Category: Finance

Back Loaded Bribery

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I’ve always said that much of the corruption in politics is not the result of an explicit quid pro quo, but an understanding that, once your political career is done, if you promulgate the agenda of the malefactors of wealth, you will be taken care of.

It’s a lot like being a “Made Man” in the mob.

Case in point, Timothy “Eddie Haskell” Geithner:

Former U.S. Treasury Secretary Timothy Geithner is preparing to borrow from JPMorgan Chase & Co. to help fund his new career in private equity.

Geithner, 54, secured a credit line with JPMorgan, one of the largest banks he oversaw during the financial crisis, to finance personal investments in funds started by his current employer, Warburg Pincus, according to a filing with the New York Department of State. He is borrowing money to invest in a $12 billion private equity fund that the firm raised in November, its first main fund since he joined almost two years ago, a person familiar with the situation said.

………

The regulatory filing doesn’t disclose the size of the loan or the financial terms, such as the interest rate. Warburg Pincus hasn’t said how much Geithner agreed to commit to the new fund, and the filing doesn’t say whether he made use of the credit line to finance it.

Mary Zimmerman, a spokeswoman for New York-based Warburg Pincus, declined to comment or make Geithner available. Officials for JPMorgan declined to comment.

This is the Timothy Geithner who claimed that he was not a banker, after being the fucking President of the Federal Reserve Bank of New York.

It now appears that he was enough of a banker to get a sweetheart loan from JP Morgan for what is probably north of $100 million.

Make no mistake.  This is a payment for his being one of them, and for running the Treasury Department for the banksters benefit.

It’s Bank Failure Friday!!! (On Saturday)

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We had 2 3 more failures this week, all of them credit unions.

  1. Montgomery County Credit Union, Dayton, OH
  2. Cory Methodist Church Credit Union​, Cleveland​, OH
  3. ​CTK Credit Union, Milwaukee, WI​

Here is the Full NCUA list.

So, we have 4 credit union failures, and no commercial bank failures so far this year, continuing on, and exptending on, the trend that began last year.

It is odd that credit unions are failing faster than commercial banks.

Elizabeth Warren Is Not Going to Make an Endorsement in the Primaries, but This Comes Close

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The distinguished Gentlewoman from Massachusetts just cut Lloyd Blankfein a new asshole over his whining about Bernie Sanders criticizing him:

Elizabeth Warren entered the intensifying battle for the Democratic presidential nomination, defending Vermont Sen. Bernie Sanders from a new attack by the head of Goldman Sachs — a Wall Street behemoth whose executives have delivered hundreds of thousands of dollars to Hillary Clinton, her presidential campaign and her family’s foundation.

In an interview with International Business Times hours before Wednesday night’s Democratic town hall in New Hampshire, the Massachusetts senator — whose endorsement is coveted by both Democratic candidates — slammed Goldman Sachs CEO Lloyd Blankfein for asserting earlier in the day that Sanders’ criticism of Wall Street had created a dangerous environment in America.

“He thinks it’s fine to prosecute small business owners, it’s fine to go hard after individuals who have no real resources, but don’t criticize companies like Goldman Sachs and their very, very important CEO — that’s what he’s really saying,” Warren told IBT.

In January, Sanders pointed to billionaire Blankfein as a prime example of the corporate greed he says is harming the United States. Sanders also released a television ad in which he slammed Goldman Sachs by name, and he has criticized Clinton, a former senator and secretary of state, for accepting $675,000 of speaking fees and $930,000 of campaign contributions from the firm and its executives during her career. Goldman Sachs has donated at least $250,000 to her family’s foundation — which in 2014 held a donor meeting at the company’s Manhattan headquarters.

Blankfein responded to Sanders’ criticism on Wednesday in an appearance on CNBC, saying the intensity of the criticism created an environment that “has the potential to be a dangerous moment — not just for Wall Street, not just for the people who are particularly targeted, but for anybody who is a little bit out of line.”

