The CalPERS board and staff need to take lessons from Donald Trump, the acknowledged master of factually challenged, emotional-laden personal attacks. The Investment Committee meeting’s amateurish imitation yesterday was painful to watch.
Or is this a sign, as is true on so many other fronts, that CalPERS is unable to learn from the best?
The triggers for the protracted, unseemly exhibition of impotent rage were frustration over things that any pol or seasoned professional ought to be able to handle like an adult.
The first black eye is the beating CalPERS is taking from the press and beneficiaries over Chief Investment Officer Ben Meng having lost the fund over $1 billion by giving up a tail risk hedge right before it would have paid off. The second is the staff and board being stymied in their joint effort to have the board effectively resign as far as oversight of investments is concerned, despite the California constitution making that an unambiguous and inescapable board duty.
While it is a positive development that members of the public got wind of the planned staff coup and made enough of a stink to force CalPERS back to the drawing board, don’t kid yourselves. This institution is as committed as ever to doing the wrong thing as far as performing its fiduciary duty is concerned. They plan to be back with version 2.0 of the board effort to abandon oversight of investments.
As we’ll discuss, the Board’s and staff’s embarrassing conduct was heavy on these Trumpian elements:
Whining and shows of unwarranted victimhood
Refusal to accept responsibilities of office
Displays of fury at being subjected to democratic checks, which in CalPERS’ case are trivial
Attacks on the press, for the apparent sin of reporting as opposed to printing CalPERS PR
Denial of First Amendment rights
Demonstrable lies, a long-standing CalPERS staple
As with Trump, the CalPERS lashing out is a sign of institutionalized narcissism. Like Trump, virtually all of the CalPERS board and its senior staff is unwilling to admit error and will scapegoat and fabricate instead.
But the wee problem CalPERS has, much more so than Trump, is that its dedicated fanbase is shrinking. More and more members of the California public, who backstop CalPERS as state taxpayers (and often are seeing how CalPERS’ rising employer contributions are pinching their city’s budget) are taking interest in CalPERS since its serious underfunding is increasingly their problem. And a root cause of CalPERS’ distress is another Trump-level canard, that CalPERS can earn its way out of its hole. The sharp rises in employer contributions and the state’s repeated mini-bailouts in the form of pre-funding demonstrate otherwise. Note these are payments against an existing unfunded liability. They are pre-funding in the sense they are more than the state is required to make per its funding policy.
Since the board meeting continues this week, I’m running this post relying on the rush transcript generated via the closed caption on the webcast, rather than wait for the video to be posted. I wish it were otherwise, because you really do need to see and hear what went down to appreciate how juvenile the board’s conduct was, particularly given that everyone knew they were on tape. The session devolved into a “hate on Margaret Brown” bitchfest, when it was CalPERS staff that was behind the press stories correctly criticizing CalPERS CIO “Wrong Way” Ben Meng for dumping tail risk hedges despite the advice of its expert, Wilshire, which had publicly spoken in support of the position in August, and objections of investment office members.
For instance, Rob Feckner literally screamed about a comment submitted by a CalPERS beneficiary. Since when do elected officials have the right to browbeat citizen performing a public service by weighing in on pending decisions?
Lies, Lies, and Yet More Lies, First From Meng
There were so many falsehoods in a relatively short meeting that we hope we don’t tax reader patience by cataloguing them. This tally will also reveal the other Trumpian qualities listed above.
Meng continued pretending he did not lie to the board, both directly and by omission. Recall that Margaret Brown asked Meng in the March board meeting about the tail hedges:
Board Member Margaret Brown: Ben, can you tell me how our left-tail investments are performing? Are they performing the way we thought they would in this economic downturn?
Chief Investment Officer Ben Meng: Good morning, Ms. Brown. Yes, for any left-tail risk hedging strategy you’re referring to, they should perform well in this kind of a down market, as they were exactly designed to do. And from what we know are most of these strategies are performing as anticipated.
Meng cannot credibly deny that he gave direct and specific answer to the question of how our, meaning CalPERS, left-tail hedges were doing. He did not tell the board that he’d decided to ditch them and had largely completed the process. Board member Stacie Olivera confirmed to the Wall Street Journal that she did not recall having been informed of Meng’s decision.
