New Jersey Funneling Pension Fund Cash to Wall Street Investment Managers

By David Dayen, a lapsed blogger, now a freelance writer based in Los Angeles, CA. Follow him on Twitter @ddayen

David Sirota has carved out a much-needed niche lately by poking around in the unseemly deals between public pension funds and Wall Street predators, and he brings yet another scoop, this time in New Jersey:

Gov. Chris Christie’s administration openly acknowledged that more New Jersey taxpayer dollars were going to land in the coffers of major financial institutions. It was 2010, and Christie had just installed a longtime private equity executive, Robert Grady, to manage the state’s pension money. Grady promoted a plan to put more of those funds into riskier investments managed by Wall Street firms. Though this would entail higher fees, Grady said the strategy would “maximize returns while appropriately managing risk.”

Four years later, New Jersey has secured only half the promised results. The state has sent more pension money to big-name Wall Street firms like Blackstone, Third Point, Omega Advisors, Elliott Associates and Grady’s old firm, The Carlyle Group. Additionally, the amount of fees the state pays financial managers has more than tripled since Christie assumed office. New Jersey is now one of America’s largest investors in hedge funds.

The “maximized returns” have yet to materialize… Had New Jersey’s pension system simply matched the median rate of return, the state would have reaped roughly $3.8 billion more than it did between fiscal years 2011 and 2014, says pension consultant Chris Tobe.

The $939.8 million million in Wall Street fees from 2010-2013 are bad enough, especially for below-market returns, but the sheer riskiness of these bets, essentially letting fund managers gamble with public money, is truly nauseating. As Sirota points out, New Jersey has authorized over one-third of its pension funds to alternative investments, from hedge funds to private equity firms to venture capital funds. That is alarmingly high. Calpers, the largest pension fund in the country, has dropped their alternative investment stake to less than half that. These investments don’t outperform the market, but they’re great to grease the palms of the managers with fees. In this case, those managers happen to be ket backers of Chris Christie:

The above-average costs for New Jersey are a direct result of Christie administration officials moving more pension money to Wall Street firms. The management fees those firms charge are far more expensive than the fees for passive index funds and the costs associated with equities being managed by in-house pension staff. Investments with Wall Street managers comprise less than half of New Jersey’s pension portfolio — but those investments’ attendant fees account for 96 percent of the pension system’s total overhead expenses, according to State Investment Council documents […]

As previously reported by IBTimes, campaign finance records show that employees and others affiliated with firms managing New Jersey pension money made $167,000 worth of donations to New Jersey Republicans since 2009. Employees of those firms have also donated more than $11 million to the Republican Governors Association and the Republican National Committee. Christie is the chairman of the RGA and both organizations spent heavily to support his 2013 reelection campaign.

This amounts to Christie funding his presidential ambitions with New Jerseyite’s taxpayer money. He funnels that money to Wall Street managers, and they recycle a chunk of it back to him and his causes. As Sirota points out, the donations line up with when the firms got the contracts to manage the pension money. In one case, a contract went to the venture capital firm General Catalyst Group right after one of their partners made a $10,000 donation to the state Republican Party.

It’s more than amusing seeing Orin Kramer try to justify these practices to Sirota. Kramer, the hedgie and former chair of the State Investment Council, ran the pension fund into the ground by dumping money into Lehman-related assets, leading to $115 million in losses. (We got a very fun phone call from Kramer the last time we had the temerity to mention that on this site, so keep your line open, Yves!)

The amount of back-patting and favor-making in New Jersey, done with public money, which all then justifies cutting the meager pensions of state employees, deserves a ton more scrutiny. So it’s good that Sirota’s been on the case.

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This entry was posted in Hedge funds, Investment management, Politics, Private equity, Privatization, Ridiculously obvious scams on by .

About David Dayen

David is a contributing writer to Salon.com. He has been writing about politics since 2004. He spent three years writing for the FireDogLake News Desk; he’s also written for The New Republic, The American Prospect, The Guardian (UK), The Huffington Post, The Washington Monthly, Alternet, Democracy Journal and Pacific Standard, as well as multiple well-trafficked progressive blogs and websites. His has been a guest on MSNBC, CNN, Aljazeera, Russia Today, NPR, Pacifica Radio and Air America Radio. He has contributed to two anthology books, one about the Wisconsin labor uprising and another on the fight against the Stop Online Piracy Act in Congress. Prior to writing about politics he worked for two decades as a television producer and editor. You can follow him on Twitter at @ddayen.

16 comments

  1. pretzelattack

    ah, then they get tio use the self created pension crisis to justify cutting the pensions of public employees; and they said privatization wasn’t efficient!

  2. Ric Can

    almost a billion dollars in fees over 3 years … and what did this largesse cost the recipients? All told a little over 11 million. Nice work if you can get it…and if you’re a friend of Chris Christie chances are you will.

  3. cnchal

    So, Wall Street digests everyone’s money, and out of Wall Street’s sewers flow cholera, with the second sewer exit in NJ.

