calpers

CalPERS: New Strategic Plan Would Refocus Portfolio on Core U.S. Properties

February 10, 2011

The nation’s largest pension fund, the California Public Employees Retirement Fund (CalPERS), is close to deciding it’s time to reduce its exposure in value-add and international properties, get out of REITs altogether and instead focus on core properties in the U.S. CalPERS Investment Committee is meeting on Valentine’s Day to consider recommendations for a new strategic real estate investment plan that would, among other things, have it: Investing…

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California Proving To Be a Bear Market for Hines

January 6, 2011

The California Public Employees’ Retirement System (CalPERS) has replaced Hines as manager of its National Office Partners (NOP) real estate portfolio and tapped CommonWealth Partners LLC (CWP) to take over the huge office portfolio. The news over Hines losing NOP was tempered by the fact that CalPERS recently agreed to increase its allocation to other Hines-sponsored-fund — notably $190 million to its Brazil fund. CalPERS also has active co…

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CalPERS Transitions $1.9 Bil. U.S. Industrial Real Estate Portfolio to GI Partners

December 2, 2010

The California Public Employees’ Retirement System (CalPERS) has shifted the North American assets of its CalEast Global Logistics LLC, valued at $1.9 billion, to GI Partners. In addition, it has transitioned its European industrial assets, valued at…

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Robert Teitelman: Kahan and Rock and the problem with proxy access

November 11, 2010

In the world of corporate governance, there are moments of sense that flash like lightning across the sky. Mostly, though, it’s unrelievedly dark. The lightning flash this time comes from two of the legal eminences of governance research, Marcel Kahan from New York University Law School and his frequent collaborator, Edward Rock of the University of Pennsylvania Law School, in a post to the Harvard Law School School Forum on Corporate Governance and Financial Regulation. The pair tackle the question of proxy access for shareholders, a proposal that got a shove forward in the Dodd-Frank financial reform legislation. The Securities and Exchange Commission then passed new rules in August, only to delay implementation in October. Proxy access is this year’s must-have governance policy (closely followed by the related say-on-pay). Allowing shareholders to easily nominate directors represents the latest attempt to explain why, despite steady progress (though that is a slippery term for an elusive subject) in shareholder rights, companies keep going wrong, from too much risk to too much comp. The heart of that “wrong,” governance orthodoxy now insists, stems from the difficulty and expense that shareholders — always portrayed as a sort of monolithic mob with a single interest — must shoulder to place candidates for directorships into nomination. Shareholders, in other words, cannot be at fault; all sin lurks within senior managements and boards. Proxy access comes down to this: If you give long-term shareholders (meaning those who own 3% of the shares for three years) easy access to board nominations, they will finally be able to perform their monitoring function adequately. This, Kahan and Rock write, is “the conventional wisdom,” adding: “Because proxy access is viewed as dramatically lowering the costs of an election contest, both proponents and opponents of these rules predict that they will have a significant impact.” The pair, however, summarily reject that notion. “We argue,” they write, “that proxy access will lead to few shareholder nominations, that most of the nominees will be defeated, and that the occasional nominee who does get elected will have little impact.” Boom. Why the rejection? Kahan and Rock tick off factors that are so well known by this point that it’s almost embarrassing to bring them up: Most mutual funds and private pension funds have never shown an interest in corporate activism. A few large public pensions, like CalPERS, they admit, “have shown a modest interest,” but that doesn’t inspire them. And the most activist of shareholders — hedge and union-affiliated funds — “will generally not satisfy the ownership and holding period requirements.” For the most part, proxy access won’t help here-today-gone-tomorrow Carl Icahn. We’re back to where we started from: Shareholder democracy doesn’t work effectively because most shareholders are, often for their own good reasons, profoundly passive. Kahan and Rock argue that compared with current systems of “withhold-vote campaigns,” cost savings in proxy access campaigns aren’t significant, higher levels of shareholder support are required, and running “positive campaigns” (vote for my nominee not withhold your vote for theirs) opens shareholders up to unwanted attack for conflicts of interest or lack of qualifications. And again, many of these funds are publicity- and cost-averse. “Overall, we believe that proxy access will have some undesirable effects — it will result in some increase in company expenses and may rarely increase the leverage of shareholders whose interest conflict with those of shareholders at large — and some desirable ones — it may occasionally lead to the election of nominees at recalcitrant boards, where such nominees may have a modest impact on governance and a marginal impact on company value … the net effect is likely to be zero.” That’s a pretty bad grade. Again, Kahan and Rock are hardly stealth stakeholder theorists or initiates into the Marty Lipton school of entrenched management. They are very near the center of governance thought, academic division. Their conclusions thus raise the obvious question: If proxy access is a big fat dud, where does governance go from here? Robert Teitelman is editor in chief of The Deal.

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David Spencer Seconi: Rattner’s Case Just Another Chapter in a Frightening New Trend

