:57 | 4731002 James_Cole
James_Cole's picture

Salt of the Earth, really.

 

The interesting thing is the incredible similarities between the rise of the SA in Germany and groups like the Oath Keepers in the US - right down to fighting with competing militia groups. 

 

And then there's the paranoia, they claimed recently to have 'reliable information' that eric holder had authorized a drone strike on their operations at the bundy ranch. Anyone above the age of ten buying into the idea of the US droning American citizens in Nevada out of the blue... well that be some seriously questionable brain functioning and judgement! 

 

 

Tue, 05/06/2014 - 07:04 | 4731190 N2OJoe
N2OJoe's picture

Ruby Ridge and Waco would disagree.

Mon, 05/05/2014 - 22:25 | 4730675 VegasBob
VegasBob's picture

Well, I just go back to the second rule of graduate school:

 

If you can't dazzle them with your brilliance, then baffle them with bullshit.

 

That's a perfect explanation as to how these "alternative investments" work.

Mon, 05/05/2014 - 22:32 | 4730689 Soul Glow
Soul Glow's picture

Grad school?  I learned how to bullshit in 7th grade when my teachers tried to give me bad grades.  You paid money for to learn that?

Mon, 05/05/2014 - 22:26 | 4730677 Soul Glow
Soul Glow's picture

Blackstone?!  

No?!?!?!  What?????  

I am Jack's lack of surprise.

Mon, 05/05/2014 - 22:40 | 4730678 Edward1290
Edward1290's picture

relax.........its Gods work

 

http://www.dianomi.com/

 


Tue, 05/06/2014 - 05:09 | 4731101 intric8
intric8's picture

all levity aside,

americans are being BETRAYED at every turn

by those we entrust power

great wrongs, and at every inquiry

a dead end

protected by rule of law

and behind it, money, lots of it

the loss of freedoms, liberty

Who wrote the law

who has taken possession of the wealth

who benefits from americas sacrifice

they betray

they are americas enemies

they will make it legal

Mon, 05/05/2014 - 22:28 | 4730680 Dr. Engali
Dr. Engali's picture

Good stuff. Hey did you hear the latest about Michelle? She's joining the whose who of fashion in New York:

http://nypost.com/2014/05/05/michelle-obama-cuts-ribbon-at-new-anna-wint...

Can we talk about her for a while. I just love her........Sighhhhhh.

Mon, 05/05/2014 - 22:52 | 4730743 Colonel Klink
Colonel Klink's picture

Can we talk about HIM for a while. I just love HIM........Sighhhhhh.

FIFY

Mon, 05/05/2014 - 22:30 | 4730685 Bemused Observer
Bemused Observer's picture

But people will still say it's the greedy penshioners that are fleecing them...:-(

Mon, 05/05/2014 - 22:36 | 4730698 Caviar Emptor
Caviar Emptor's picture

Yes! CNBS 'xperts' will agree that the greed of the pensioners led them to invest with the thieves! And therefore they deserve to be fleeced. Oh and by the way, morons deserve to lose in the Darwinian struggle against princes of darkpoolness. Heads u lose tails I win!

Tue, 05/06/2014 - 01:01 | 4730955 RockyRacoon
RockyRacoon's picture

This is not likely to be touched by the marionettes at CNBC.  The only thing wrong with the article is the last word: "Incredible"

No, it's not incredible.  Seems like business as usual on Wall Street.

Mon, 05/05/2014 - 22:40 | 4730710 CPL
CPL's picture

Oh they've been running that meme/story/lie for a while now.

Google the following:  greedy pensioners

Who the hell would write a story to kick someone off their own savings?  The people that spent it.

Mon, 05/05/2014 - 23:48 | 4730856 Bemused Observer
Bemused Observer's picture

Something like 80% of the comments I've read have been from people saying things like,"Good! I'm tired of working every day so these deadbeats can retire at 50 on my dime!" Alot of them were downright gloating...I can't see it as a 'meme', I'm sorry. I've seen it, it made an impression on me.

