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Thursday, February 7, 2008

PERS goes bottom-fishing

Fresh from losing $6 billion last month (bad news from the Old Boy Network reported on a Saturday -- typical O), the Oregon public pension folks are saddling up, heading out, and buying up hundreds of millions in tanking real estate and mortgages in the subprime market. The appropriateness of this kind of money play is not beyond question. Cashing in on people's misery -- is that what we want our public money doing? Plus, are things going to turn around, or are these bad assets just going to keep getting worse?

Then there's the fact that the money's going to Lone Star Funds, a private equity firm out of Texas with, shall we say, an interesting way of doing things.

Between this and the $775 million more the Oregon pension folks have reportedly got ready to hand over to the sweethearts at Texas Pacific Group, the Network Formerly Known as Goldschmidt sure seems to be carrying on business as usual.

Comments (12)

Is that what we want our public money doing?

While the original source of pension contributions is "public money", once it enters the trust fund, doesn't it belong to the beneficiaries?

"doesn't it belong to the beneficiaries?"

Minor quibble, since it is a defined benefit plan, the public (ie taxpayers) will have ot make up the difference on shortfalls, not the employees.

Buying up subprime portolios, well, this could really tank PERS (or I guess make it a ton of money.) Using retirement money with that much risk. I wonder which of Neil/Diana's friends are selling these?

In the context of FASB 140, is there some gaming of the tax authorities by allowing a true lender to take a write off on a pool of notes that are sold to a junk debt buyer, where the JDB obtains payment above their purchase price . . . and most significantly above the original lenders factual assertion to the IRS of complete/partial worthlessness?

I would contend that the debtor-on-the-notes, outside of the pool, can demand that the original lender be forced to reverse their write-off. The game, relative to pooling, is to avoid this result by having the extra collection be applied against non-collection from fellow pool members, as a class.

I have been preparing a challenge against Capital One, by way of PRAA, to address this very point; and ORS 646.180, where price discrimination on the sale can result in a declaration that the sale is void. On Jan 23 the Capital One folks told investors they are taking an "opportunistic and flexible approach to charge-off debt sales as a recovery tool"

Get that, charge-off . . . as . . . recovery . . . tool. (From the tax man.)

I was going to make a public records request against the state treasury relative to their investments in Capital One, then

. . . the PERS news pops up. Is the business model for the private equity folks here, on these recent deals, similar to that of PRAA? (Yeah, except for the collateral that is priced at twice what it should be.) They certainly are not a "lender" or "creditor" that originates loans and subject to the oversight by the Federal Reserve or state bank regulators.

It is perhaps time to test the limits of the recent amendments to the public records law. And to perhaps test the limits of the courts ruling on limits on personal liability for individuals associated with OHSU . . . but here applied to those who manage the "independent" PERS fund.

Should the prospective State Treasurer candidates be asked if, as to the public trust, incest is best?

(PG -- it all depends on whom you ask, and when. Pension bond proceeds, at least, are in accounts with the name of the employers on them.)

Socially responsible investing is a worthy goal, but it also generally results in lower returns: you voluntarily give up some returns for the positive externalities of, say, not supporting apartheid in South Africa, or not supporting "big oil", or whatever cause you're interested in.

Should socially responsible investing be a goal of the boards that invest public dollars? Sure, as long as you recognize that in the long run you're likely to have lower returns, meaning increased taxes may be needed. It's fine to invest based on social values, but there is almost always a financial tradeoff.

"Cashing in on people's misery -- is that what we want our public money doing?"

Free Enterprise in my book. But others may really want the 'socially responsible' funds.

"Plus, are things going to turn around, or are these bad assets just going to keep getting worse?"

Great question. I see this as a double-down strategy. They lost Billions indirectly due to the expanded subprime related effects to their portfolio. So now somebody says, 'Hey, maybe we can make some money off this dead cat bounce'. Also known as trying to catch a falling knife. Never know when it has hit bottom; they could just keep getting worse.

But not to worry. The people making the money calls, are not playing with their own money, so if/when it does get much worse, the answer will be "Opps. So sorry."

Minor quibble, since it is a defined benefit plan,

Actually PERS is arguably not a defined benefit plan *right now* because the most common method for calculating benefits is money match, which is not a defined benefit because it varies depending on how much the employee put in the variable account and how well the market did.