October 14, 2010

Probably not the person the White House wanted to see in the news — Steven Rattner, the individual once in charge of Obama’s initiative to overhaul the auto industry, was reported to have agreed to a $5 million settlement and a partial ban on participating in the securities industry. The story of Mr. Rattner is quite striking. Worth hundreds of millions of dollars, founder of the powerful Quandrangle Group and long-time industry insider, Mr. Rattner certainly had everything that one could have wished from a career in finance. Yet, these most recent charges are not the first time he has been caught pushing the boundaries of ethical behavior. After being promoted to the job of auto industry overseer, it was revealed that Rattner had been an investor in the hedge fund powerhouse Cerberus, which had significant stakes in Chrysler and GMAC. At the same moment, the S.E.C. and New York State Attorney General Andrew Cuomo were investigating a case involving Rattner’s alleged “pay to play” deals with the state’s pension fund. Pension funds are massive organizations that require the services of highly skilled financial professionals in order to meet their annual goals. The boards that run the funds will often hire independent advisors to help management the fund’s assets. Yet, the fairness of the selection process can be undermined in two ways, both of which are often referred to as “pay to play”: First, independent advisors looking to gain access to these funds may bribe the elected officials in order to skew the selection process. Second, these board members may require under-the-table contributions as a prerequisite for the advisors to work for the fund. The recent rise in pay to play schemes has touched pension funds around the country, most famously CALPERS, the California behemoth that admitted to working closely with such insiders. They were forced to settle with prosecutors for a crippling $895 million in 2008 and recently announced that they were severing ties with a different private equity group, Pacific Corporate Group, after the group’s recent settlement with Cuomo. Things have not been pretty for the $125 billion New York pension fund, either. Alan G. Hevesi, the former state comptroller, pleaded guilty just last week for steering money to an organization that had contributed to his campaign. David Loglisci, the former chief investment officer, pleaded guilty last March on claims that he often conceded control of the fund to Mr. Hevesi’s top political officers. The problems for Mr. Rattner began in 2004 when, upon hearing that pay to play was common industry practice, he reached out to Mr. “Hank” Morris, Mr. Hevesi’s top political advisor, and soon Quadrangle became the happy recipient of a cool $100 million from the pension fund. Afterwards, it was revealed that Rattner had been involved in the distribution of a film made by the brother of the fund’s chief financial officer, a clear conflict of interest. When the movie allegations first arose, Rattner was accused and later acquitted following information supplied to prosecutors claiming that he was in no way involved in the movie’s distribution. Soon after, however, information surfaced that contradicted these claims, and Rattner was brought back into court. Yet, the consequences of this behavior are very marginal in the scheme of things. A $5 million fee for a man worth hundreds of millions is certainly not the message that the S.E.C. should be sending to others who engage in this elicit behavior. While securities fraud in the past has often been a game played with rich people’s money, investment firms have been creating ever more elaborate schemes in the pursuit of squeezing profits out of the average individual (think the most recent mortgage crisis). Playing with pension funds, however, is much more dangerous, and the recent rise in pay to play settlements should send a clear warning signal not only to the federal government, but to those putting their money in these organizations. The incentive for investment firms to enter the market is clear, as public pension plans alone hold approximately $2.9 trillion in assets. Yet, workers place their complete trust in these organizations to do what is right with their money. When pension funds are caught up in the scandals, it is not the embarrassment of the funds that should be making headline news, but rather the fact that they are playing with future security of millions of workers. Unlike the mortgage crisis, where many individuals bought outside their means and failed to read the fine print, pension funds become embroiled in conflict of interest scandals without ever consulting those from which they take money.

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Marty Robins: Why Corporate Governance Matters to Everyone

August 17, 2010

So many of the problems we face today result from poor decision-making by private corporations. Prominent examples include the Gulf oil spill and the seriously weakened financial sector, which is imperiling the rest of our economy. However, so many who describe themselves as liberals or progressives seek to address such problems with more government regulation and programs instead of by preventing the bad decisions at the source, which is likely to be more efficient from a resource utilization perspective. That is, having government do or prohibit something is inherently more costly than having the private sector get to the same result on its own as a result of the cost of the government. It is also arguably less effective because the government is not the direct stakeholder and does not have the same access to information or incentives as do properly informed, incentivized private actors. Of course, as we currently see, using government programs to rectify problems created in the private sector is the most expensive of all the alternatives. How does one get better decisions in the private sector? While there is no foolproof way to prevent such bad decisions, many analysts believe that the field of “corporate governance” is a very good place to start. This field involves efforts to get the right people and the right information into the decision-making process so as to enhance the likelihood of a “good” — or at least non-disastrous — decision. It’s hardly a secret that for too long, many business decisions have resulted from inadequate deliberation by an “old boys’ club” which did not reflect multiple viewpoints or sufficient consideration of risks and benefits. The field may at first glance seem like a dusty academic area, but it is actually fundamental to the well being of all Americans. In recent years, corporate governance scholars such as Lucian Bebchuck of Harvard Law School, Nell Minow of The Corporate Library and James McRitchie of CorpGov, activist investors such as CalPers, CalSTERS, Carl Icahn, Andrew Shapiro and Bill Ackman and, to some extent, the Delaware courts, have sought to change this situation by facilitating better process and more inclusive boards of directors. A major step forward is the inclusion in the new financial regulation bill of expanded proxy access for minority shareholders in public company board of director elections, in order to get more viewpoints into the boardroom. Arguably in the same vein, is the inclusion in the bill of a non-binding ‘say-on-pay’ vote for shareholders. Despite these improvements, it may come as a surprise that corporate law still gives officers and directors a largely free pass for even disastrous outcomes of their decision-making. In a recent law review article, the author has publicly lamented this situation and suggested changes in corporate law so that those responsible for horrible decisions bear some financial risk from their consequences. In that our federal fisc. is already stretched to the breaking point, with trillion dollar deficits as far as the eye can see, we need to be looking for ways of preventing debacles so that we minimize future burdens on public resources. Yet, one rarely hears those advocating more government action or regulation of business speak of ways we can introduce real incentives for business to meaningfully regulate itself. I don’t know if this is because they feel that business is inherently evil, so that efforts to improve corporate governance are futile, if they don’t understand business or corporate law, don’t understand the connection between business decision-making and public consequences, or some other reason. However, I strongly advocate that this orientation change in the near future, as we are in need of some out-of-the-box thinking as to how to reduce the demands on government, and improved performance in the corporate sector is a good place to start. One can justifiably advocate different approaches to improvement of governance, but the issue needs to be on the radar screen of anyone with a serious interest in public policy. For that matter, even conservatives in their zeal to reduce government spending need to seriously consider ways to avoid the need for such spending, and recognize that while the business sector is a net major positive for our society, there is significant room for improvement in its performance and that such improvement is essential for our general welfare. It is no longer realistic to look to government to rectify problems caused in the private sector, or to simply ignore such problems and their broader consequences. We all need to look for innovative ways to avoid such problems, such as using the governance process to do so.

