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Archive for the ‘Oregon-PERS’ Category

In order to understand Robert Mercer’s brilliant financial engineering,  let’s begin our analysis using three outstanding local Portland beers.  They are Rogue Brewery’s Shakespeare Stout, Widmer’s Hefeweizen and Deschutes Breweries Fresh Squeezed IPA.  All are distributed by Portland based Columbia Distributing, one of the nations largest beer distributors, which was purchased by the Jim Simons controlled investment fund Meritage in 2012.  Simons along with Robert Mercer are Co-CEO of the $100 billion Rentec hedge fund.

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This analysis will unravel the relationship between Rentec’s Medallion fund, its company retirement plan,  the Meritage private equity fund, which purchased Columbia Distributing in 2012, and numerous tax exempt foundations including those of Jim Simons, Nat Simons and Robert Mercer.

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See prior September 18. 2017 blog post  for important background regarding PERS adoption of age weighted IAP accounts.

Once again, it appears that younger workers are being short changed by PERS in the adoption of age weighted IAP accounts.  Remarkably, there was no opportunity for public discussion on vendor selection or strategy regarding how the age based portfolios would be constructed.

Rather, it was announced in September that the French insurance conglomerate AXA’s subsidiary Alliance Bernstein, what some call the AIG of France, would be awarded the contract to manage more than $8.2 billion in participants IAP accounts.   Some will argue that this isn’t really an $8.2 billion contract since it will simply involve reshuffling assets among participants internally.  My thought would be, tell that to the participants.

Paris Based AXA and Le Vie Bonne Courtesy of Oregon PERS

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One obvious question to PERS directors and Democratic State Treasurer Tobias Read is why a domestic vendor was not chosen for this important public contract.  All sitting members of the Oregon Investment Council were appointed by Democratic Governors.   And where were the labor unions?

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In 2004 the State of Oregon decided to isolate the “employee contribution” part of PERS and put these amounts into what are called IAP (Individual Account Program) accounts. These 200,000 IAP accounts are essentially a defined contribution program, not unlike a 401K, for which members earn returns based upon market results with no guaranteed rate of return.

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Index based investment using a company’s total stock market value is a great concept and indexes such as the S&P 500 generally provide solid low cost diversification.

Unfortunately, Wall Street has now applied this concept to “sectors” of the stock market without adjusting for the size of individual companies.  This is not only exposing investors to added risk due to poor diversification yet also handicapping newer smaller companies on which the future economy is dependent.

Let’s take a look at the two largest holdings in the MSCI Health Care Sector Index.  An index used by more than 97 percent of all large fund managers.

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This week TD Ameritrade held its annual institutional advisor conference at Cesar’s Palace in Las Vegas.  CEO Fred Tomczyk, pictured on left below, summarized TD’s strong financial position in addition to his belief that money market accounts should be about safety and stability. For this reason, TD has chosen to minimize both duration and credit risk in these accounts. Tomczyk is clearly the right person to be leading TD Ameritrade.

Tom Bradley, pictured on right below, leads the institutional area and was instrumental in successfully advocating against the Merrill Lynch brokerage exemption rule, a rule which allowed investment professionals to avoid registration with either the state or SEC.  It is now up to the SEC to take action regarding this rule which has led to such widespread abuse.

I asked the first question of Tom after his presentation.  The question was, will TD Ameritrade now aggressively advocate that private equity and hedge funds be required to register with the SEC.   This same question was asked of both Karl Rove and General Wesley Clark, in addition to whether or not they are personally invested in private equity or hedge funds.  I will mention their responses below.

My sense is that requiring hedge funds and private equity to be registered with the SEC is essential to restore transparency and investor confidence. Bradley  responded that he is optimistic and sees the new SEC chair as a reasonable person but stopped short of committing to lead this much needed effort.  Bradley also noted that the SEC has had difficulty regarding effective enforcement, as indicated by the $50 billion Madoff scandal that broke in December.

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In response to my question directly to Rove and Clark, Karl Rove said “I am too poor to invest in private equity and hedge funds,” but added that he thought that as long as these investors are large sophisticated investors, perhaps there is no need for registration.  He added that if he were not speaking at the conference he would be hunting with T. Boone Pickens, one of the nations largest private equity investors.

Pickens spoke the previous day and noted he had lunch with President Bush that week, a lunch Bush requested.   Pickens added that Bush asked him straight out, “Boone do you understand all this stuff Wall Street has created.”  Pickens replied, I am a geologist and have no idea what they were doing.

What neither Rove or Bush seem to realize is that the biggest investors in these hedge and private equity funds are now tax exempt public pensions, endowments and foundations.  What this means is that teachers, janitors and college students financial futures are directly tied to these investment vehicles, making registration with the SEC imperative.  Not to mention their interlocks to banks and their government insured deposits.

Clark was articulate in his response, noting that elimination of the “uptick rule” had fueled short selling by hedge funds, perhaps adding to market volatility.   He did not however answer the question regarding whether he was personally invested in such funds.  Clark also cited the Bush administration as being lax in its regulatory responsibilities.  Although perhaps true, Rove repeated several times that it was the Democrats who blocked the Bush administrations efforts to regulate Fannie Mae, a key catalyst to the current financial crisis.

