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The recent economic catastrophe which has come to be called the Great Recession by some of us, is still with many of us. Before and during the Great Recession, local government bodies (known collectively as "munis") lost a lot of taxpayer money by making poorly understood investments. Right after the Great Recession began, a wise observer of investing habits by poorly trained municipal employees who were given the unenviable task of making money in a financial market without any experience in it, made this critical observation of how exotic investment schemes came to be sold to munis by what can only be called predator investors:
If it is too complicated for most of us to understand in 10 to 15 minutes, then we probably shouldn't be doing it.
Christopher Whalen of Institutional Risk Analytics, quoted in "Sunday Business" Section of New York Times National Edition on Sunday, March 23, 2008 and in 1 Dennis J. Wall, Litigation and Prevention of Insurer Bad Faith, § 3:109 "The New 'Credit Insurance?'? Credit Default Swaps" (3d ed. Thomson Reuters West in Two Volumes, with 2015 Supplements).
Times may have changed but practices have not, it seems. Another report in the "Sunday Business" Section of the New York Times seven-and-one-half years later addresses similar investing practices by pension funds holding the pension money of muni public employees:
The [hedge fund] manager is being paid upfront 2 percent with certainty, and the client is given 80 percent of the net return, after the fact, with uncertainty. I think it's unconscionable in the context of taxpayers who get to foot the bill if something goes wrong.
Howard Crane, a former trustee of the Colorado Public Employees' Retirement Association, quoted by Gretchen Morgenson, "Fair Game / A Sales Pitch Casts a Spell on Pensions," p. 1, col. 1 ("Sunday Business" Section of New York Times Nat'l ed., Sunday, November 8, 2015).
The report is not limited to one size of pension fund or one area of the country, mentioning instead a wide variety of funds which have experienced the same deeply disappointing results. The funds mentioned in the report include:
- The Kentucky Retirement System.
- The Teacher Retirement System of Texas.
- The Employees' Retirement System of Rhode Island.
These widely separated pension funds actually have many things in common, as it turns out:
- The pension funds have chosen to invest their pension money with hedge funds.
- The hedge funds have worse returns and higher expenses than the market as a whole, including the reported results of market performance studies by the Office of the Utah Legislative Auditor General and by the American Federation of Teachers.
- The AFT report reveals that hedge funds lost investment revenue of $8 Billion for the pension funds over "a total of 88 fiscal years studied" combined, while during the same time periods the hedge funds managers collected an estimated $7.1 Billion in fees from the pensions. (Talk about symmetry there; they lose $8 Billion and pocket $7.1 Billion, according to the report.)
- The administrators of these pension funds have a fiduciary duty to the muni public employees whose pension money the administrators are investing.
Parenthetically, the California Public Employees' Retirement System began winding down its investments in hedge funds because of the funds' demonstrated track records over a year ago.
Generally breaches of fiduciary obligations are excluded from insurance coverage under many policies of insurance, but insurance can be purchased specifically to cover them. Do you think that the persons responsible for administering muni employee pension funds have coverage for fiduciary breach?
Please Read The Disclaimer. ©2015 by Dennis J. Wall, author of Litigation and Prevention of Insurer Bad Faith (3d ed. Thomson Reuters West in 2 Volumes, with 2015 Supplements). All rights reserved.
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