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Ellen Brown: How Brokers Became Bookies: The Insidious Transformation of Markets Into Casinos

July 15, 2010

“You all are the house, you’re the bookie. [Your clients] are booking their bets with you. I don’t know why we need to dress it up. It’s a bet.” — Senator Claire McCaskill, Senate Subcommittee investigating Goldman Sachs ( Washington Post , April 27, 2010) Ever since December 2008, the Federal Reserve has held short-term interest rates near zero. This was not only to try to stimulate the housing and credit markets but also to allow the federal government to increase its debt levels without increasing the interest tab picked up by the taxpayers. The total public U.S. debt increased by nearly 50% from 2006 to the end of 2009 (from about $8.5 trillion to $12.3 trillion), but the interest bill on the debt actually dropped (from $406 billion to $383 billion), because of this reduction in interest rates. One of the dire unintended consequences of that maneuver, however, was that municipal governments across the country have been saddled with very costly bad derivatives bets . They were persuaded by their Wall Street advisers to buy municipal swaps to protect their loans against interest rates shooting up. Instead, rates proceeded to drop through the floor, a wholly unforeseeable and unnatural market condition caused by rate manipulations by the Fed. Instead of the banks bearing the losses in return for premiums paid by municipal governments, the governments have had to pay massive sums to the banks — to the point of pushing at least one county to the brink of bankruptcy (Jefferson County, Alabama). Another unintended consequence of the plunge in interest rates has been that “savers” have been forced to become “speculators” or gamblers. When interest rates on safe corporate bonds were around 8%, a couple could aim for saving half a million dollars in their working careers and count on reaping $40,000 yearly in investment income, a sum that, along with social security, could make for a comfortable retirement. But very low interest rates on bonds have forced these once-prudent savers into the riskier and less predictable stock market, and the collapse of the stock market has forced them into even more speculative ventures in the form of derivatives, a glorified form of gambling. Pension funds , which have binding pension contracts entered into when interest was at much higher levels, need an 8% investment return to meet their commitments. In today’s market, they cannot make that sort of return without taking on higher risk, which means taking major losses when the risks materialize. Derivatives are basically just bets. Like at a racetrack, you don’t need to own the thing you’re betting on in order to play. Derivative casinos have opened up on virtually anything that can go up or down or have a variable future outcome. You can bet on the price of tea in China, the success or failure of a movie, whether a country will default on its debt, or whether a particular piece of legislation will pass. The global market in derivative trades is now well over a quadrillion dollars — that’s a thousand trillion — and it is eating up resources that were at one time invested in productive enterprises. Why risk lending money to a corporation or buying its stock, when you can reap a better return betting on whether the stock will rise or fall? The shift from investing to gambling means that not only are investors making very little of their money available to companies to produce goods and services, but also that the parties on one side of every speculative trade now have an interest in seeing the object of the bet fail , whether a company, a movie, a politician, or a country. Worse, high-speed program traders can actually manipulate the market so that the thing bet on is more likely to fail. Not only has the market become a casino, but the casino is also rigged. High frequency traders — a field led by Goldman Sachs — use computer algorithms to automatically bet huge sums of money on minor shifts in price. These bets send signals to the market that can themselves cause the price of assets to shoot up or tumble down. By placing high-volume trades, the largest speculative traders can thus intentionally “fix” prices in any direction they want. “Prediction” Markets Casinos for betting on what something will do in the future have been elevated to the status of “prediction” markets, and they can cover a broad range of issues. MIT’s Technology Review launched a futures market for technological innovations, in order to bet on upcoming developments. The NewsFutures and TradeSports Exchanges enable people to wager on matters such as whether Tiger Woods will take another lover, or whether Bin Laden will be found in Afghanistan. A 2008 conference of sports leaders in Auckland, New Zealand, featured Mark Davies, head of a sport betting exchange called Betfair. Davies observed that these betting exchanges, while clearly gambling forums, are little different from the trading done by financial firms such as JPMorgan. He said: I used to trade bonds at JPMorgan, and I can tell you that what our customers do is exactly the same as what I used to do in my previous life, with the single exception that where I had to pour over balance sheets and income statements, they pour over form and team-sheets. The online news outlet Slate monitors various prediction markets to provide readers with up-to-date information on the potential outcomes of political races. Two of the markets covered are the Iowa Electronic Markets and Intrade . Slate claims that these political casinos are consistently better at forecasting winners than pre-election polls. Participants bet real money 24 hours a day on the outcomes of a range of issues, including political races. Newsfutures and Casualobserver are similar, smaller exchanges. Besides shifting the emphasis to gambling (“Why Vote When You Can Bet?” says Slate ‘s “Guide to All Political Markets”), prediction markets, like the stock market, can be rigged so that they actually affect outcomes. This became evident, for example, in 2008, when the John McCain campaign used the InTrade market to shift perception of his chances of winning. A supporter was able to single-handedly manipulate the price of McCain’s contract, causing it to move up in the market and prompting some mainstream media to report it as evidence that McCain was gaining in popularity. Betting on Terrorism The destructive potential of prediction markets became particularly apparent in one sponsored by the Pentagon, called the “policy analysis market” (PAM) or “terror futures market.” PAM was an attempt to use the predictive power of markets to forecast political events tied to the Middle East, including terrorist attacks. According to the New York Times , the PAM would have allowed trading of futures on political developments including terrorist attacks, coups d’état, and assassinations. The exchange was shut down a day after it launched, after commentators pointed