Financial Times Joins the Party on CalPERS (and Links to Naked Capitalism)

By Lambert Strether of Corrente.

So, it’s not just Fortune and the Wall Street Journal; now it’s the FT piling on, but because Yves really is on vacation, the happy task of doing the happy dance falls to me. Here’s the scoop, from FT’s story headlined “Calpers’ support of private equity ‘propaganda’ slammed” this morning:

Joseph Jelincic, a board member of Calpers, which helps finance the retirement plans of teachers and firefighters, has sent a damning letter to Anne Stausboll, the pension plan’s CEO. He questioned the competency of Calpers’ investment staff regarding its private equity holdings.

(See the Appendix for posts giving plenty of detail on the competency of Calpers staff.)

Calpers employees were perpetuating the mythology of private equity managers by telling the board the fund was “receiving a better deal [from its private equity managers] than we actually are”, Mr Jelincic said.

NC readers will recall that Joseph Jelincic was the CalPERS board member who questioned Réal Desrochers in the video for which Yves provided extensive exegesis last week. Some of the mythology that Jelincic was talking about showed up in a deck prepared by CalPERS staff:

[JELINCIC: ] The [staff] presentation is good as far as it goes. It’s very high level. But one of the things that it did is that it assumed away the things like offsets and fee waivers and clawbacks and fund costs and preferred returns, which are all the areas that are creating the controversy.

These are the areas where the SEC has said limited partners are getting ripped off, where the IRS has said it looks like taxpayers are getting ripped off.

So how big is the rip off? How big are all those numbers that were “assumed away”? From the FT article, Oxford’s private equity expert Ludovic Phalippou:

“Calpers’ total bill is likely to be astronomical. People will choke when they see the true number.”

Of course, the biggest myth of all is that private equity delivers superior returns. As Yves has written:

A myth that has allowed private equity to persist in its predatory ways is that private equity delivers returns that investors can’t obtain through other investment strategies.

We’ve described the large body of research that demonstrates otherwise.

Perhaps there’s more on private equity returns to come.

Oh, here’s the link:

Yves Smith, a critic of the private equity industry on the Naked Capitalism website, said that the oversimplifications and mistakes made by Calpers’ management suggested it could not invest responsibly in private equity at all.

CalPERS has around $30 billion (of its approximately $300 billion total) invested — on behalf of pensioners like teachers and firefighters — in private equity, and that’s real money, even today. So you can see that the potential public policy implications of CalPERS management failures are substantial, especially given that, by all accounts, CalPERS is one of the best-managed funds out there.

It remains to be seen whether the CalPERS staff will treat Jelincic’s letter as a test of their public relations skills, or as something more serious; but that such material appears in the FT (albeit on the Labor Day weekend) would suggest that events are outrunning their ability to control the story. Pass the popcorn.


For those who came in late, here’s the entire series:

  1. CalPERS’ Private Equity, Exposed: Executive Summary
  2. Senior Private Equity Officers at CalPERS Do Not Understand How They Guarantee That Private Equity General Partners Get Rich
  3. CalPERS Staff Demonstrates Repeatedly That They Don’t Understand How Private Equity Fees Work
  4. CalPERS Chief Investment Officer Defends Tax Abuse as Investor Benefit

More to come.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. PlutoniumKun

    Initially, when Yves started writing about Calpers I skimmed over it, having no interest in Californian teachers pensions or, well, anything to do with pensions (except my own). I didn’t really understand why the internal workings of one pension fund was more important than the normal work of this site in exposing Wall Street, etc. But this has become fascinating in its own way, and its wonderful to see how my favourite website is now making a real difference out in the real financial world. Its lovely to see the corrupt and incompetent squirm with embarrassment for once (at least those who aren’t actual psychopaths).

    Congratulations to Yves, Lambert, etc., for their terrific work on this. Everyone with a pension is in your debt.

  2. Kokuanani

    The mention of NC in the Financial Times should provide a spike in readership, especially as they attempt to catch up by clicking all those items in the Appendix [which you so thoughtfully provided].

    Great job by both you & Yves.

    1. Lambert Strether Post author

      Wrong order! This is Yves’s work, not mine (and verging dangerously on reporting, too). The work that I do frees Yves up to do this work; that’s my contribution (aside from serving as an occasional sounding board).

  3. Larry

    I would assume this will get picked up in greater detail by the local press now. I was surprised that nobody on the Sacramento beat was covering Yves work on Calpers, but with the WSJ and FT running the story, I don’t see how they can ignore it now.

    As to Lambert’s other point, I doubt we’ll see heads roll. I suspect PR costs to ramp up for the fund.

    1. Yves Smith

      If you are in California, writing a short note to the editor of the Sacramento Bee saying more or less that you are perplexed that they are asleep at the wheel on a major story right there in Sacramento might help nudge them out of their torpor.

      1. walt

        I just searched the Bee on line for “CalPERS”: the “latest” (most recent) were 2 months ago and unrelated to their investments.