Meng tried to claim his specific answer about “left-tail hedges” was misunderstood. Note this is from the rush transcript. I’ve cleaned up a few obvious errors, but you can infer the drift of the gist even if some phrases aren’t exact:
Chief Investment Officer Ben Meng: Now, I would like to take a moment to speak about the portfolio management related to explicit option space highened strategies. I want to address these and put facts on the record. Although this decision in and of itself not rise to the materiality of our total fund, but it does give opportunity to review a broader topic, our efforts taken in recent past to prepare ourselves on market draw backs and plan holding on during crises. I would like to note that market draw down mitigation and insurance are closely related to topics that have been used interchangeably.
Meng’s claim is abjectly false. The tail risk hedges have for years consistently been described at CalPERS as tail risk, or regularly more specifically, in CalPERS’ documents, as left-tail risk hedges, and never (at least until by Meng very recently) as part of liquidity (drawdown) management. For instance, from the August Investment Committee transcript:
Andrew Junkin, Wilshire Associates: So we’re reporting on a number of strategies here. There’s some really weird numbers on this page that I thought it was worth highlighting. So I’m looking at the TLPM [Trust Level Portfolio Management] Risk Mitigation Strategies. You have $200 million exposed to those strategies, and you can see down 82 percent. That’s seems awful. Remember what those are there for. They are sort of tail-risk hedging strategies. In normal markets, or in markets that are slightly up, or slightly down, or even massively up, those strategies aren’t going to do well.
But there could be a day when the market is down pretty significantly and we come in and we report that the risk mitigation strategies are up 1,000 percent.
Notice that this argument also show Meng is shifting ground in his defenses, which is generally a sign of bad faith (remember how many justification were offered over time for invading Iraq?). This is what Meng said to Institutional Investor shortly after Bloomberg broke the story:
We terminated explicit tail-risk hedging options strategies because of their high cost, lack of scalability, and the fact that there are better alternatives available to CalPERS.
Apparently, bested by Taleb and another round of not-buying-it reporting, Meng is falling back on the dodge he presented in his talk to staff last week: that this was really a drawdown mitigation strategy.
This is also patently untrue. The program was initiated by former CIO Ted Eliopoulos to protect against 2008-level extreme market moves, and not as a liquidity measure. We explained why that sleight of hand didn’t work in an earlier post. A short proof: Ron Lagnado, who just left CalPERS for Universa, the fund manager CalPERS ditched and so gave up its over $1 billion payday, has as part of his duties developing drawdown mitigation strategies for pension funds. If Universa thought its existing products were suitable for drawdown mitigation, they’d already be selling them as such rather than developing new versions.
Meng misrepresented the position of the tail risk hedges. Meng also tried saying that the hedge results needed to be viewed in terms of the total portfolio, as if Universa and critics were saying otherwise. Huh?
First, a billion plus dollars is significant for CalPERS. Trying to pretend otherwise is an insult to intelligence.
Second, even though the press went gaga over Univera’s options outcomes in isolation, the fund manager has made a point of stating its return on a portfolio basis, as in in connection with the performance of underlying stocks being hedged. That metric shows Universa earning an 11.5% compounded annual return since 2008. That is markedly above CalPERS’ portfolio benchmark of 7%, and disproves CalPERS’ regular whinge that only private equity can meet the target.
Meng restated his inaccurate depiction of “research” on tail hedges. Meng doubled down another misrepresentation that he made in his webcast talk to staff. It was already debunked by Nassim Nicholas Taleb short form in his video and in more detail in one of our posts.
Meng tried insinuating that there’s a considerable literature challenging tail-risk hedging. Yet all Meng has been able to serve up is an op-ed, not an academic study, by Robert Litterman, and a bona fide journal article by Antti Ilmanen.
As we described, the Litterman piece made a hash of both the business risk of investment bank equity sales and trading operations, and the ongoing liquidity needs of pension funds (as in not appreciating needs of ones in a negative cash position like CalPERS).