out that the system made it far too easy to make money with terror attacks. At a July 28, 2003 press conference, Senators Byron L. Dorgan (D-ND) and Ron Wyden (D-OR) spoke out against the exchange. Wyden stated, “The idea of a federal betting parlor on atrocities and terrorism is ridiculous and it’s grotesque,” while Dorgan called it “useless, offensive and unbelievably stupid.” “This appears to encourage terrorists to participate, either to profit from their terrorist activities or to bet against them in order to mislead U.S. intelligence authorities,” they said in a letter to Admiral John Poindexter, the director of the Terrorism Information Awareness Office, which developed the idea. A week after the exchange closed, Poindexter offered his resignation. Carbon Credit Trading A massive new derivatives market that could be highly destructive economically is the trading platform called Carbon Credit Trading, which is on its way to dwarfing world oil trade. The program would allow trading in “carbon allowances” (permitting companies to emit greenhouse gases) and in “carbon offsets” (allowing companies to emit beyond their allowance if they invest in emission-reducing projects elsewhere). It would also allow trading in carbon derivatives ; for example, futures contracts to deliver a certain number of allowances at an agreed price and time. Robert Shapiro, former undersecretary of commerce in the Clinton administration and a cofounder of the U.S. Climate Task Force, has warned, “We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market.” Eoin O’Carroll cautioned in the Christian Science Monitor : Many critics are pointing out that this new market for carbon derivatives could, without effective oversight, usher in another Wall Street free-for-all just like the one that precipitated the implosion of the global economy… Just as the inability of homeowners to make good on their subprime mortgages ended up pulling the rug out from under the credit market, carbon offsets that are based on shaky greenhouse-gas mitigation projects could cause the carbon market to tank, with implications for the broader economy. The proposed form of cap and trade has not yet been passed in the U.S., but a new market in which traders can speculate on the future of allowances and offsets has already been launched. The largest players in the carbon credit trading market include firms such as Morgan Stanley, Barclays Capital, Fortis, Deutsche Bank, Rabobank, BNP Paribas, Sumitomo, Kommunalkredit, Credit Suisse, Merrill Lynch and Cantor Fitzgerald. Last year, the financial services industry had 130 lobbyists working on climate issues, compared to almost none in 2003. The lobbyists represented companies such as Goldman Sachs and JPMorgan Chase. Billionaire financier George Soros says cap-and-trade will be easy for speculators to rig. “The system can be gamed,” he said last July at a London School of Economics seminar. “That’s why financial types like me like it — because there are financial opportunities.” Time to Board Up the Casinos and Rethink Our Social Safety Net? Our forebears considered gambling to be immoral and made it a crime. As the Industrial Revolution and the ascendance of capital changed religious mores, gambling gradually gained acceptance, but even within that permissive paradigm, derivative trading was originally considered an illegal form of gambling. Perhaps it is time to reinstate the gambling laws, board up the derivatives casinos, and return the stock market to what it was designed to be: a means of funneling the capital of investors into productive businesses. Short of banning derivatives altogether, the derivatives business could be slowed up considerably by imposing a Tobin tax , a small tax on every financial trade. “Financial products” are virtually the only products left on the planet that are not currently subject to a sales tax; and at over a quadrillion dollars in trades annually, the market is huge. A larger issue is how to ensure adequate retirement income for the population without forcing people into gambling with their life savings to supplement their meager social security checks. It may be time to rethink not only our banking and financial structure but the entire social umbrella that our Founding Fathers called the Common Wealth. The genius of Social Security was its recognition of the basic economic truth that real “security” rests on the ability of a society to provide for and take care of those who, because of age, health or economic conditions, cannot take care of themselves. Deficit hawks cry that we cannot afford more spending; but according to Richard Cook, a former U.S. Treasury Department official, the government could print and spend several trillion new dollars into the money supply without causing price inflation. Writing in Global Research in April 2007, he noted that the U.S. Gross Domestic Product in 2006 came to $12.98 trillion, while the total national income came to only $10.23 trillion; and at least 10 percent of that income was reinvested rather than spent on goods and services. Total available purchasing power was thus only about $9.21 trillion, or $3.77 trillion less than the collective price of goods and services sold. Where did consumers get the extra $3.77 trillion? They had to borrow it , and they borrowed it from banks that created it with accounting entries on their books. If the government had replaced this bank-created money with debt-free government-created money, the total money supply would have remained unchanged. That means a whopping $3.77 trillion in new government-issued money could have been fed into the economy in 2006 without inflating prices. Different proposals have been made concerning how this money should be distributed, but at least some of it could be used to provide adequate social security checks, relieving the pressure to gamble with our savings. The Federal Reserve has funneled $4.6 trillion to Wall Street in bailout money, most of it generated via “quantitative easing” (in effect, printing money); yet hyperinflation has not resulted. To the contrary, what we have today is Depression-style deflation . The M3 money supply shrank in the last year by 5.5 percent, and the rate at which it is shrinking is accelerating . The explanation for this anomaly is that the Fed’s $4.6 trillion added by quantitative easing fell far short of the estimated $10 trillion needed to “reflate” the money supply after the ” shadow lenders ” disappeared. When these investors discovered that the “triple-A” mortgage-backed securities they had been purchasing from Wall Street were actually very risky investments, they exited the market, credit dried up, and the money supply (which today consists almost entirely of credit or debt) collapsed. The only viable way to reflate a collapsed money supply is to put more money into it; and creating the national money supply is the sovereign right of governments, not of banks. If the government wants to remain sovereign, it needs to reassert that right. Niko Kyriakou contributed to this article.