        1. lord koos

          It’s possible that it is not an accident. I know that in the past the owners of The Bee were notorious uber-conservatives.

          1. Brian M

            It was actually the now definct Sacremento Union that was ultraconservative. The Bee is just standard neoliberal boosterism (they supported the Basketball Stadium for example)

  4. allan

    Congratulations to Yves for the long overdue notice that her CalPERS series is receiving. Hopefully the message that PE is a crappy `asset class’ will also makes its way to university and non-profit endowment managers.

  5. cnchal

    AAARRRGGGHHHH!!! Yves, you are killing me.

    Pirate Equity kingpin Carlyle here on the deck of my pirate ship, and the whole hull is shaking. What the hell are you doing? Using those pinheads Desrochers and Tollette as battering rams? I’m trying to get to the boatyard I bought with my victim’s money before you knock a below the waterline hole through the hull. She needs new diesels, more grappling hooks, and a patch job on the holes you put there already. When I go down into the hold, and look at the gory mess, I swear to you, I will never steal money from a public pension fund again. I will confine my piracy to the pirate sector from now on.

    Captain Carlyle

  6. TheCatSaid

    I’ve been reading and re-reading posts from this riveting series.

    To restate the elephant in the room, CalPERS is the largest public pension fund in the USA, with 300 billion in assets.

    That SHOULD give CalPERS great negotiating power–for more disclosure on the GP contracts, for more disclosure on how the GPs are running the companies they invest in (including all fees charged, and for what), and transparency about their strategies for how they manage these companies), and for disclosure about what GPs additionally “earn” through “tax incentives”.

    The fact that CalPERS HAS NOT been asking these questions and applying their potential negotiating power on behalf of the millions of pensioners whose funds it controls–and CalPERS’ deceptive/incorrect answers to basic questions–shows that the CalPERS higher ups are incompetent to do their job on behalf of the millions of pensioners whose funds are at risk through these investments, and have an all-too-cozy (captured, corrupt) relationship with the GPs.

    And if other aspects of CalPERS administration are better than that of other pension funds, where does that leave pension funds as a whole? Are they a one-way gravy train into the pockets of PE GPs (and other kinds of Funds)?

    Given what NC has revealed in this series, heads should roll and pensioners should be out on the streets if they care about having pensions left after GPs have taken their multiple bites, most of which have gone unobserved.

    The rules governing PE (and SEC) need a makeover. Some kind of non-captured entity needs to oversee this (Bill Black or equivalent?), not the also-captured Congress and also-captured–by-the-revolving-door political appointees.

  7. flora

    Great to see respected mainstream media picking up the story and crediting NakedCapitalism.
    Thank you for your continuing PE reporting.

  8. PaulHarveyOswald

    FWIW: I pitched this to a local radio talk show in Milwaukee. David M. Silber, CIO of The City of Milwaukee wrote an Op-Ed regarding this in Pensions & Investments back in July. Local angle with universal appeal, says I. Maybe they think its too weedy for radio–but I initially stumbled across Yves through Harry Shearer’s Le Show, so there’s that. There was no response from a producer (acknowledgement neither), and as yet nothing on-air. But, to be fair, I don’t listen to every single show. Perhaps this sunlight will generate more momentum in MKE.

  9. John Wright

    From my view in Northern California I do not expect to see any demonstrations by CalPERS pensioners.

    The pensioners covered by CalPERS have their pensions backstopped by the entity (local government, or local agency such as a water district) that has signed up with CalPERS.

    If CalPERS returns went zero or negative, the pension shortfalls would be required to covered by the original employing entity.

    CalPERS is definitely tied into CA politics, in 1999 a state bill (SB400) sweetened CalPERS pensions retroactively because CalPERS predicted high returns well into the future with no claw back if the high return assumptions proved incorrect.

    And CalPERS allows some workers to increase their pension benefits by manipulating final year(s) pay higher via overtime or a final year promotion, a policy that appears actuarially unjustified to me unless one expects other workers have a smaller pension resulting from a pay decrease in their final year(s).

    This is called “pension spiking”

    So any demonstrations against CalPERS should be by the taxpayers who will be called on for CalPERS shortfalls.

    Kudos to NC for highlighting PE and CalPERS. As a CA resident and non-state pensioner I want CalPERS to perform better as I do not want to backstop CalPERS shortfalls with higher personal taxes.

    1. TheCatSaid

      I appreciate this clarification. Makes it clear that it potentially affects all taxpayers in CA (where CalPERS is concerned). Non-taxpayers would also lose out if services from the state were reduced due to pension shortfalls.

      1. John Wright

        To further illustrate the taxpayer liability for CalPERS shortfalls, here is link to an article on the small CA town of Healdsburg’s “trust fund to stabilize pension costs”

        A quote from the article that highlights the backstopping of CalPERS.

        “If the market does well, and CalPERS investments are on target or higher, Mickaelian said the city won’t have to touch the money in the pension stabilization fund. But it can be used if state investments lag and the city is required to make a greater contribution to employee retirements.”

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