Note Meng also misrepresent the Ilmanen study. Not only was it not as negative toward tail-risk hedges as Meng claimed, but far more important, it is utterly irrelevant to the type of tail risk hedges Universa uses. The Ilmanen analysis analyzes at the money strategies, while Universa relies solely on out of the money hedges. Meng’s big beef was cost. Guess what? At the money options are way more expensive than out of the money options.
Now the board is too uninterested, as well as too clueless, to get to the bottom of this. But Meng is repeating an obvious lie again before his staff. He is not helping his standing in their eyes, nor in the investment community broadly.
Meng repeated the canard that CalPERS has better hedges. Repeating something that has been disproven does not magically make it true. First, the fact that CalPERS had other diversification approaches doesn’t explain or justify dumping the tail risk hedges. This was not an either/or. Those diversification measures alleviaed different risks. Second, without belaboring the point, Meng continues to considerably exaggerate the cost of the Universa hedges (notice he keeps making generic statements about tail hedge costs, not about the ones CalPERS actually used). Finally, Meng skips over the fact, as Taleb effectively pointed out, that Meng’s “hedges” (long Treasuries and low vol stocks) did more to give up the right tail (upside) than mitigate downside (left tail).
The Board’s Lies
The big item on the Investment Committee agenda was Item 7b. As we discussed at length, it amounted to the board ceding what little remained of its supervision of the investment office.
The board appeared blind-sided by the volume and directness of the public comments, which were submitted by e-mail and read into the record.
One of the ways the board and staff have been able to kid themselves as to how they are perceived by CalPERS beneficiaries is that normally, anyone who wants to weigh in has to trek to Sacramento. As a result, five comments in opposition to an agenda item would be a high number. The physical set up (cavernous room, audience below board members on a dais) also tends to lead to an unduly deferential tone, as if those speaking were supplicants, as opposed to taxpayers and beneficiaries who expect accountability from state officials.
Not a single comment supported the proposal. Few minced words. Some extracts, each from a separate comment:
I firmly oppose the reduction of board investment oversight as a reduction of its fiduciary duty.
We want you to maintain our pension..If you could not commit to this demand it is incumbent upon you to resign your board position and clear the path for more committed and clear minded persons.
The CalPERS staff has had a history of criminal behavior…Staff works for you and you are for us, the beneficiary. Engage in more, not less oversight of that.
Investment Committee agenda item 7b. It is wrong headed and inappropriate and quite possibly illegal under California law. It would result in there being little functional oversight by the board of their mandated oversight duties under the California Constitution…Recent decisions by Ben Meng have had disasterous implications. I believe that to simply throw away the limited oversight which the board currently exercises is the height of folly. I further believe should the board adopt consent item 7b, the board will open itself up to a potential class action lawsuit on behalf of CalPERS beneficiaries.
What is going on with CalPERS loss of a billion dollars as if it can be shrugged off? There must be more oversight by knowledgeable board members. The responsibility falls directly upon the board members’ shoulders. My husband is a retired correctional officer with a background in finance. He would be a more responsible board member than the current members.
I firmly oppose the proposed reductions in board oversight. The organization is poorly run and I pay high premiums for my long term care insurance. I want better management and more oversight. Please reject the changes and begin to look at the management. Some need to be terminated.
I oppose the proposed changes. I watched the March meeting. I heard that the left tail hedge was performing as expected. I did not hear that it had already been abandoned last year. I read reports in various media about the staff eliminating billions of dollars in left tail hedge protection mere weeks before the market crashed. An approximate loss, $1 billion. It appeared the board wasn’t informed nor did they authorize this. This is why the staff needs more oversight and not less.
Bloomberg, the Wall Street Journal and Institutional Investor have published new reports surrounding CalPERS Ben Meng missing out over one billion in gains by exiting a tail risk hedge before the crash. The issue isn’t that he made poor investment calls. Even veteran investors make mistakes. It appears he has exceeded his authority by firing the tail risk managers without informing the board or even CalPERS consultant, Wilshire Associates… .CalPERS is afflicted with the worst crisis since the Great Depression. It appears that the chief investment officer is not up to his job.