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Ellen Brown: The Mysterious CAFRs: How Stagnant Pools of Government Money Could Help Save the Economy

May 21, 2010

For over a decade, accountant Walter Burien has been trying to rouse the public over what he contends is a massive conspiracy and cover-up, involving trillions of dollars squirreled away in funds maintained at every level of government. His numbers may be disputed, but these funds definitely exist, as evidenced by the Comprehensive Annual Financial Reports (CAFRs) required of every government agency. If they don’t represent a concerted government conspiracy, what are they for? And how can they be harnessed more efficiently to help allay the financial crises of state and local governments? The Elusive CAFR Money Burien is a former commodity trading adviser who has spent many years peering into government books. He notes that the government is composed of 54,000 different state, county, and local government entities, including school districts, public authorities, and the like; and that these entities all keep their financial assets in liquid investment funds, bond financing accounts and corporate stock portfolios. The only income that must be reported in government budgets is that from taxes, fines and fees; but the investments of government entities can be found in official annual reports (CAFRs), which must be filed with the federal government by local, county and state governments. These annual reports show that virtually every U.S. city, county, and state has vast amounts of money stashed away in surplus funds. Burien maintains that these slush funds have been kept concealed from taxpayers, even as taxes are being raised and citizens are being told to expect fewer government services. Burien was originally alerted to this information by Lt. Col. Gerald Klatt, who evidently died in 2004 under mysterious circumstances , adding fuel to claims of conspiracy and cover-up. Klatt was a an Air Force auditor and federal accountant, and it’s not impossible that he may have gotten too close to some military stash being used for nefarious ends. But it is hard to envision how all the municipal governments hording their excess money in separate funds could be complicit in a massive government conspiracy. Still, if that is not what is going on, why such an inefficient use of public monies? A Simpler Explanation I got a chance to ask that question in April, when I was invited to speak at a conference of Government Finance Officers in Missouri. The friendly public servants at the conference explained that maintaining large “rainy day” funds is simply how local governments must operate. Unlike private businesses, which have bank credit lines they can draw on if they miscalculate their expenses, local governments are required by law to balance their budgets; and if they come up short, public services and government payrolls may be frozen until the voters get around to approving a new bond issue. This has actually happened, bringing local government to a standstill. In emergencies, government officials can try to borrow short-term through “certificates of participation” or tax participation loans, but the interest rates are prohibitively high; and in today’s tight credit market, finding willing lenders is difficult. To avoid those unpredictable contingencies, municipal governments will keep a cushion of from 20% to 75% more than their budgets actually require. This money is invested, but not necessarily lucratively. One finance officer, for example, said that her city had just bid out $2 million as a 30-day certificate of deposit (CD) to two large banks at a meager annual interest of 0.11%. It was a nice spread for the banks, which could leverage the money into loans at 6% or so; but it was a pretty sparse deal for the city. Meanwhile, Back in California That was in Missouri, but the figures I was particularly interested were for my own state of California, which was struggling with a budget deficit of $26.3 billion as of April 2010. Yet the State Treasurer’s website says that he manages a Pooled Money Investment Account (PMIA) tallying in at nearly $71 billion as of the same date, including a Local Agency Investment Fund (LAIF) of $24 billion. Why isn’t this money being used toward the state’s deficit? The Treasurer’s answer to this question, which he evidently gets frequently, is that legislation forbids it. His website states: Can the State borrow LAIF dollars to resolve the budget deficit? No. California Government Code 16429.3 states that monies placed with the Treasurer for deposit in the LAIF by cities, counties, special districts, nonprofit corporations, or qualified quasi-governmental agencies shall not be subject to either of the following: (a) Transfer or loan pursuant to Sections 16310, 16312, or 16313. (b) Impoundment or seizure by any state official or state agency. The non-LAIF money in the pool can’t be spent either. It can be borrowed, but it has to be paid back. When Governor Schwarzenegger tried to raid the Public Transportation Account for the state budget, the California Transit Association took him to court and won . The Third District Court of Appeals ruled in June 2009 that diversions from the Public Transportation Account to fill non-transit holes in the General Fund violated a series of statutory and constitutional amendments enacted by voters via four statewide initiatives dating back to 1990. In short, the use of these funds for the state budget has been blocked by the voters themselves. Bond issues are approved for particular purposes. When excess funds are collected, they are not handed over to the State toward next year’s budget. They just sit idly in an earmarked fund, drawing a modest interest. What’s Wrong with This Picture? California’s budget problems have caused its credit rating to be downgraded to just above that of Greece, driving the state’s interest tab skyward. In November 2009, the state sold 30-year taxable securities carrying an interest rate of 7.26% . Yet California has never defaulted on its bonds. Meanwhile, the too-big-to-fail banks, which would have defaulted on hundreds of billions of dollars of debt if they had not been bailed out by the states and their citizens, are able to borrow from each other at the extremely low federal funds rate, currently set at 0 to .25% (one quarter of one percent). The banks are also paying the states quite minimal rates for the use of their public monies, and turning around and relending this money, leveraged many times over, to the states and their citizens at much higher rates. That is assuming they lend at all, something they are increasingly reluctant to do, since speculating with the money is more lucrative, and investing it in federal securities is more secure. Private banks clearly have the upper hand in this game. Local governments have been forced to horde funds in very inefficient ways, building excessive reserves while slashing services, because they do not have the extensive credit lines available to the private banking system. States cannot easily incur new debt without voter approval, a process that is cumbersome, time-consuming and uncertain. Banks, on the other hand, need to keep only the slimmest of reserves, because they are backstopped by a central bank with the power to create all the reserves necessary for its member banks, as well as by Congress and the taxpayers themselves, who have been arm-twisted into repeated bailouts of the Wall Street behemoths. How the CAFR Money Could Be Used Without Spending It California, then, is in the anomalous position of being $26 billion in the red and plunging toward bankruptcy, while it has over $70 billion stashed away in an investment pool that it cannot touch. Those are just the funds managed by the Treasurer. According to California’s latest CAFR, the California Public Employees’ Retirement Fund (CalPERS) has total investments of $360 billion, including nearly $144 billion in “equity securities” and $37 billion in “private equity.” See the State of California Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2009, pages 83-84. This money cannot be spent, but it can be invested — and it can be invested not just in conservative federal securities but in equity, or stocks. Rather than turning this hidden gold mine over to Wall Street banks to earn a very meager interest, California could leverage its excess funds itself, turning the money into much-needed low-interest credit for its own use. How? It could do this by owning its own bank. Only one state currently does this — North Dakota. North Dakota is also the only state projected to have a budget surplus by 2011. It has not fallen into the Wall Street debt trap afflicting other states, because it has been able to generate its own credit through its own state-owned Bank of North Dakota (BND). An investment in the State Bank of California would not be at risk unless the bank became insolvent, a highly unlikely result since the state has the power to tax. In North Dakota, the BND is a dba of the state itself: it is set up as “the State of North Dakota doing business as the Bank of North Dakota.” That means the bank cannot go bankrupt unless the state goes bankrupt. The capital requirement for bank loans is a complicated matter, but it generally works out to be about 7%. (According to Standard & Poor’s, the worldwide average risk-adjusted capital ratio stood at 6.7 per cent as of June 30, 2009; but for some major U.S. banks it was much lower: Citigroup’s was 2.1 per cent; Bank of America’s was 5.8 per cent.) At 7%, $7 of capital can back $100 in loans. Thus if $7 billion in CAFR funds were invested as capital in a California state development bank, the bank could generate $100 billion in loans. This $100 billion credit line would allow California to finance its $26 billion deficit at very minimal interest rates, with $74 billion left over for infrastructure and other sorely needed projects. Studies have shown that eliminating the interest burden can cut the cost of public projects in half. The loans could be repaid from the profits generated by the projects themselves. Public transportation, low-cost housing, alternative energy sources and the like all generate fees. Meanwhile, the jobs created by these projects would produce additional taxes and stimulate the economy. Commercial loans could also be made, generating interest income that would return to state coffers. Building a Deposit Base To start a bank requires not just capital but deposits. Banks can create all the loans they can find creditworthy borrowers for, up to the limit of their capital base; but when the loans leave the bank as checks, the bank needs to replace the deposits taken from its reserve pool in order for the checks to clear. Where would a state-owned bank get the deposits necessary for this purpose? In North Dakota, all the state’s revenues are deposited in the BND by law. Compare California, which has expected revenues for 2010-11 of $89 billion . The Treasurer’s website reports that as of June 30, 2009, the state held over $18 billion on deposit as demand accounts and demand NOW accounts (basically demand accounts carrying a very small interest). These deposits were held in seven commercial banks, most of them Wall Street banks: Bank of America, Union Bank, Bank of the West, U.S. Bank, Wells Fargo Bank, Westamerica Bank, and Citibank. Besides these deposits, the $64 billion or so left in the Treasurer’s investment pool could be invested in State Bank of California CDs. Again, most of the bank CDs in which these funds are now invested are Wall Street or foreign banks . Many private depositors would no doubt choose to bank at the State Bank of California as well, keeping California’s money in California. There is already a movement afoot to transfer funds out of Wall Street banks into local banks. While the new state-owned bank is waiting to accumulate sufficient deposits to clear its outgoing checks, it can do what other startup banks do – borrow deposits from the interbank lending market at the very modest federal funds rate (0 to .25%). To avoid hurting California’s local banks, any state monies held on deposit with local banks could remain there, since the State Bank of California should have plenty of potential deposits without these funds. In North Dakota, local banks are not only not threatened by the BND but are actually served by it, since the BND partners with them, engaging in “participation loans” that help local banks with their capital requirements. Taking Back the Money Power We have too long delegated the power to create our money and our credit to private profiteers, who have plundered and exploited the privilege in ways that are increasingly being exposed in the media. Wall Street may own Congress, but it does not yet own the states. We can take the money power back at the state level, by setting up our own publicly-owned banks. We can “spend” our money while conserving it, by leveraging it into the credit urgently needed to get the wheels of local production turning once again.