My overall take on the Rove Clark debate is that Rove overlays his economic philosophy with too much politics and not enough basic math, although he was certainly right on the Fannie Mae issue.  Clark is a brilliant articulate leader, perhaps able to contribute to solving this mess, yet he is simply naive with respect to the impact of hedge and private equity funds.  One thing is for sure and that is the increasing importance of Paul Volcker to the Obama administration.  Volcker appears to be the only visible leader who truly “gets” what is needed to stabilize the system.   Pictured below is a photo of Rove and Clark responding to my question.

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William Poole, pictured below, was also keynote speaker.  His presentation was superb, yet like many distinguished economists he is handicapped by not understanding accounting and taxation.  His perspective seemed to be that free market solutions are always best and did not seem to understand the importance of adequate disclosure to generate transparency and related investor confidence.  I asked Poole after his presentation if he supported hedge and private equity funds being required to register with the SEC and he replied no because they might just move to London.  He clearly has no grasp regarding the significance of this vast shadow banking system and how it has destabilized our economic system.  Such funds are now receiving most of their funding from US based public pensions and endowments and therefore the SEC or another government regulator clearly has the leverage to generate this needed oversight.   It is not likely that these funds will abandon their funding sources.

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On January 31st I posted a brief video on youtube summarizing a program in which the Oregon Investment Council is lending its securities portfolios, using State Street as an intermediary, to hedge funds and private equity firms so that they may meet the ownership standards required to conduct short selling– betting on the declines of stocks.   The video can be seen by searching for Bill Parish Public at youtube.com or by following this link: Public Pensions Fuel Short Selling.

Below is the Agenda, note this was for January 2009, it mistakenly lists Jan 2008, highlighting the review of this program in addition to a photo of Tom Motley, the representative from State Street in charge of Security Lending.

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It is somewhat astonishing that these hedge and private equity firms are therefore profiting on the decline of the very same securities owned by the Oregon Investment Council.  Clearly, the lending of securities owned by public pensions should be banned immediately by the Obama administration.  While short selling may be an important part of the overall market, the notion that right of ownership can be lent for the purpose of such investments is simply ridiculous, no matter how long it has gone on.

A link to this video was also sent to several leading journalists and today the Wall Street Journal printed a story today regarding AIG’s security lending portfolio.   Although AIG’s program is different in detail, the same overall concept is used.  That is, AIG was lending its right of ownership to others so they could engage in transactions which regulators would otherwise prohibit.

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On Sunday December 21, 2008  Oregonian columnist Steve Duin wrote a column  titled  “A fool and his trust are soon parted.”  Clearly, Oregon State Treasurer Randall Edwards, in his management of the plan, has breached his responsibility to Oregon’s parents savings for college, saddling those making conservative bond choices with losses of almost 40 percent.   President elect Obama’s home state, Illinois, also uses Oppenheimer.

In 15 years as an investment manager, perhaps the most disappointing experience for me was when Edwards, pictured below far left, and Richard Solomon, far right, who later went from the College Savings board to chair Oregon’s $70 billion PERS fund, chose Oppenheimer to be the key vendor to Oregon’s College Savings plan over Vanguard.

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Most startling about the choice was that they had full information regarding why Vanguard was a better choice, including documentation from me outlining the unique risk involving the Tremont Group, a wholly owned Oppenheimer subsidiary, that lost $3 billion on the Madoff Scandal.   Even today, after numerous scandals, few are openly recommending that hedge and private equity funds register with the SEC, something I have aggressively pushed for since 2003.

The deciding factor in Edwards and Solomon’s choice was $350K in advertising Oppenheimer agreed to contribute in order to promote the plan.  Those would be the television ads Edwards appeared in, ads that, well, greatly simplified his re-election campaign.  Also particularly disappointing was the fact that Edwards wife had recently been Chair of the Portland Public Schools board, a role in which the importance of a quality college savings plan would seem most apparent.

Hopefully the new incoming State Treasurer Ben Westlund will replace Oppenheimer as the key vendor with Vanguard and make it possible for advisors like myself, who are residents of Oregon, to recommend the Oregon plan.   Thus far I have recommended the TD Ameritrade plan, based upon Nebraska’s plan, which is mostly Vanguard funds.  Unlike Oppenheimer, Vanguard does not pay kick backs to advisors and public officials or what are often referred to as “fees” and “administrative reimbursements,” by recipients.

In many states, parents mistakently choose their home state plan, i.e.  Oregon, in order to receive a deduction for state income tax purposes.   Simply changing this policy, as Pennsylvania did, is another easy way to fix the problem.  That way parents can choose the best plan for their children and escape the plans that were structured to benefit advisors.  The following summarizes the change in Pennsylvania:

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Pulitzer Prize winning reporter Nigel Jaquiss of Willamette Week also wrote a story this week about the Oregon 529 Plan which includes pdf files of correspondence from myself to former State Treasurer Randall Edwards regarding why Vanguard should have been chosen rather than Oppenheimer.  Jaquiss story  Titled “Bill Cassandra Parish” provides a good detailed summary of what happened in 2004.

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