When specifically asked by a board member about left tail investment, your CIO replied about any left tail risk hedging strategy you are referring to without mentioning that most of what was thought to be being referred to had been liquidated…. This is a very glaring material omission. I fear what other surprises may be in store. In the context of a staff member, I see no other interpretation than his response being a blatant lie. The fact that your general counsel and CEO witnessed that and have done nothing to protect CalPERS or you as board members from liability shows your problems run deep.
This is literally an abdication on the board’s fiduciary duty. The board has already relinquished far too much authority and latitude to staff. Staff needs to be head accountable by the board. Strong board oversight needs to be maintained now more than ever. Especially now in light of the recent market actions and incompetent decisions by CIO Ben Meng.
Mind you, there was considerably more of this sort of thing, including a statement of opposition by RPEA and California State Retirees, the two large retiree organizations,
The board has managed to erect a bubble of self-regard and reject well-warranted criticism of its incompetence and negilgence. But when it gets it full bore from members of the public at large, rather than let it sink in that they might have a real problem, their defense mechanisms go into overdrive.
The board’s fabrications came fast and furious. Theresa Taylor asked Meng if he wanted to respond. He ran through his tired and repeatedly debunked talking points.
Theresa Taylor doled out six, arguably seven, falsehoods in impressively short order (again, from the closed caption transcript):
Investment Committee Chairman Theresa Taylor: I said earlier that the board and staff works as a team and after hearing commentary, coming to the question our CIO’s honesty, et cetera, I want to make it clear that a board member has a right after they ask a general question in open session, especially if it can be interpreted if you go too much into the granular that it is something we can’t talk about in open session, which is investment strategy, that they can go directly to the person they asked the question for. We are board members. It is not like we are members of the public. So, it is really important that the board members work as a team as well. So, I think after Ms. Brown made sure that she coercioned and helped other people — coerced and helped get other people — by this last letter record into the record, having people put letters in with misinformation and I’m sorry they were given misinformation because she had every opportunity to talk to Ben, to talk to Marcie, to talk about to Rob, to talk to Henry, the President of the board, she did none of those things. And I think it is incumbent upon us to call on bad behavior when we see it.
This is nonsense.
The board and staff are not a team. Board members regularly repeat the bizarre and deeply wrong-headed notion that they have a duty to CalPERS and must make defending the institution, meaning the employees, a top priority.
In fact, the board’s sole legal duty is to the beneficiaries. None of the law governing the pension fund give the organization any role. In other words, it is merely and exclusively a vehicle for executing the board’s fiduciary duty. The CalPERS operation is subordinate to the board,
Due to handing over too much authority to staff, the board’s only remaining direct report is CEO Marcie Frost. The board needs to hold her accountable for management of staff and the fund’s performance.
This “team” talk smacks of corruption. Too many members of the board are all too happy to engage in oversight theater because the perks of being a CalPERS board member regularly includes junkets to conferences on the East Coast and for the ones overseas, business class travel.
Investment strategy is not a closed session matter. It would be a violation of the Bagley-Keene Open Meeting Act to try to discuss investment strategy in closed session. Taylor reveals she is not fit to run a committee with misreprestatations like that.
Margaret Brown is not a cop. I am sure she wishes she were, but it is laughable for Taylor to suggest that Brown could coerce anyone. In fact, this is projection, since CalPERS does regularly attempt to muscle opponents, particularly through CalPERS-orchestrated attacks in the media and buying off journalists with promised of exclusive stories to get them to soften or abandon unfavorable stories (I have heard first hand of this behavior).
Brown did not provide “misinformation”. In the narcissistic World According to CalPERS, any report on one of their many failings must be untrue. Sorry, no one buys it. Either say specifically what if anything Brown got wrong or else stop smearing her. The absence of detail speaks volumes.
Brown was not responsible for the unfavorable press stories. This is implicit in the “misinformation” remark since the e-mail that Brown sent to some beneficiaries encouraging them to weigh in in public comments was so thin as not to have enough in it to be labeled “information” that would warrant running to staff for a check. Other comments by board members similarly have the subtext that Brown was responsible for the press uproar.
