Pulling Back CalPERS' Ethics Curtain

JAN. 7, 2010

By WAYNE LUSVARDI

The Securities and Exchange Commission has exposed the self-righteous CalPERS, the California Public Employees Retirement System, as no longer the self-anointed ethical wizards of pension funds.

L. Frank Baum wrote that when he started writing his series of children’s story books about Dorothy and the Wizard of Oz that he left Toto, Dorothy’s curious little dog, in Kansas while Dorothy was in California. Without Toto to pull the curtain back and expose the Wizard, Dorothy was left in California believing the Wizard to be all wise and righteous. 

The SEC has just pulled the curtain back on the self-righteous Democratic-controlled Board of Directors of CalPERS and has begun to bark so that all the Dorothys in California can see what has been happening.

Last year, the SEC filed its first ever enforcement action against a state by accusing New Jersey of securities fraud for misleading pension fund bond investors.  Now the SEC has turned its attention to CalPERS, which lost about 25 percent of its gargantuan investment portfolio value after the national financial crisis.  The issue is whether CalPERS disclosed the riskiness of its pension investments and how much money it would need to cover pension obligations.  By using an unrealistic 8 percent rate of return on its investments CalPERS hid its actual financial condition.

Quoted in the New York Times, David Crane, former budget expert for former Gov. Arnold Schwarzenegger, CalPERS nondisclosures in its “largest non-voter approved debt issuance in California history” amounted to worse ethics than Goldman Sachs’ nondisclusures about risk and conflicts of interest.

CalPERS once tried to block Warren Buffett from being appointed to the Board of Directors of Coca Cola and tried to get the head of Safeway fired. The agency tried to throw its weight around by imposing what it called rules for “good corporate governance” on corporate boards that were seeking investment capital from CalPERS via Wall Street.  Behind it all were the interests of unions to change the rules of investment.  We can see the fruit of its behind-the-curtain machinations in the national financial meltdown of 2008, the collapse of General Motors, and the looming insolvency of CalPERS to meet future pension obligations.

Back in 1991, then-Gov. Pete Wilson, playing the role of Toto the barking dog, tried to gain control of CalPERS by revising the way board members were appointed.  He failed due to opposition by Democrats and unions.

Anticipating exposure by the SEC, in September 2010, CalPERS instituted some cosmetic reforms to restore public confidence by installing a Senior Level Enterprise Risk Management Office and Enterprise Chief Risk Officer as well as an Ethics Hotline to identify fraud and waste.

However, CalPERS’ reforms apparently do not extend to full disclosure of political donations and potential perceived conflicts of interest by its external fund managers.

During the November 2010 state elections a Cal-PERS fund manager, Tom Steyer, donated $5 million to kill the effort suspend California’s green power law, which had potential influence on CalPERS investments.

CalPERS policies were little different than infamous insurer AIG. Both were involved in highly leveraged lending.  They bet with borrowed money that served as collateral. But lenders had re-invested that collateral in mortgage-backed securities – the same type of investment of the borrower.  In gambling, this is called doubling down on your bets. But apparently CalPERS got away practice with this partly by using its self-righteous “good governance” ethics as a cover.

Unlike Sherlock Holmes’ dectective story where the criminal was exposed by a dog that failed to bark, California has had some dogs barking about what has been going on at CalPERS since Pete Wilson in 1991. But California’s media and electorate have been turning a deaf ear to the watchdog. But will they listen to the SEC?