“How Wall Street Drove Public Pensions into Crisis and Pocketed Billions in Fees” by Gary Rivlin

“…A ‘Wall Street coup’ — that’s how pension expert Edward ‘Ted’ Siedle describes it. Public pensions across the country now squander tens of billions of dollars each year on risky, often poor-performing alternative investments — money public pensions can ill afford to waste. For all the talk of insolvency, $4 trillion now sits in the coffers of the country’s public pensions. It’s a giant pile of money of intense interest to Wall Street — one generally overseen by boards stocked with laypeople, often political appointees. ‘Time and again,’ Siedle has written, ‘hucksters successfully pull the wool over these boards’ eyes.’

“…The health of public pensions in the United States more or less peaked around 2000. On average, state and local pensions were 103 percent funded that year, according to Boston College’s Center for Retirement Research, with more money on hand than they even needed. At that point, only 3 percent of public pension dollars were invested in alternatives. But then the dotcom crash caused a steep fall in the stock market, with the Nasdaq index dropping by 77 percent and the S&P 500 by 43 percent. Pensions that had been more than fully funded in 2000 now had only 90 percent of the money they needed on hand. What happened next is what Teresa Ghilarducci describes as ‘chasing returns’ — dialing up the risk to fill the gap. ‘I’ve seen it a lot: funds shooting for the moon because they’re trying to catch up’ said Ghilarducci, co-author of a 2016 book, ‘Rescuing Retirement.’

“As the hedge funds and private equity firms moved in, so did another actor: the placement agent. Pensions were such a potentially lucrative source of profits for any hedge fund or private equity firm — able to invest tens of millions, if not hundreds of millions of dollars, at a time — that money managers began to hire intermediaries to help convince pension funds to invest with them. At their most benign, placement agents are well-compensated salespeople, helping public pensions gain access to better investments. Time and again, though, ‘placement agents’ have been shown to function more as political fixers who use their connections, campaign contributions, and even outright bribes to influence the staff, trustees, advisers, or elected officials who have the capacity to help steer pension dollars into the coffers of one of their clients.

“In fact, the federal wiretap that caught Blagojevich trying to sell Barack Obama’s soon-to-be-vacated Senate seat for $1.5 million had been put in place during an investigation of the influence of placement agents inside the Illinois teachers’ pension fund (as well as possible kickbacks related to state health facilities). Among those that Operation Board Games — as the U.S. Attorney’s Office and FBI dubbed their investigation — targeted was Tony Rezko, who was found guilty in 2008 of scheming with Teachers’ Retirement System trustee Stuart Levine to get kickbacks from a money management firm seeking some of the pension fund’s money. (Levine also went to jail.) Blagojevich aide Christopher Kelly killed himself after being indicted as part of a conspiracy to block a $220 million investment with Capri Capital already approved by the TRS board unless Capri donated to Blagojevich’s re-election campaign. A third man, William Cellini Sr., delivered the threat by giving Capri a choice: raise $1.5 million for Blagojevich or kiss the $220 million deal goodbye. Cellini was found guilty in 2011. The probe also uncovered evidence that the Carlyle Group had paid $4.5 million to a lobbyist to gain a share of the union’s retirement money as well. Carlyle was never charged with a crime.

“…The exposure of so many pensions to hedge funds is a tribute to the influence of marketing departments and placement agents — and the intense pressure that trustees and staff feel to rev up returns with the high-octane investments they crave…” (A Giant Pile of Money: How Wall Street Drove Public Pensions Into Crisis and Pocketed Billions in Fees by Gary Rivlin).

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