By Diligens, a member of the Establishment not loyal to his class
Yves asked me to explain why CalPERS matters, not just to government workers or taxpayers in California, but to anyone who cares whether our financial institutions serve citizens or whether the reality is the opposite.
Let me tell you something about myself. I know a lot about public pension funds and financial institutions generally, having done business with many in both categories in the U.S. I’ve also been giving faithfully to Naked Capitalism because I recognize the importance and high caliber of its coverage. So please join me by going to the Tip Jar.
Here are two key facts about CalPERS. First, and you may find this hard to believe, but CalPERS continues to be one of the best-run public pension funds in the U.S. Yes, I mean that, and I think Yves agrees. That’s why her reporting on CalPERS’ many lapses is so important: This is as good as it gets, folks. It’s mostly downhill from here in terms of the government organizations managing trillions in savings for worker retirements.
Second, to offer CalPERS another back-handed compliment, it is almost certainly among the most, and perhaps THE most, transparent financial institution of significance in the U.S.
Wait a minute, you may be saying, we’ve seen on the blog what a complete, utter mess CalPERS is. How can what you say be true? Well, it’s time to wake up and smell the coffee, folks. This is how the world operates. Financial institutions sell out the interests they are supposed to protect every second of every day. They do it for a variety of reason—institutional aggrandizement, laziness, fear of career reprisals, money in the pockets of decision-makers.
“Where are the customers’ yachts?” You’ve heard the line, first asked decades ago by a writer pointing out that financial institution employees often lived the high life while their clients didn’t. Nothing has changed, and in some sense, nothing ever will in the sense that the tendency, absent countervailing pressure, will always be for financial institutions to sell out their clients. Naked Capitalism is an important countervailing pressure, as we all know.
A key factor that distinguishes CalPERS from other financial institutions that are equally or more vulnerable to the pernicious impact of self-interest is that CalPERS is required by law to perform much of its business in public. You are never going to see a Goldman Sachs board meeting on YouTube. So, in that sense, CalPERS is a proxy for what happens everywhere but is usually invisible.
There are some inter-related reasons why CalPERS’ lapses are so tragic, beyond the recognition that it is almost certainly worse everywhere else.
First, at some point in the past, the organization credibly served as tribune for ordinary working people with respect to financial markets and the business world. I mean this not in the very narrow, cramped sense that CalPERS has retreated to, which is currently as an advocate in the business world for a grab-bag of left-of-center environmental and social issues, but in the much more expansive sense in which it was clearly true 20 years ago.
Back then, the CalPERS was engaged in a frequently sophisticated, nuanced, and impactful way across a huge number of financial issues on behalf of the public interest. In a sense, they were financial revolutionaries.
CalPERS played a major role in forcing the SEC to require CEO employment contracts to be disclosed. CalPERS was instrumental in reforming so-called “soft dollar” kickbacks from brokers to investment managers. CalPERS published a report publicly challenging the then-prevailing terms and conditions of private equity funds, and in so doing, put great pressure on the fund managers. CalPERS was among the first institutional investors to take on the role of lead plaintiff in securities litigations, alleging that public companies had defrauded investors.
One could go on and on, listing the many ways in which CalPERS stood shoulder to shoulder with the interests of the little guy on financial issues during its glory days. The immensity of its accomplishments during that revolutionary era inspired many — financial reformers, academics, politicians — who thought they saw in CalPERS a rapidly-emerging model of public-interest-centered capitalism.
As we now know, the organization started to lose momentum in the early 2000s, with the critical juncture almost certainly having been the installation in 2003 of the CEO who is now in federal prison for bribery. The reasons why CalPERS lost steam are complex and somewhat open to debate. But it’s not unreasonable to argue that, leaving aside the political intrigues and personalities, the fundamental, structural cause of failure was of the same sort that we see in non-elite actors of all types when they successfully storm the gates of the financial and social aristocracy.
Put simply, revolutionary ideals are hard to sustain. Once insurgents find themselves inside the walls, the elites generally don’t treat them as overt enemies. In fact, it’s usually the opposite — here, have a seat at my beautifully appointed table. How about a glass of wine? Have you been to Davos to raise your important concerns with the audience there? Let me get you an invitation. Oh, and there’s a thing at the Aspen Institute next week with a dozen CEOs. It’s lovely there at this time of year, and I’m sure everyone will be interested in what you have to say.
Sadly, the path from revolutionary leader to dupe is an incredibly short one, but in the process of walking down it, the journey is lined with ego gratification. And the trip is definitely in business class, that I can assure you.