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Ellen Brown: The Mysterious CAFRs: How Stagnant Pools of Government Money Could Help Save the Economy

May 21, 2010

For over a decade, accountant Walter Burien has been trying to rouse the public over what he contends is a massive conspiracy and cover-up, involving trillions of dollars squirreled away in funds maintained at every level of government. His numbers may be disputed, but these funds definitely exist, as evidenced by the Comprehensive Annual Financial Reports (CAFRs) required of every government agency. If they don’t represent a concerted government conspiracy, what are they for? And how can they be harnessed more efficiently to help allay the financial crises of state and local governments? The Elusive CAFR Money Burien is a former commodity trading adviser who has spent many years peering into government books. He notes that the government is composed of 54,000 different state, county, and local government entities, including school districts, public authorities, and the like; and that these entities all keep their financial assets in liquid investment funds, bond financing accounts and corporate stock portfolios. The only income that must be reported in government budgets is that from taxes, fines and fees; but the investments of government entities can be found in official annual reports (CAFRs), which must be filed with the federal government by local, county and state governments. These annual reports show that virtually every U.S. city, county, and state has vast amounts of money stashed away in surplus funds. Burien maintains that these slush funds have been kept concealed from taxpayers, even as taxes are being raised and citizens are being told to expect fewer government services. Burien was originally alerted to this information by Lt. Col. Gerald Klatt, who evidently died in 2004 under mysterious circumstances , adding fuel to claims of conspiracy and cover-up. Klatt was a an Air Force auditor and federal accountant, and it’s not impossible that he may have gotten too close to some military stash being used for nefarious ends. But it is hard to envision how all the municipal governments hording their excess money in separate funds could be complicit in a massive government conspiracy. Still, if that is not what is going on, why such an inefficient use of public monies? A Simpler Explanation I got a chance to ask that question in April, when I was invited to speak at a conference of Government Finance Officers in Missouri. The friendly public servants at the conference explained that maintaining large “rainy day” funds is simply how local governments must operate. Unlike private businesses, which have bank credit lines they can draw on if they miscalculate their expenses, local governments are required by law to balance their budgets; and if they come up short, public services and government payrolls may be frozen until the voters get around to approving a new bond issue. This has actually happened, bringing local government to a standstill. In emergencies, government officials can try to borrow short-term through “certificates of participation” or tax participation loans, but the interest rates are prohibitively high; and in today’s tight credit market, finding willing lenders is difficult. To avoid those unpredictable contingencies, municipal governments will keep a cushion of from 20% to 75% more than their budgets actually require. This money is invested, but not necessarily lucratively. One finance officer, for example, said that her city had just bid out $2 million as a 30-day certificate of deposit (CD) to two large banks at a meager annual interest of 0.11%. It was a nice spread for the banks, which could leverage the money into loans at 6% or so; but it was a pretty sparse deal for the city. Meanwhile, Back in California That was in Missouri, but the figures I was particularly interested were for my own state of California, which was struggling with a budget deficit of $26.3 billion as of April 2010. Yet the State Treasurer’s website says that he manages a Pooled Money Investment Account (PMIA) tallying in at nearly $71 billion as of the same date, including a Local Agency Investment Fund (LAIF) of $24 billion. Why isn’t this money being used toward the state’s deficit? The Treasurer’s answer to this question, which he evidently gets frequently, is that legislation forbids it. His website states: Can the State borrow LAIF dollars to resolve the budget deficit? No. California Government Code 16429.3 states that monies placed with the Treasurer for deposit in the LAIF by cities, counties, special districts, nonprofit corporations, or qualified quasi-governmental agencies shall not be subject to either of the following: (a) Transfer or loan pursuant to Sections 16310, 16312, or 16313. (b) Impoundment or seizure by any state official or state agency. The non-LAIF money in the pool can’t be spent either. It can be borrowed, but it has to be paid back. When Governor Schwarzenegger tried to raid the Public Transportation Account for the state budget, the California Transit Association took him to court and won . The Third District Court of Appeals ruled in June 2009 that diversions from the Public Transportation Account to fill non-transit holes in the General Fund violated a series of statutory and constitutional amendments enacted by voters via four statewide initiatives dating back to 1990. In short, the use of these funds for the state budget has been blocked by the voters themselves. Bond issues are approved for particular purposes. When excess funds are collected, they are not handed over to the State toward next year’s budget. They just sit idly in an earmarked fund, drawing a modest interest. What’s Wrong with This Picture? California’s budget problems have caused its credit rating to be downgraded to just above that of Greece, driving the state’s interest tab skyward. In November 2009, the state sold 30-year taxable securities carrying an interest rate of 7.26% . Yet California has never defaulted on its bonds. Meanwhile, the too-big-to-fail banks, which would have defaulted on hundreds of billions of dollars of debt if they had not been bailed out by the states and their citizens, are able to borrow from each other at the extremely low federal funds rate, currently set at 0 to .25% (one quarter of one percent). The banks are also paying the states quite minimal rates for the use of their public monies, and turning around and relending this money, leveraged many times over, to the