CalPERS Illegally Trying to Hide Its Scheming to Hand Over Private Equity to BlackRock

CalPERS continues to thumb its nose at the law. The latest example involves its plan to give enormous power and profit to BlackRock, a financial firm that damaged CalPERS in the past by putting it in the Stuyvesant Town real estate deal, in which CalPERS lost its entire $500 million investment.1

It’s astonishing to see an organization refuse to allow for open discussion of fundamentally important policy decisions, as required by the Bagely-Keene Open Meeting Act. That intransigence is made even worse by the fact that CalPERS is seriously considering implementing a strategy that would harm its beneficiaries and California taxpayer. CalPERS plans to introducing another middleman into its most expensive investment strategy, private equity. That would increase already high private equity costs and lower returns.

Mind you, this is the antithesis of the approach CalPERS uses for every other investment strategy, where it correctly fixates on cost reduction, to the degree that CalPERS has misrepresented data to exaggerate how much it has lowered costs.

Later in the post, we reproduce an e-mail by board candidate Margaret Brown to the members of the CalPERS board, along with its CEO Marcie Frost and general counsel, Matt Jacobs, vigorously objecting to how staff intends to discuss this and other agenda items impermissibly in secret.

CalPERS makes no pretense that it has any legal justification for this move. Note that the default position of Bagley-Keene is that all deliberations of governmental bodies are to be held in public; private discussions must be put on the agenda with a citation of the section of law that allows for the discussion to be in secret. You can see there is no such notice:

Contrast this with Item 2, the only one of seven substantive agenda items for which CalPERS did provide the required notice:

Board member JJ Jelincic also views the relegation of this item to closed session as bogus:

I have read the agenda item and can see no reason that it’s in closed session except to save staff from embarrassment.

Needless to say, PR considerations are not a legally valid basis for discussing a major policy item, which is what this proposal amounts to, in secret.

The reason this item is scheduled for this Monday’s Investment Committee meeting is apparently because Bloomberg reported on CalPERS’ interest in outsourcing its private equity operations to BlackRock. The board is not supposed to find out about major plans like that in the press.

We described at length in an earlier post what a bad idea this is. It is made even worse by the fact that it is a bait and switch. It is inconsistent with the “business models” that CalPERS presented to the board at an offsite in July. As we wrote:

CalPERS will pay more in fees with BlackRock and there is no reason to expect improved performance. As the former Chief Investment Officer for North Carolina, Andrew Silton, stressed, CalPERS is such a large investor in private equity that is unlikely to achieve better than index-like returns. And it’s a no-brainer that introducing another intermediary means more fees and costs.

BlackRock would effectively be a dedicated fund of funds manager for CalPERS, an approach that is typically used only by small fry, like high net worth individuals and and smaller institutional investors, or for bigger players, to achieve adequate diversification for small, niche-y strategies (say if CalPERS decided to make an allocation to infrastructure in Latin America).

It is remarkable to see CalPERS consider outsourcing, since going in the direction of increasing its cost flies in the face of prudent investment management. It also contradicts the approach CalPERS takes in all other strategies in which it invests, where it has a strong focus on expense reduction and manages many of its investments in house because it is cheaper.

Private equity expert and board candidate Mike Flaherman estimated that even if CalPERS negotiated “heroically” that it would pay an additional .20% in fees plus a share of the profits. That means $50 million at a bare minimum versus the roughly $5 million of cost for CalPERS’ current internal team. Moreover:

…it is likely that BlackRock’s compensation will rise over time, as CalPERS will likely pay a much lower fee for BlackRock to monitor legacy investments made by the CalPERS team compared to the compensation paid for new investments sourced by BlackRock. Over time, the CalPERS-sourced investments will be harvested and replaced by BlackRock-sourced ones, likely leading to large cost increases.

To add insult to injury, CalPERS staff failed to tell the board that Mark Wiseman of BlackRock, who staff presented as an independent expert at the July offsite, was very much an interested party.

Even if you were to accept the premise that this outsourcing scheme is a good idea, it is also remarkable to see CalPERS considering only one vendor for it, when many firms would likely be interested in managing the program, and on top of that, a firm that has treated CalPERS badly in the past. The Stuy Town deal was controversial internally when it was under consideration, and there were multiple parties who argued that it was a bad deal .Some people directly involved say that BlackRock had made misleading representations in marketing the deal and also treated CalPERS unfairly as it unravelled. Unless BlackRock has somehow made up to CalPERS for the loss, which seems impossible given its magnitude, it is hard to fathom why CalPERS would be willing to do business with an organization that has dealt with them in bad faith in the past.