Mon, 05/05/2014 - 23:51 | 4730863 Bemused Observer
Bemused Observer's picture

And, the 20% or so that were supportive of the people in Detroit nearly always got 'jumped' by someone calling them a socialist or a member of the 'free stuff army'...

Tue, 05/06/2014 - 00:45 | 4730928 CPL
CPL's picture

Exactly, it's money those people were told was going to be saved in trust in a community venture to invest their collected pool of money.  The theory goes the larger the pile of money, the more diverse the investment base that can be developed. It sounds great on paper.  Makes a great 'investment' advice column.  Sells alot of bonds, CD's, mutual funds...sells a lot of paper that isn't ever going to be paid back because the system would collapse the same day.

There are only two things that a big pile of other people's money attracts. 

Thieves and Taxmen, today though no one could tell the difference between the two since they seem to be having a great time lending on another other people's money.  Worst yet...not putting it back.  My favorite jacking inflation to cover the loss by handing less value back to someone that's busted their ass for decades.  It's so amazingly broken and crooked, once the math hits a 'number' then it self destructs one of two ways.

1) too many people withdrawl at once. (remember rrsp's are 'stagard' pay outs, the can pay three card monte as long as there are suckers at the table)

2) too much money in the money supply and the 'million dollar' cushion is worth the same as a fist full of lint.

There's just no escape hatch to the current financial system that I've noticed.  Only people left they can steal from is each other. 

So get the popcorn.  Show's just about to start. ( I strongly suggest not being the last guy to clean out their retirement account, historically never works out well )

Tue, 05/06/2014 - 14:20 | 4732732 Monty Burns
Monty Burns's picture

Don't know about the USA but in Europe if you 'clean out' your retirement fund  you pay anything between 40% and 65% tax. You're left with less than half usually.

Tue, 05/06/2014 - 00:30 | 4730917 CPL
CPL's picture

An idea an infection?  Sure. 

20 years ago the professional banking crowd that cheered people on into 401k's and RRSP's like cattle.  Today the same banks help "cyprus" their clients.  So if it ain't heavy metal or crypto, and in your hand, you ain't getting it back.  That's the underlying message in all those articles.  No one is getting it back.  I hate to say it, but you've all been robbed and thanked the thieves for their services. 

And weirdly, even with the news, gave them more money because of an illusionary tax break around contributions to the free floating untaxed slush funds.  Additionally they don't have to be reported on. 

Remember it's a yearly estimate, the nice man in the suit at the bank told you that and buried in that brick of paper to start your 'registered plan' it says it as well.  They don't have to tell you a damn thing until you withdraw your funds.  That btw is how Madoff pulled the wool over the eyes of his investors.  He did it by 'estimate'...until he didn't have any more money.  Took a while to find out though didn't it?

Only way anyone with a 401k or an RRSP will know is until they fill out a brick of paper work to receive it in their hand.   Until then everyone receives a free "Madoff-like" news letter from governments, investment companies and banks reassuring them of the solvency of their 401k or RRSP.  That somehow it's safer because of a news letter or a cheap ad to 'bank with us'.

It's all a scam, has been from the start. 

Q:  How do you get money, untaxed back into a fixed pool of investments of the companies you and your friends own exclusively? 

A:  You convince people that the money they made is worth more in someone else's hands off the books, because that's the definition of off book accounting.  You hide money in escrow and there's no need to report operational costs, because it's 'registered' therefore 'safe'.  Like a savings account magically became worthless since the government got to hold the bag. (how well does that work out historically?)

Anycase, it all sounds pretty stupid doesn't it? 

Yet people throw money hand over fist that they will never see again into them.  Because the nice man in the suit at the bank said it would be there by the given estimate.  Ask any ex-nortel employee, or DEC employee, or HP, or Ford...or whoever.  Every piggy bank looted.  Every last one.  These are no different, it's just paper agreements that don't mean anything to anyone taking care of anyone's money.

Tue, 05/06/2014 - 03:34 | 4731074 DontGive
DontGive's picture

Amen to that. That's a lot of words to say: fuck 'em all.