    Hey, New Jerseyites. Do yourself a favor and kick the irredeemably corrupt governor Christie in the shins. Aim for a break that never heals.

    His Colonel Klink routine of “I see nothing” when the lanes leading to the bridge were closed was comical.

    It is my observation that most politicians are narcissists. You tube Christie, fits it to a tee.

  4. OooSillyMe

    For years pensions funds have been underfunded, unfunded, liquidated for the “good” of the corporation, state, city, town etc……and all of a sudden they notice there is a “crisis”….. All the while whining at how they need to “reform” entitlements….which of course is code for cut….. So what is their solution other than the old standby that people must “save” for their retirement…….as if the jobs these days would allow that… There needs to be reform all right and that won’t happen until the American people stand up and stop letting these people rob us over and over again…….or we put them on the guillotine after taking away every dime they have……

    1. RUKidding

      Or even IF some citizens are lucky enough to have some hard earned ca$h to save, where the EFF do you put it? A “savings” account?? A CD?? A bond fund? A money market account?? US Treasuries?? The Wall Street Casino (where, clearly, the House always wins)??

      Might as well bury it in a coffee can in your back yard. Might actually be safer there, but good luck on your savings growing At. All.

      1. Joe Chase

        Sorry to get in the way of a good dead horse beating; two quick questions:

        First how did you decide that “your savings growing” is simply a riskless/effortless thing? Growing your savings will never be one of the self evident truths.

        Second, and a broader question, would anyone like to suggest why Governor Christie would need to go out looking for ways to catch up with unfunded obligations?

        Hint: its only catching up if it’s runaway

      2. steelhead23

        Spot on Mr. Kidding. Something I feel is missing in our discussions of our economic turmoil is the effect that economic uncertainty and ZIRP are having on savings and those on a fixed income. I likely would retire this year but for these concerns and beyond a shadow of doubt, I am hording more and spending less than I would if our future looked economically secure. Chew on that for a moment. The intent of ZIRP was to stimulate economic expansion. Yet, if low returns on low risk investment (e.g. Treasury bonds) are causing folks to reduce spending to be more personally secure, ZIRP is having the opposite effect. If our money managers aren’t looking into the issue of the effects of ZIRP on demand, that is to prove that it is increasing demand, they are indeed charlatans. I think this issue is most important on workers nearing retirement, when their supposedly “expendable” is highest. You’re killing me Janet.

  5. Nat Scientist

    The corporate-state fascist Benito Mussolini always slides into the frame when Gov. Christie pops up. Why is that?

  6. Jim Haygood

    NJ is the champion chump of pension pitfalls. Back in 1997, the horsey-set airhead Gov. Christine Whitman (whose husband was a Wall Street honcho) issued $3 billion of state bonds to make a leveraged stock market bet with Shiller’s 10-year P/E ratio at 32, exactly equal to the market’s valuation in Sep. 1929. What do you think happened when the Internet Bubble popped? SPLAT, that’s what. NJ’s underfunded pension scheme is still sucking wind, after getting the stuffings pounded out of it during 2000-2002.

    No analogue to Shiller’s CAPE exists for hedge funds, since they are arguably a funding vehicle rather than a distinct asset class. But on a contrarian basis, with the usual top-tickers (the public sector) piling in while rich valuations prevail in public equities, it’s practically a slam-dunk that an apocalyptic SPLAT occurs soon in alternative investments, which doubtless have their share of Corzine-style looters (another NJ ex-gov). Chris Christie does look a lot like Humpty Dumpty, come to think of it.

    I am the eggman, I am the eggman, I am the WALRUS. Koo koo ka choo …

  7. HOnk honk

    To be fair, Mr. Haygood, times like now, at the peak, are when passive investments retrospectively outrun safer alternatives. By alternatives I mean cheap neutral or collared funds – actual hedge funds, unlike the shell games banks use to bilk bignosed clown Orin Kramer as he sucks his moist fetid dick-sized cigars with Rain-Man intensity.

  8. WGersen

    Time to dust of this chestnut that Yves has referenced whenever the words “NY Pension” appear: http://www.nytimes.com/1995/02/22/opinion/in-america-whitman-steals-the-future.html
    “Moderate Republicans” appeal to NJ because they refuse to solve problems the direct way: by raising taxes… Christie seems to have added a wrinkle: collecting money from beneficiaries of this scam to fund his presidential race. Sadly his portrayal of teachers and public servants as “greedy” is getting more traction with the voters than the progressive bloggers facts on the pensions… but agreeable fantasies that don’t cost anything and blame someone else are always better than disagreeable truths that require an examination of the mirror…

  9. participant-observer@insightdeliverysystems.com

    Only this afternoon in DMV while looking at Gov Brown’s pic on the wall above the heads of the busy body civil servants, I was thinking, in light of the recently proposed CA water bond, how the governor, K. Harris et al., have (or should have) a “fiduciary duty” to protect state worker pensions from the Wall St/Cayman/City cannibals.

    I hope DD and others will keep a close eye on state pension funds! Thanks for this, DD!

Comments are closed.