Below is the text of board candidate Margaret Brown’s e-mail to the board. If you look at the board agenda, you will see that not only is the item we flagged, the discussion of private equity business models, is missing the required statutory citation(s) for why it is being relegated to closed session, but five other agenda items are also being discussed impermissibly in private.

Dear CalPERS Board Members,

My name is Margaret Brown. I am a candidate for the CalPERS board and I am also a manager in a school district where I administer large-scale capital projects involving the expenditure of  million of dollars.

I am writing today to point out that, should you proceed with any items other than item two at your Monday Investment Committee closed session,  a serious violation of the Bagley-Keene Open Meeting Act will result. The violation will occur because of a substantial defect in your notice for that meeting. The legally required notice for that meeting is found here:

I am referencing page four of the notice, which is the agenda for the closed session of the Investment Committee, scheduled to begin at 8:45 am.  Item two of this agenda references the statutory authority for that specific item to be considered in closed session. However, none of the other seven items on this agenda cite the statutory authorityfor their inclusion in closed session rather than open session.  Failure to cite the statutory authority for including an item in closed session is a serious violation of the Bagley-Keene Open Meeting Act, which states in relevant part:

11125. (b) The notice of a meeting of a body that is a state body shall include a specific agenda for the meeting, containing a brief description of the items of business to be transacted or discussed in either open or closed session. A brief general description of an item generally need not exceed 20 words. A description of an item to be transacted or discussed in closed session shall include a citation of the specific statutory authority under which a closed session is being held.

Should you wish to consider the items scheduled for the defective closed session meeting, I believe that you have no alternative other than to issue a new, compliant notice and wait the legally required period before proceeding.

I strongly caution you against ignoring this substantive defect in your current meeting notice and proceeding in the face of the resulting Bagley Keene violation.

Now that each of you has been put on notice of the violation via this email, you would be engaged in a knowing violation if you proceed anyway, which is a crime:

11130.7.  Each member of a state body who attends a meeting of that body in violation of any provision of this article, and where the member intends to deprive the public of information to which the member knows or has reason to know the public is entitled under this article, is guilty of a misdemeanor.

Further, you should know that I have spoken with a journalist who is highly interested in the closed session item related to restructuring the CalPERS private equity program, and who has expressed determination to argue, via litigation if necessary, that the transcript for that item may not be shielded from PRA release because the item was not properly included in closed session.

Also, if your General Counsel want to see a correctly noticed set of meetings, you should consult CalSTRS, where each closed session item cites the statutory authority for such closed session consideration. See here:

Thank you.

Margaret Brown

Candidate 4 CalPERS Board 2017, Position B

Notice that the remedy for the items that are bona fide closed session items is for the staff to re-do the agenda with the required legal citations and have the discussion later. For instance, personnel matters (which is on the agenda as Item 8) are required to be discussed in private, so the compliance there would merely result in some delay. However, given that CalPERS does not have a board meeting in October, it will be ever more inclined than usual to thumb its nose at the law and proceed willy-nilly. And rest assured, I am going to submit a Public Records Act request for the transcript of the “private equity business models” agenda item. It is a policy matter and unlike specific pending fund investment, is not legally protected, and I am prepared to litigate. CalPERS has been acting like a $300 billion banana republic for far too long and that needs to stop.

1 Please do not fall for the story that Stuy Town was a reasonable deal. Anyone with decent knowledge of the New York City rent regulations could have told you the basic premise was bogus: that the new owners could raise rents rapidly and increase cash flow. The purchase price was so high that the rental income was insufficient to cover debt service, meaning getting income up quickly was imperative. But the apartments were overwhelmingly rent regulated. NYC tenants don’t leave rent-protected, below market apartments readily. And housing court in New York is tenant friendly, so the various tenant harassment strategies by the new landlords were beaten back.

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  1. H. Alexander Ivey

    Give ’em hell Harry, er… Harriet, er… Yves.

    Now I know why my Singapore CPF retirement age was raised. I missed the yr 2010 story about Stuy Town.

    I’m contributing $10 for your Public Records Act request.