Tue, 05/06/2014 - 22:08 | 4734567 WTFUD
WTFUD's picture

@CPL I can see clearly now my pensions gone. . . . . it's gonna be a bright, bright, sunshiny day.

Mon, 05/05/2014 - 22:31 | 4730686 i_call_you_my_base
i_call_you_my_base's picture

These people should hang.

Tue, 05/06/2014 - 11:14 | 4731966 homonohumanus
homonohumanus's picture

That type of punishment just show why "we" lose and they won.

It is a too kind arted punished.

I would feed them to lions and make a show how of it, the good old circus.

 

Not too mention nobody has to inflict the death penalty, beasts do their things. 

Mon, 05/05/2014 - 22:33 | 4730696 fonzannoon
fonzannoon's picture

this article illustrates why the fed is putting hedge funds out of business with SPY. How can the fed successfully transmit the wealth effect if they pump up the S&P 30% and fucking blackstone underperforms it by 67% and takes half of what they made in profits. what a fucking waste. The pension fund fiduciary's should be put in jail for selling out for a steak dinner and tixx to a ballgame and blackstone needs to gtfo of the way of spy which could be had for 20bps. This article is the best commercial ever for MYRA 2.0 which is 60% spy and 40% tlt with a guaranteed 8% rate of return backed by kevin henry.

Tue, 05/06/2014 - 04:18 | 4731094 intric8
intric8's picture

Guaranteed? 8%? i havent heard of such a thing since bernie madoffs fund!

Mon, 05/05/2014 - 22:42 | 4730713 Caviar Emptor
Caviar Emptor's picture

They still believe in "gurus" and "wizards" of the "Market". Just like there are magic no-lose "systems" at the tables in Vegas.

Mon, 05/05/2014 - 22:46 | 4730721 Seasmoke
Seasmoke's picture

I'm getting sick of Stephen A. Schwarzman

Mon, 05/05/2014 - 22:50 | 4730733 Colonel Klink
Colonel Klink's picture

Blackstone, another tribal owned skimming hedgefund.  Oh and let's not forget it's parent company, Blackrock.

Mon, 05/05/2014 - 22:53 | 4730747 navy62802
navy62802's picture

Just one symptom of the spread of fascist economics, though none dare call it that.

Mon, 05/05/2014 - 23:02 | 4730765 williambanzai7
williambanzai7's picture

Mon, 05/05/2014 - 23:03 | 4730770 Kaiser Sousa
Kaiser Sousa's picture

no sympathy for anyone who remains in this debt based slave system...U HAVE A CHOICE..

u choose to stay...get fucked and enjoy it....

Mon, 05/05/2014 - 23:05 | 4730771 williambanzai7
williambanzai7's picture

Tue, 05/06/2014 - 00:30 | 4730916 Tachyon5321
Tachyon5321's picture

Blackstone's strategy is much better than trying to laundry drug money. It also goes a long way to explain why the rich want to raise taxes. By paying taxes they legally get to keep half of the taxpayers money they steal.

 


 

 

Tue, 05/06/2014 - 02:22 | 4731016 kurt
kurt's picture

Thar Be Evil Fucks

They Be At Yer Money

The'll be lafin' at yer stomach pains and worries

'Cuz they be Scurvy Scum what work day and night

Ta Rob You Blind, and it ain't funny

 

Tue, 05/06/2014 - 05:31 | 4731130 russwinter
russwinter's picture

There's More to the Story of Ultra-Junk Finance:

http://winteractionables.com/?p=11085

 

Tue, 05/06/2014 - 07:16 | 4731206 FreeNewEnergy
FreeNewEnergy's picture

Hang every one of the greedy mother-fuckers. 10-20 per day for a few months ought to send the right message.

Tue, 05/06/2014 - 15:55 | 4733213 Loucleve
Loucleve's picture

J. Thomilson Hill - co chair, Blackstone Group.

Member - Council on Foreign Relations.

Tue, 05/06/2014 - 21:43 | 4734494 WTFUD
WTFUD's picture

I'm shocked, shocked I tell ya!

Do NOT follow this link or you will be banned from the site!