By MARY WILLIAMS WALSH
New York Times
March 21, 2004
A small but growing part of the $2 trillion in state and local pension funds is being steered into high-risk investments by pension consultants and others who often have business dealings with the very money managers they recommend. After making such investments, a few of these pension funds have come up short, forcing the governments to draw on tax dollars.
The Securities and Exchange Commission is so concerned that it has begun an inquiry into the practices of pension consultants, who serve as gatekeepers for thousands of money managers. The regulators will find not just financial consultants but a web of intermediaries marketing agents, lobbyists, brokers and world leaders between pension funds and the investments they choose.
Some play surprising roles. Former President Bill Clinton meets with pension trustees on behalf of the Yucaipa Companies, a private firm that seeks financial returns through social investing. Ehud Barak, the former Israeli prime minister, persuaded the Pennsylvania teachers' pension fund to commit $125 million to SCP Private Equity Partners, a firm that invests in Israeli military technology. New York's former state comptroller, H. Carl McCall, encouraged the Illinois teachers' pension fund to place $20 million in Healthpoint, a private firm that invests in orthopedic devices companies.
Some pension consultants play host to gatherings that showcase such famous people to pension officials. Money managers may pay tens of thousands of dollars to participate and often supply the marquee talent. Consultants, meanwhile, are being paid by the pension funds to track and rate the money managers but may take money from the managers for other services.
Under the consultants' watch, more money is flowing into private or alternative investments, which are not publicly traded like stocks and bonds and whose performance cannot be tracked in any agreed-upon way. Private investment pools attracted virtually no state pension money a decade ago, but the typical state pension fund now has nearly 5 percent of its assets in them, and some states have far more. Though such unregulated investments offer the potential for high returns, they carry more risk than conventional stocks and bonds. A few governments have lost money. Richard Holbein, a pension consultant in Dallas, put the Arkansas teachers' pension fund in touch with Andrew S. Fastow, then chief financial officer of Enron, who was pitching investments in one of Enron's off-balance-sheet entities. Arkansas committed $30 million and may have lost it all. ...
Specialists say the structure of public pension funds leaves them particularly vulnerable. Fund boards are responsible for investing hundreds of millions of dollars, but only the biggest ones can afford professional investment staffs. Public trustees are often drawn from the ranks of firefighters, teachers and other public employees whose retirements they are protecting. They often have little financial training and are expected to serve as volunteers. Most public funds therefore rely heavily on consultants, even though the consultants may have business ties with the very money managers they are supposed to help select. ....
Bill Clinton addressed at least two public trustees' conferences last year and was well received, said Jack Silver, a former trustee of the Chicago teachers' pension fund who attended both. Mr. Silver has been an outspoken critic of the undisclosed business relationships of pension intermediaries, but he said Mr. Clinton made useful remarks about the economy not a sales pitch and that the trustees benefited from his appearance. So, he added, did Mr. Clinton's sponsor, Yucaipa. "It's marketing," Mr. Silver said. "When you have somebody like him, people remember."
Yucaipa's managing partner, Ronald W. Burkle, is a billionaire and has been a substantial donor to many politicians, including Mr. Clinton and several past and present trustees of Calpers. In 2001, Calpers voted to commit $450 million to three Yucaipa private investment funds, which are designed to generate returns and societal benefits, by financing neglected businesses in poor neighborhoods and companies that treat workers conscientiously. Calpers' most recent annual report showed that these funds have drawn about $51 million in total investments and related fees, and have so far not produced returns.
A Calpers spokesman said that private investment funds routinely draw on the partners' capital in the first few years, and pay returns only later. He also said the commitment to Yucaipa's funds is only a small part of Calpers's $164 billion portfolio. Yucaipa said its fledgling investments were poised to bear fruit, but it could not provide additional information last week.
Some pension officials say they find the out-of-office politicians useful liaisons. Jon Bauman, the executive director of the Illinois teachers' pension fund, said his board had been considering an investment in Healthpoint when Mr. McCall became vice chairman. His arrival "added to a favorable opinion," Mr. Bauman said. Ny Times.
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A Clinton profiting from shady investment practices? I'm shocked!