  2. DorothyT

    California has a long history with BlackRock. Then Insurance Commissioner now Congressman John Garamendi hired Blackstone for $250K/month as a consultant when he seized Executive Life Insurance Co.(ELIC) in 1991. ELIC held the world’s largest junk bond portfolio at the time, thanks to its president Fred Carr’s relationship with junk bond impresario Michael Milken. This was the storied portfolio of 400+ corporations and holding companies, the work out of which made billionaires of many (notably Leon Black who formed Apollo to advantage himself of the huge pickings and who negotiated some of the mergers and acquisitions. Lest we forget, Black was Milken’s right hand at Drexel, the creator/underwriter of most junk bonds at that time.)

    Blackstone already had investments in certain ELIC holdings. It’s ‘said’ that BlackRock was formed by a Blackstone partner so that it could get involved with the pickings apart from Blackstone’s consulting relationship, which was paid for by ELIC’s policyholders. As the workout of the portfolio proceeded over the ensuing years, CalPERS became an investor. Just look at who was on the board to see the connections. Note, Black and Apollo were part of recent CalPERS news events.

    Anyone who tries to figure out California, ELIC, CalPERS etc. needs to look back in history. At the time, Blackstone consultants left the ‘project,’ it could be said in disgust. Honor still mattered.

    1. Yves Smith Post author

      Even thought Blackstone incubate BlackRock, they are now independent firms and Larry Fink, its head, has long been an independent and significant player. In fact, the move for BlackRock to get more into PE is directly competitive with Blackstone.

      1. DorothyT

        Didn’t imply that they weren’t separate from the beginning. And what I wrote has no relevance to BlackRock-Blackstone today. If you saw a list of ELIC’s bonds as organized by traunches, you’d understand how fortunes were made from buying this portfolio for 30% or less of its then value. Among those with the greatest value were those in the ‘troubled’ traunch as debt was swapped for equity.

        When this $10B portfolio was up for grabs after Leon Black bought it and operated it in the aftermath (as equal partner with the so-called French buyers), that’s when BlackRock seized opportunities that Blackstone was unable to due to conflict of interest as consultant to the Insurance Commissioner. (Black was allowed to operate the portfolio even before the sale was approved by the court.)

        You should look back at the CA elected officials from the ELIC day on the CalPERS board dating back to the ELIC days and who continued to serve at points thereafter.

        1. Yves Smith Post author

          With all due respect, you have not provided any proof that your story means bupkis as far as CalPERS is concerned. There is informed speculation that Leon Black’s investment in Executive Life, which was key to his early success, was due to him getting various California officials to bend the rules. There are more conspiratorial charges that he had to pull strings to get prosecutorial forbearance.

          But that has absolutely nothing to do with CalPERS.

          The insurance commissioner has never had any role whatsoever in CalPERS board appointments or the management of CalPERS’ portfolio.

          CalPERS only started investing in PE in 1990. I have the entire history of CalPERS’ investments in PE. CalPERS did not invest in any Apollo funds prior to 1996, well after the Executive Life deal.

          1. DorothyT

            Tip of the iceberg, Harry.

            Furthermore, former Ins. Commissioner Garamendi became Lt. Governor before successfully running for Congress in 2009. Atty. General Lockyer was termed out and became State Treasurer (CalPERS board). While A.G., Lockyer’s head of the fraud division commissioned a damning report about the whole Executive Life deal, it never saw the light of day. Over the years the A.G.’s office refused CA Public Records Act requests to unseal it. And the head of the fraud division took an ‘early retirement.’

            Yves’ review of CalPERS trades wouldn’t reveal all of how the ELIC portfolio was sliced and diced and who profited. Breaking up that portfolio went on for many years. The ‘troubled traunche’ wasn’t ‘bupkis’!

  3. Marc Andelman

    A very serious issue for which a lot more discussion is needed is what, exactly, are hedge funds doing with this money, and, how opaque is this process. A long list of socially destructive,also blatantly and highly criminal schemes has in the news for years. Someone had to give Martin Shkreli, Theranos, etc.,etc. their billions. Pensions and endowments are the major source of capital, so, if not them,who?
    Other hedge funds are doing (recently) legal but socially destructive things, like investing in North Korea (slave labor),or, suing impoverished countries. Much other activity is not reported upon, like suing small business or inventors. Also not reported upon is how large companies have been asset stripped and the role of that in the virtual elimination of the manufacturing sector. Trump is a disease. I believe this is the cause, and, we will have worse and worse leaders until when and if major underlying issues are fixed.

  4. Sandy Jacoby

    What’s best practice among state and local pension funds similar to CalPERS with respect to the issues raised in the post? A comparison group might include the NY state and local funds, Colorado, Connecticut, and Wisconsin.

