krebscycle

When economists talk of “the market”, they mean the collective decision of investors. The Obama administration is lending to build electric cars and batteries.

a total of $8 billion in loan commitments, including a whopping $5.9 billion to help Ford retool factories in Kentucky, Michigan [..], Illinois, Missouri and Ohio to produce 13 “more fuel-efficient models.” Nissan North America is getting $1.6 billion to retool its Smyrna, Tenn., factory to build electric cars and batteries.

Secretary Chu of DOE blew away a bunch of red-tape to make these investments, but the “professional money managers” including those who manage of the retirement funds of California public employees were too busy losing money on real-estate speculation to invest making electric cars in California. According to the hacks at the Chicago school and other propaganda shops, the “free market” decides what to invest in more efficiently than stupid governments, especially those elected by dumb voters. That’s why public pension plans hire the best and brightest from the free market to help them decide what to invest in, instead of green power or manufacturing or other things that impractical government bureaucrats would pick.

The California Public Employees’ Retirement System officially has lost a $500-million stake in the biggest deal ever in the U.S. for a single piece of residential property. The owners of Stuyvesant Town and Peter Cooper Village, a complex of 56 buildings with 11,000 rental units near the East River in Manahattan, have agreed to turn the property over to creditors after defaulting on $4.4 billion in debt. CalPERS had committed 26.5% of the partnership led by Tishman Speyer Properties and Black Rock Inc., one of the fund’s real estate investment advisors. “This was one of our investments when the real estate market was peaking during 2005 and 2006,” said Clark McKinley, a CalPERS spokesman. “Performance was negatively affected by the aftershock of the market collapse.” CalPERS wrote its Stuyvesant stake down to zero [LA Times]

Stuyvesant Town was one of the last places in Manhattan where public employees, firefighters and court clerks and sanitation workers could afford to live and the public employees of California had ½ billion dollars of their pension money invested in a $5billion scheme to kick those people out of their homes and convert the complex to luxury housing- while making huge fees for advisors!

Calpers is leaning toward dumping BlackRock Inc. as a real-estate adviser after the firm steered the nation’s largest pension fund into a disastrous investment in the Peter Cooper Village and Stuyvesant Town apartment complex, according to people familiar with the situation.  Wall Street Journal

BlackRock declined to comment on the Calpers review, citing a policy against discussing client activity. Calpers paid BlackRock $12.6 million in real estate advisory fees last year, the Journal said. [WSJ]

It’s not like they only had a problem with non-rich tenants in New York

East Palo Alto: CalPERS invested $100 million in a Page Mill Properties plan to upgrade 1,700 rent-controlled units and charge market rents. Critics said 1,500 low-income tenants were displaced. After a complex legal battle, the lender foreclosed. [Calpensions]

Actually, CaLPERS paid a lot of expensive “advisors” for good advice that helped it lose 40% !

FORTUNE – Before clocking a $100 billion loss in early 2009, the California Public Employees’ Retirement System, known as Calpers, had the swagger of a hedge fund and the certainty of a saint. Other pension funds followed its lead, loading up on leverage, investing in unrated CDOs, shoving money into high-priced private equity deals and barreling into commodities and real estate. [CNN]

What’s great is that all these pension plans learned a lesson from the stock debacle.

The question now is whether a loss of nearly 40% of its market value – the worst loss in the system’s 77-year history – has brought Calpers sufficiently back down to earth to avoid another such debacle, and whether other chastened pension systems have followed suit. In truth, not all of the evidence of a rebirth at Calpers is comforting. And in the case of some other underfunded pension funds, their latest financial bets look downright scary. “Some pension plans are evidently hoping to make up losses by taking more risk,” says Olivia Mitchell, executive director of The Pension Research Council at the University of Pennsylvania’s Wharton School, whose research has shown many pension funds to be poor asset pickers. But, “pension plans that take a risky position to try to ‘earn their way out of underfunding’ are quite likely to bear big downside risk when the market tanks.”

Why look at the Teachers retirement fund for Texas

The Teacher Retirement System of Texas is buying into the mall business. The $97 billion pension fund announced Monday that it planned to invest $500 million in the nation’s second-largest mall operator, General Growth Properties Inc. [Statesman]

General Growth is, of course, a stable and reputable firm that is in bankruptcy. So they are not investing in electric cars, batteries, wind power, or any kind of manufacturing, but are investing in malls even though we know wind power investments are profitable.

The report said CalPERS made policy changes allowing more risk and debt, followed by large ill-timed investments at the height of the real estate boom, resulting in a real estate portfolio worth $13.7 billion in January, down 47.5 percent for the year. CalPERS sold $16 billion worth of income-producing and other low risk real estate, said the report, and then spent the money while buying $30 billion worth of higher risk real estate as the market peaked in 2005 and 2006. Adding to the risk, CalPERS used a form of debt backed by CalPERS itself rather than the property. And as the real estate holdings became larger and more complex, CalPERS management was hampered by an inadequate data system. Ted Eliopoulos, the CalPERS senior real estate officer, who has been working on reforms since taking the post three years ago, told the investment committee last week the report was a chance to “reflect” on experience and “provide hopefully some insight.” [Calpensions]

Here’s one insight: pensions run by and looted by the mafia do better than pensions under “professional money managers”

In the 1960’s and 1970’s, the Teamsters’ huge Central States pension fund was a wellspring of union corruption. Tens of millions of dollars were loaned to racketeers who used the money to gain control of Las Vegas casinos. Administrative jobs were awarded to favored insiders who paid themselves big fees. A former Teamster president and pension trustee was convicted of trying to bribe a United States senator. Yet for nearly half a million union members who are expecting the fund to pay for their retirement, those may have been the good old days. Since 1982, under a consent decree with the federal government, the fund has been run by prominent Wall Street firms and monitored by a federal court and the Labor Department. There have been no more shadowy investments, no more loans to crime bosses. Yet in these expert hands, the aging fund has fallen into greater financial peril than when James R. Hoffa, who built the Teamsters into a national power, used it as a slush fund. [cepr]

Adam Smith, who is the supposed saint of free market conservatives explained the problem

The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

This is why DOE, which has a management responsible to elected officials, is making sensible and prudent investments in basic industry, while the unaccountable managers of pension funds and their paid advisers are more interested in casino investments in real-estate or the bond market. Patient long term investment takes a lot of work and generates few transaction fees. If you get paid for being an active manager of other people’s money, you will, naturally, act to maximize your income.

(originally published on dailykos. Republished here 2010. Minor edits 2015)