In fact, Bloomberg broke the story of the over $1 billion loss, and it was clearly news to Brown and Stacie Olivera (at a minimum) that the position had been exited. So that story obviously came from staff.
Naked Capitalism broke that Meng had fibbed to Brown and thus the board about the status of the left-tail hedge without any input from Brown. A commenter had seen the March board meeting, called out Meng’s misrepresentation, and we quickly updated the post, adding the section of the board transcript which confirmed the reader’s recollection. Brown evidently also put information from the transcript on her Facebook page.1
The next round of stories also came out of a staff leak. The Meng webcast to staff was not listed on CalPERS site. The only people who knew of its existence were CalPERS employees. One of them passed it to Universa, leading Taleb to produce the short video that he graciously passed on to Naked Capitalism. That generated another round of media coverage.
Brown supposedly should have talked to “Ben and Marcie” and didn’t. This qualifies as a twofer. First, since Brown was not conveying information to the press, there was nothing for her to check with the staff. But second, Brown actually was trying to get an explanation for what happened with the tail hedges. Per board policy, she cannot go to directly to staff. Brown has to make any requests to speak to staff through the board president Henry Jones or Marcie Frost.
Frost repeatedly blew off Brown’s e-mailed requests to set up a phone meeting. Keep in mind that these brush-offs came after the coronavirus lockdowns. Frost is usually busy with external meetings in California. Those were off given the crisis restrictions. What could Frost possibly have been busy with to justify ignoring a board member? This looks like a childish effort to put Brown in her place.
I will limit myself to the additional board misrepresentations that are not just echoes of the Taylor falsehoods above. Next from David Miller:
Board Member David Miller: …it’s really incumbent on us to communicate with the stakeholders to help them understand when there’s things they are liable to misunderstand or be actively misinformed about and we can anticipate it that as board members, it is incumbent on us to help them understand, for example, that changes are not an abdication of responsibility. They do not change anything about our responsibilities and are not us failing to be effective fiduciaries.
This is false, as you can readily see from our detailed discussion of the markup to the proposed policy changes. The board was planning to cede substantial areas of oversight and we discussed specifically how having those points of intervention had prevented some particularly reckless recent proposals from moving forward.
It is also offensive to see Miller patronize CalPERS beneficiaries and members of the public. Many of them have considerable legal, political, and organizational experience, and are capable of determining the validity of information. The fact that they aren’t buying what CalPERS is selling does not mean they are “misinformed”. It means they are discerning.
Miller has an additional bonkers cultish formulation:
And these things don’t indicate that we are not doing our job or that staff are not doing their job or are criminals…And I would hope in future that our stakeholders, some of whom have been former board members and know very well what is in our delegations and how they relate to what is in the Constitution and the law and governance structure to not continue this kind of behavior and we can hopefully go forward and not have these kind of damaging to our system, damaging to our interests and the interests of our members and our retirees and their dependents because that’s a failure of fiduciary responsibility.
Miller distorts the criticisms. Pointing out that staff, namely former CEO Fred Buenrostro, has engaged in criminal conduct is 100% accurate, and grounds alone to demand even more board vigilance than at other pension systems, if nothing else because CalPERS will not get the benefit of the doubt in any ethical scandals. It is also true that the board has not been doing its job, as we’ve been documenting at length since 2014.
But the idea that there is something heinous in calling out the board and staff for their failing to perform their fiduciary duty is bass-ackwards. The more Miller and his fellow board members continue to excuse and enable avoidable staff mistakes and lies, the harsher and louder the outside voices will become.
Shorter: executing on the board’s fiduciary duty means pressing the staff to run a tight and professional ship, not obsessing about their hurt feelers and worrying about PR. The board needs to be focusing relentlessly on CalPERS underfunding.
Rob Feckner was up next. He demonstrated that he was so not on top of facts that he asserted that the board meeting where Brown queried Meng about the tail hedges was in February. First, there was no Investment Committee meeting in February. Second, had Feckner bothered doing actual work, something to which most members of the board appear to be allergic to, he would have located the exchange, and it’s in the March board transcript. Third, Brown would have had to be quite the seer to be interested in tail hedges during the February board meetings, which were before the market plunge.
