June 12, 2024

CALPERS Pleads Stupidity On Subprime Mortgage Losses

Calpers Blames Rating Agencies For Losses

Fallout from the financial world’s past love affair with subprime mortgages continues as the California Public Employees’ Retirement System (Calpers) announced it is suing the rating agencies.

NEW YORK (Reuters) – Calpers, the biggest U.S. public pension fund, has sued the three largest credit rating agencies for giving perfect grades to securities that later suffered huge subprime mortgage losses.

The California Public Employees’ Retirement System said in a lawsuit filed last week in California Superior Court in San Francisco that it might lose more than $1 billion from structured investment vehicles, or SIVs, that received top grades from Moody’s Investors Service Inc, Standard & Poor’s and Fitch Inc.

By giving these securities their highest ratings, the agencies “made negligent misrepresentations” to the pension fund, Calpers said. Such ratings, which typically accompany investments with almost no risk of loss, “proved to be wildly inaccurate and unreasonably high.

Calpers results for the fiscal year to date as of April 30, 2009 show a loss of 26% and assets of $176 billion.  Calpers assets have declined by a massive $77 billion from $253 billion at 12/31/07.

Calpers return for the 10 year period ended 4/30/2009 was 2.4%, actually a respectable showing compared to the passively managed Vanguard S&P 500 index fund (VFINX) which has declined 2.3% over the past 10 years.

Despite huge losses for the past several years, Calpers has paid out large bonuses.

Calpers, Calstrs award big bonuses despite losses: California’s two biggest public employee pension funds handed out millions of dollars in bonuses last year to their top executives and investment managers, despite losing billions of dollars.

Ailman’s counterpart at the California Public Employees’ Retirement System, Russell Read, received a $208,677 bonus to his $555,360 base pay in August, more than a month after he had resigned from the fund’s top investment job.

Despite continued losses in the market, both funds expect to cut more bonus checks, which they call “incentive awards,” this summer.

Calper’s does not mention that their 10 year investment results could have been higher had Calpers simply invested in bank CDs.  Going forward, Joe Dear, head of Calpers,  is predicting robust future investment returns.  In a recent interview with Barrons, Mr. Dear stated that  “So as a long-term investor, we think the markets are going to produce good returns that will enable us to make our assumed rate of return of 7.75%”.

Apparently Mr. Dear is very confident that the highly paid investment managers at Calpers can achieve investment returns going forward that will be over 3 times better than the past decade.   To achieve returns of almost 8% per year will be remarkable indeed for an economy that many view as being on the verge of a depression.

Fooled by Rating Agencies?

For Calpers to blame the rating agencies for losses suffered on subprime loans seems disingenuous.  The Calpers lawsuit implies that Calpers management did not understand what they were investing in or did not complete the due diligence required of them as stewards of public pension funds.

Calpers money managers have been amply rewarded for outperforming investment benchmarks.   Considering the expertise and experience of Calpers investment managers, none of them came to the conclusion that subprime mortgages were risky?  No one thought that mortgages made to subprime zombies with 550 credit scores and “stated” income would default?   Calpers really thought that subprime mortgages were safe triple A investments just because the rating agencies said so?

Instead of pursuing dubious claims, Calpers management would be better off spending their time figuring out how  to increase investment returns from 2.4% to the lofty 7.75% that is needed to meet future pension obligations.

Disclosures: Position in VFINX

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