However, money match will fade out due to the limit on earnings (interest) credited to employee accounts and as Tier One employees retire out of the system; the "full formula" and "pension plus annuity" methods of calculating benefits, which are both defined benefits, will be used more.

"the "full formula" and "pension plus annuity" methods of calculating benefits, which are both defined benefits, will be used more."

Thank you, I honestly try to be accurate, but appreciate any corrections. The main thing is that if these subprime portfolios default as things move on, they won't look too good and taxpayers will make up the difference.

Ideally, a purchase of the security (foreclosed home) at less than market value with a resulting first time home buyer program, at a reasonable, fixed rate mortgage could be a great deal. Both for PERS and the buyers who probably could not qualify for a conventional loan. Bag the portfolios and buy the security. Offering the asset to first time home buyers who actually live there will balance the misery factor.

At 8% per year, Money Match is unlikely to disappear before *most* of the Tier 1 members retire. They're already down to 40% of the membership and are declining in numbers rapidly each year. Tier 2 members also have Money Match, but without the guarantee. It is there where the Full Formula is likely to supplant Money Match. Tier 2 members aren't eligible for Formula + Annuity. It only applies to members working in a PERS covered job prior to January 1, 1981, and Tier 2 didn't come into existence until January 1, 1996.

While you are technically correct that Money Match will disappear eventually, it is going to take quite awhile before that happens. I suspect the majority of Tier 1 members will retire under Money Match plus their IAP (a defined contribution plan to which all employee contributions have gone since 1/1/2004; there is no employer match on those funds).

I think people discount the success of the Oregon Investment Council. Take a close look at their success over the past 20 years and compare their results to just about any reasonable benchmark. Their losses during 2001 and 2002 were mild compared to their benchmarks. Actually, if it were possible, I'd put my "mad money" in their hands and let them invest it for me. I'm sure it would do better than I'm doing with the money spread across equities and index funds. Not a pretty sight.

If one wants to question the motives of the OIC, fine, but if you want to look at performance over the long run, I'd much rather have the state letting the OIC run the portfolio than to have some other group of bozos running it.

I can see social merits in investing in subprime debt. It helps ease the credit freeze up a bit, as long as PERS doesn't invest a big fraction of its assets into them, and this helps stabilize the overall economy. Once the economy stabilizes, the value of the subprime debt and collateral assets should rise making it a good investment. If PERS doesn't buy the subprime debt, the borrowers aren't any better off.

That said, I myself would rather invest in blue chip stocks than high yield junk debt because historically the returns are higher in stocks. You can also buy preferred stocks with yields in the 7 to 8% range with risk ratings higher than the subprime. But PERS has actually got a pretty good overall track record of Investment - much to my chagrin.

The rub with rolling repos is as the economy tanks the illegal aliens will bail for home and with them goes the demand for housing their presence had created.

More of a draining out than a trickle down.

"If PERS doesn't buy the subprime debt, the borrowers aren't any better off."

If 18 USC 1014 were faithfully asserted, regarding blow-up doll appraisals from the professionals, wouldn't a companion remedy be to restore the borrower to the position they had been in before taking on the debt? The financial community is certainly not relying on the buyer to self-appraise the collateral they will hold, for regulatory soundness purposes.

The isolation on the credit characteristics of borrowers --subprime-- is a carefully scripted diversion from 1) the banks and bank regulators immediate recognition of much lower real value of the collateral that they hold, and 2) that the sellers who received the cash have taken their pyramid scheme gains -- largely tax free gains -- and committed them to some other use.

I am not in favor of giving a blanket pardon to folks who violated 18 USC 1014, under the guise of sympathy for poor borrowers. I know that it is pretty hard for folks to resist the temptation to embrace the American Dream, as envisioned by the lenders and sellers.

If a sale is voided wouldn't the seller have to return such public down payment gifts that they have received?

If home prices were to drift back to a natural equilibrium with private sector wages then this would have a nice additional pay off of scaling back the bonding authority of local and state government, where it is pegged to a fraction of the appraisal values.

The constellation of folks that are willing to scape goat some poor folks is so large that it seems like it should have a name like any cluster of dim lights in the sky. We could choose between pixie dust or wealth, as they are synonymous here.

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