states and their citizens at much higher rates. That is assuming they lend at all, something they are increasingly reluctant to do, since speculating with the money is more lucrative, and investing it in federal securities is more secure. Private banks clearly have the upper hand in this game. Local governments have been forced to horde funds in very inefficient ways, building excessive reserves while slashing services, because they do not have the extensive credit lines available to the private banking system. States cannot easily incur new debt without voter approval, a process that is cumbersome, time-consuming and uncertain. Banks, on the other hand, need to keep only the slimmest of reserves, because they are backstopped by a central bank with the power to create all the reserves necessary for its member banks, as well as by Congress and the taxpayers themselves, who have been arm-twisted into repeated bailouts of the Wall Street behemoths. How the CAFR Money Could Be Used Without Spending It California, then, is in the anomalous position of being $26 billion in the red and plunging toward bankruptcy, while it has over $70 billion stashed away in an investment pool that it cannot touch. Those are just the funds managed by the Treasurer. According to California’s latest CAFR, the California Public Employees’ Retirement Fund (CalPERS) has total investments of $360 billion, including nearly $144 billion in “equity securities” and $37 billion in “private equity.” See the State of California Comprehensive Annual Financial Report for the Fiscal Year Ended June 30, 2009, pages 83-84. This money cannot be spent, but it can be invested — and it can be invested not just in conservative federal securities but in equity, or stocks. Rather than turning this hidden gold mine over to Wall Street banks to earn a very meager interest, California could leverage its excess funds itself, turning the money into much-needed low-interest credit for its own use. How? It could do this by owning its own bank. Only one state currently does this — North Dakota. North Dakota is also the only state projected to have a budget surplus by 2011. It has not fallen into the Wall Street debt trap afflicting other states, because it has been able to generate its own credit through its own state-owned Bank of North Dakota (BND). An investment in the State Bank of California would not be at risk unless the bank became insolvent, a highly unlikely result since the state has the power to tax. In North Dakota, the BND is a dba of the state itself: it is set up as “the State of North Dakota doing business as the Bank of North Dakota.” That means the bank cannot go bankrupt unless the state goes bankrupt. The capital requirement for bank loans is a complicated matter, but it generally works out to be about 7%. (According to Standard & Poor’s, the worldwide average risk-adjusted capital ratio stood at 6.7 per cent as of June 30, 2009; but for some major U.S. banks it was much lower: Citigroup’s was 2.1 per cent; Bank of America’s was 5.8 per cent.) At 7%, $7 of capital can back $100 in loans. Thus if $7 billion in CAFR funds were invested as capital in a California state development bank, the bank could generate $100 billion in loans. This $100 billion credit line would allow California to finance its $26 billion deficit at very minimal interest rates, with $74 billion left over for infrastructure and other sorely needed projects. Studies have shown that eliminating the interest burden can cut the cost of public projects in half. The loans could be repaid from the profits generated by the projects themselves. Public transportation, low-cost housing, alternative energy sources and the like all generate fees. Meanwhile, the jobs created by these projects would produce additional taxes and stimulate the economy. Commercial loans could also be made, generating interest income that would return to state coffers. Building a Deposit Base To start a bank requires not just capital but deposits. Banks can create all the loans they can find creditworthy borrowers for, up to the limit of their capital base; but when the loans leave the bank as checks, the bank needs to replace the deposits taken from its reserve pool in order for the checks to clear. Where would a state-owned bank get the deposits necessary for this purpose? In North Dakota, all the state’s revenues are deposited in the BND by law. Compare California, which has expected revenues for 2010-11 of $89 billion . The Treasurer’s website reports that as of June 30, 2009, the state held over $18 billion on deposit as demand accounts and demand NOW accounts (basically demand accounts carrying a very small interest). These deposits were held in seven commercial banks, most of them Wall Street banks: Bank of America, Union Bank, Bank of the West, U.S. Bank, Wells Fargo Bank, Westamerica Bank, and Citibank. Besides these deposits, the $64 billion or so left in the Treasurer’s investment pool could be invested in State Bank of California CDs. Again, most of the bank CDs in which these funds are now invested are Wall Street or foreign banks . Many private depositors would no doubt choose to bank at the State Bank of California as well, keeping California’s money in California. There is already a movement afoot to transfer funds out of Wall Street banks into local banks. While the new state-owned bank is waiting to accumulate sufficient deposits to clear its outgoing checks, it can do what other startup banks do – borrow deposits from the interbank lending market at the very modest federal funds rate (0 to .25%). To avoid hurting California’s local banks, any state monies held on deposit with local banks could remain there, since the State Bank of California should have plenty of potential deposits without these funds. In North Dakota, local banks are not only not threatened by the BND but are actually served by it, since the BND partners with them, engaging in “participation loans” that help local banks with their capital requirements. Taking Back the Money Power We have too long delegated the power to create our money and our credit to private profiteers, who have plundered and exploited the privilege in ways that are increasingly being exposed in the media. Wall Street may own Congress, but it does not yet own the states. We can take the money power back at the state level, by setting up our own publicly-owned banks. We can “spend” our money while conserving it, by leveraging it into the credit urgently needed to get the wheels of local production turning once again.