In other words, so much for the board’s ability to depict itself as an authority on “misinformation” when it can’t even get what happened in its own meetings straight.
Feckner then started screaming about a comment submitted by a prominent retiree, David Soares. 2 Proving our suspicion that Taylor’s remark about coercion was projection, Feckner attempted to threaten Soares and the retiree organization, RPEA, that had the temerity to question the board’s planned exit from meaningful supervision of investments:
I just can’t sit back and watch staff continue to be berated, especially I believe it was Mr. Soares that said unqualified staff. Sir, who give you the ability to say who is qualified or unqualified? These people work hard every day….
Protecting you and I want to point out these are all public employees. And you all represent retired public employees. I’m not sure how many of our 2,500 people are going to be willing to join your organization the way you are treating them.
Working hard is no proof of competence, even if we charitably assume the hard work claim is true. Marcie Frost reports to the board. She is unqualified. She has only a high school diploma, no financial training, no mathematical acumen, and only ran a back office operation plus a call center with only 1/10th as many employees as CalPERS has. The fact that she was the best that CalPERS could attract in 2016 should have been a wake-up call to the board about how much the stature of the organization had fallen on their watch.
RPEA is full of former union activists. It’s unlikely that they are fazed by Feckner’s bullying. And the fact that CalPERS is leaking like a sieve and morale among its top professionals is falling is a sign that quite a few insiders are also trying to foment change.
Finally, due to how long this post has become, we must give short shrift to the staff and board violating First Amendments rights. They continue to do so by insisting that Margaret Brown not speak independently (they also did so by failing to audibly read some of the critical comments into the record properly, in particular, the one footnoted below).
Brown has every right to state her views so long as she makes clear she is speaking as an individual. Even more important, the Second Restatement of Trusts indicates that board members individually have a duty to take whatever steps they can to correct what they believe are violations of fiduciary duty by other board members. Brown is being pilloried for asking only the most obvious question of staff that any prudent director would deem uncontroversial. Perversely, she rather than the staff is the one who takes the heat when the employees do not have good answers.
But CalPERS has appeared to be on the receiving end of the beneficiary version of the March of the Ents. We know how that movie ended.
1 Your humble blogger does not do Facebook. Institutional Investor chose to reference Brown’s Facebook page apparently to play up the apparent conflict, but that story simply replayed the information in the transcript.
2 This is not just my take. Another person who saw the webcast live described Feckner as yelling. The comment that got his goat:
My name is David Soares. I am a CalPERS beneficiary, retiring at the end of 2016 after 32 years as a prosecutor in Silicon Valley. I represented over 300 prosecutors and public defenders in collective bargaining for 12 elected terms on the board of the Santa Clara County Government Attorneys Association, and I currently serve as an assistant area director of the California Retired Public Employees Association.
I write in strong opposition to proposed Delegation IC-20-01, which would delegate this Board’s historic and constitutionally-mandated oversight to unqualified and unaccountable staff. The PERF has recently struggled to reach even 70 percent funded status. Staff need more oversight, not less.
Article XVI section 17 of the California Constitution declares that the Board of Administration is the sole fiduciary of the fund, and states that, “A retirement board’s duty to its participants and their beneficiaries shall take precedence over any other duty.”
As a fiduciary, each member of this Board owes a Duty of Care to the members and beneficiaries which cannot be lawfully delegated to staff. This Duty of Care encompasses the Duty of Inquiry , that a fiduciary make Reasonable Inquiry, entertain a Good Faith Belief in the prudence of a course of action, and have No Personal Interest in the outcome.
If any member of this Board feels that discharging their constitutional duty as a fiduciary is such an inconvenience that they must unlawfully delegate that obligation to staff, I respectfully request that they submit their resignation forthwith. I caution the Board that you are each personally responsible for the discharge of your obligation to act as a fiduciary, and it would constitute a theft of public funds to expend trust monies opposing the members and beneficiaries should they seek to compel you to perform your duties.