  5. Sluggeaux

    The attitude of the CIO and his General Counsel seems to be: “So sue me!”

    They know that the Democratic Party leadership are cravenly in the pockets of Private Equity, and that lame Attorney General Xavier Becerra doesn’t even realize that his predecessor, Kamala Harris, abdicated enforcement of the laws relating to the governance of CalPERS. The Retired Public Employees Association currently doesn’t have the gumption to pursue private litigation, which the State Auditor claims is the only remedy now that the Attorney General abandoned enforcement.

    This is Cosa Nostra-grade criminality, as well as a violation of every CalPERS member and beneficiary’s state constitutional right to public oversight of CalPERS. I suspect that the CIO will soon be taking his fat pension and finding “work” as a “consultant” for some opaque and untraceable outfit — which is how kick-backs work these days.

    1. Sluggeaux

      These schnooks seem to be relying on California Government Code section 11126(c )(16), which only allows Closed Session for discussion of individual Investment Decisions, not calving-off the management of investments:

      (c ) Nothing in this article shall be construed to do any of the following:

      (16) Prevent a state body that invests retirement, pension, or endowment funds from holding closed sessions when considering investment decisions.  For purposes of consideration of shareholder voting on corporate stocks held by the state body, closed sessions for the purposes of voting may be held only with respect to election of corporate directors, election of independent auditors, and other financial issues that could have a material effect on the net income of the corporation.  For the purpose of real property investment decisions that may be considered in a closed session pursuant to this paragraph, a state body shall also be exempt from the provisions of paragraph (7) relating to the identification of real properties prior to the closed session.[Emphasis added]

      The level of mendacity in attempting to carve-out 12-14 percent of CalPERS invested assets and hand them over to a fee-for-service operation when CalPERS already spends tens of millions on internal administration is breathtaking — but most of the current Board of Administration have proven themselves to be nothing more than potted plants, evidently including gubernatorial hopeful John Chiang.

  6. Blurtman

    That Tishman Spyer can continue to access capital is a transparent example of an obvious double standard. Walk away from a $5.4 billion loan, continue to borrow. Walk away from a $200,000 mortgage, no more money for you.

    One wonders if there is a revolving door between Calpers and Blackrock.
    Wide Fallout in Failed Deal for Stuyvesant Town

    In the beginning, investors and lenders could not get enough of the record-breaking $5.4 billion deal to buy the largest apartment complexes in Manhattan: Stuyvesant Town and Peter Cooper Village.

    Now, three years later, they cannot get away from it fast enough.

    The partnership that bought the 80-acre property on the East River announced on Monday that it was turning the keys over to its lenders after it defaulted on its loans and the value of the property fell below $2 billion.

    Yet in walking away, the partners, Tishman Speyer Properties and BlackRock Realty, have left tenants in limbo and other investors with far bigger losses.

    Many of the other companies, banks, countries and pension funds — including the government of Singapore, the Church of England, the Manhattan real estate concern SL Green, and the Newcastle Investment Corporation — that invested billions of dollars in the 2006 deal stand to lose their entire stake.

    “At the time, it looked like a sound investment,” said Clark McKinley, a spokesman for Calpers, the giant California public employees’ pension fund, which bought a $500 million stake in the property. “When the market tanked, we got caught.”

  7. flora

    At first I thought,’If only the board knew.’ Then I thought, ‘If only the board understood.’ Now?
    The CalPERS malfeasance has me leaning between thinking the board is guilty either of ‘intellectual capture’ or ‘corruption’. (And wondering what, exactly, the difference is.) Surely the CA politicians could step in to stop or punish violations of CA open meetings law and fair election requirements. Yet, they do not. How high does intellectual capture or corruption go in CA? At this point I’m inclined to say, “Forget it, Jake. It’s Chinatown.”*

    On the other hand, giving up is no answer. Giving up will leave pensioners and CA tax payers on the hook for CalPERS staff and board corruption or ignorance or malfeasance (take your choice), and signal to other state pensions the coast is clear for these wastes or thefts of tax payer and pension members’ money. These reports serve as a warning to other states.

    In future, when this all comes crashing down, these reports will be an important record for knowing and understanding the history of what has happened. NC is the ‘reporting of record’ on CalPERS and PE. (I think NC acts as much for the future as it does for the present. )

    Thanks for your continued reporting on CalPERS, pensions, and PE.

    * ‘Chinatown’: movie .

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