Read the full article →

Calpers Votes to Split Goldman Sachs Chairman, CEO Roles Held by Blankfein

May 6, 2010

By Christine Harper and Dakin Campbell. May 6 (Bloomberg) — The California Public Employees Retirement System, the largest U.S. public pension fund, voted to split the roles of chairman and chief executive officer currently held by Lloyd Blankfein at Goldman Sachs Group Inc. Calpers voted for a shareholder proposal that would require the company to separate the positions the next time it names a CEO, the fund announced today on its website . Goldman’s board unanimously opposed dividing the roles, arguing that the current structure provides clarity and efficiency. Calpers said it voted 1.81 million Goldman shares. Blankfein, who has led the company for almost four years, will face shareholders at the annual meeting tomorrow in New York, three weeks after the firm was sued for fraud by the U.S. Securities and Exchange Commission. The SEC claims Goldman, the most profitable firm in Wall Street history, misled clients who purchased mortgage-backed securities. Goldman contests the claims and said it will cooperate with investigators.     “Calpers believes if the chair is not the CEO, the board may be able to exercise stronger oversight of management,” the pension fund said on its website. Calpers withheld support for Goldman director Lakshmi Mittal , CEO of the world’s biggest steelmaker ArcelorMittal, for sitting on too many corporate boards. Mittal has been a director since June 2008, according to Goldman. Corporate Governance Andrea Rachman , a Goldman Sachs spokeswoman, didn’t immediately return a call for comment after regular business hours. A call to Brad Pacheco , spokesman for the pension fund, wasn’t returned. Calpers, which oversees $207.4 billion, has tried to use its size to force corporate-governance changes at companies in which it has stakes. Three of Goldman’s largest rivals — Bank of America Corp. , Citigroup Inc. and Morgan Stanley — have separated the roles of chairman and CEO in the last three years. The American Federation of State, County and Municipal Employees, the largest public employee and health care workers’ union in the U.S., also voted in favor of the proposal to require Goldman to separate the roles. AFSCME withheld its votes to re-elect four board members, including Blankfein and President Gary Cohn . Executives including Blankfein, 55, appeared at a Senate subcommittee hearing last month in Washington to face questions about Goldman’s trading practices and its role in the financial crisis. The firm is being investigated by federal prosecutors, people familiar with the matter said last week. New York-based Goldman’s stock has dropped 23 percent since the SEC lawsuit was filed on April 16, making it the worst performer among the six largest U.S. banks so far in 2010. Goldman Sachs’s first-quarter earnings were the second-highest for any quarter in the firm’s history. To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net ; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net .

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