All institutions are vulnerable to this kind of decline, but CalPERS was particularly so. This was mainly true because there were never more than literally a handful of people driving the organization in the right direction. Everyone else supported it passively, either because they valued the good PR as politicians, or because they were bureaucrats who did what they were told, even if they had no understanding of the larger “why” behind the orders.
When things started to change for the worse at CalPERS, the media was very slow to pick up on it, given their incredibly superficial understanding of almost everything they cover.
As a result, the national and foreign press continued to depict CalPERS as a revolutionary force for many years after this clearly ceased to be true. That had the effect, for a long time, of obscuring to CalPERS’ leaders how far the organization had fallen. Almost all of them are non-experts in finance, and so their understanding was reliant on how the press presented their activities as opposed to how much impact the activities actually had. And, as politicians, many of them only cared about the press perception anyway.
This is where we all join the story as readers of Naked Capitalism, observing how the blog finally demolished the remnants of CalPERS’ narrative about itself, along with the associated tragi-comic actions of the institution to push even harder on the PR spin, like a 50 pound-overweight man who still believes that a long session in the steam bath will get him into his high school jeans.
Talking to Yves, it’s interesting to be reminded that what first provoked her ongoing coverage of CalPERS was her interest in private equity. Again, we see the theme of CalPERS’ exceptional transparency here, as Naked Capitalism has been able to write a larger volume of material about CalPERS private equity program at this point, because the information is available, than has collectively ever been written about Cerberus, for example, one of the largest and lowest profile PE firms which works very hard to be as non-transparent as possible.
The private equity issue is also particularly important because it is the end point of CalPERS’ path from revolutionary leader to dupe. As Naked Capitalism has so extensively documented, CalPERS has responded to the blog’s revelations in this area by a combination of: 1) defending the PE firms that are scamming them, 2) crying “there’s nothing we can do,” 3) engaging in half-hearted pseudo-reforms, 4) planning to re-structure the PE program to radically reduce its transparency.
One final point about the significance of CalPERS and Naked Capitalism’s coverage of it, and this also relates to private equity.
One area in which Yves has been relentless, across all the topics she covers, has been the economic betrayal of the working classes by elites who crave recognition for their progressive views. This sell-out is especially significant among the key enablers of PE scamming, the lawyers. Even among the big law firms representing PE managers, like Ropes & Gray and Simpson Thacher, most of the attorneys almost certainly are Democrats and view themselves as progressives, at least on social issues.
Yet these white shoe lawyers spend their days constructing misleading contracts intended to fool representatives of the little people whom they like to see themselves on the side of. On the extremely rare occasions that an investor or the SEC shows up asking questions about dubious practices, they sit with the PE managers helping them to construct explanations for their behavior that they know are misleading, though not quite “false.” Naked Capitalism has made it harder for lawyers like this to look away regarding the consequences of their actions, and for this it is to be commended.
We readers recently saw a Sacramento Bee columnist, discussing Yves’ CalPERS coverage, effectively label her as an “outside agitator,” akin to the Freedom Riders of the civil rights era. Undoubtably, this reflects CalPERS’ institutional position regarding the blog. What a tragedy that a once great institution, which once successfully agitated for change across the financial domain, has been reduced — like Bull Connor — to standing athwart history, yelling, “Stop!”
So join us at the barricades. Unlike well-meaning but clueless CalPERS staffers, Yves won’t sell out because, unlike too many erstwhile reformers who lose their way, she’s already had a seat at the table and learned to loathe the hypocrisy she saw and sometimes even unwittingly enabled. That means she also has seen the legal, messaging, and psychological tricks insiders play and is therefore effective at picking them apart. As Matt Stoller said in 2012:
When every institutional power center is leaning on every policymaker to push more carbon into the atmosphere, to cut social programs for all of us, to ratchet up the war machine, to empower the TBTF banks, dissent becomes more and more difficult. But the irony is that it is times like these when the system is weak, when the lies become even more important. Naked Capitalism is the antidote. It isn’t the whole solution, obviously. But do not underestimate the importance of having a consistent top quality community discussing financial regulations, politics and economics with social justice as the goal. This stuff is actionable, it can and sometimes does turn into policy.
So give to support taking on predatory elites and their well-paid minions. Whatever you can give, whether $5, $50, or $5000, will come back many times over, in the form of a society that is more humane, that is more just, and that we can be proud of.