Warren, a Democrat, disputed that notion in harsh terms, telling IBT that such statements show why American voters should focus on Wall Street’s power during the 2016 election.

“When Blankfein says that criticizing those who break the rules is dangerous to the economy, then he’s just repeating another variation of ‘too big to fail,’ ‘too big to jail,’ ‘too big even to prosecute,’” she said. “That tells you here we are, seven years after the crisis and these guys still don’t get it. Seven years. That crisis cost an estimated $14 trillion, it cost jobs, it cost homes, it cost retirement funds. And Lloyd Blankfein stands up and says ‘Don’t even criticize me, I ran a company that was right at the heart of some of the biggest financial frauds in history and made money off it, but don’t you dare criticize me.’ That’s his position? That’s why we need voters to get really engaged.”

This isn’t an endorsement as such, but it is a pretty clear indication that she has his back.

Lloyd Blankfein Just Gave the Best Endorsement of Bernie Sanders Ever.

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It appears that he considers the fact that Bernie Sanders does not worship his brilliance akin to terrorism:

Just days after a Bernie Sanders campaign ad singled out Goldman Sachs as “one of the Wall Street banks that triggered the financial meltdown,” the head of the global investment banking firm said such criticism is “dangerous.”

According to The Hill:

Sanders has railed against Wall Street throughout his populist campaign, accusing the sector of ruining the economy and holding down the middle class. And he has singled out [Goldman CEO Lloyd] Blankfein and his firm as a poster child for the greed and recklessness he says is endemic in finance.

In a January interview with Bloomberg, he specifically mentioned Blankfein as representing greed on Wall Street, for taking massive pay packages “after destroying the economy.”


“To personalize it, it has potential to be a dangerous moment,” Blankfein told CNBC on Wednesday. “Not just for Wall Street…but for anybody who is a little bit out of line.”

Blankfein also reportedly argued “that Sanders and his ilk are too rigid to get anything done,” as The Hill put it.

On the campaign trail, Sanders has criticized not only big banks, but rival Hillary Clinton’s cozy ties to them.

Bloomberg notes that Blankfein—who supported Clinton for president in 2008—also “declined to endorse a candidate for the 2016 U.S. presidential election, saying his imprimatur could harm that person’s chances.”

Oh, you poor delicate flower.

Bernie says mean things about you, and it’s the end of the world.

Get over yourself, you pampered, overpaid, psychopath.

Quote of the Day

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I owe almost my entire Wall Street career to the Clintons.

—Chris Arnade

Mr. Arnade continues, “I am not alone; most bankers owe their careers, and their wealth, to them. Over the last 25 years they – with the Clintons it is never just Bill or Hillary – implemented policies that placed Wall Street at the center of the Democratic economic agenda, turning it from a party against Wall Street to a party of Wall Street.”

He goes on to explain that the history of the Clintons is that they are creatures of big finance, and he uses the 1995 bailout of Mexico, which was really a bailout of big finance.

If you like Rubinomics, and believe that an excessively financialized economy is the future of America, by all means, vote for her in the primary.

Me, I’m hoping that my vote matters when Maryland votes on 26 April.

The Overton Window has Shifted

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The editorial board of the New York Times has come out in favor of a financial transaction tax.

It does not get any more establishment than that:

A financial transaction tax — a per-trade charge on the buying and selling of stocks, bonds and derivatives — is an idea whose time has finally come. It has begun percolating in the Democratic presidential campaign, with all three candidates offering proposals.

 Hillary Clinton and Martin O’Malley have proposed a worthy but narrow tax on certain high-frequency trades, which generate windfall profits on small and fleeting differences in prices at the expense of ordinary investors and market stability. Bernie Sanders supports a hefty tax on a broader range of transactions to raise revenue from Wall Street, also a worthy goal, but his proposal would be likely to squeeze investors too hard. Republicans have not engaged the debate, except to say no to taxes no matter what.

 A well-designed financial transaction tax — one that applies a tiny tax rate to an array of transactions and is split between buyers and sellers — would be a progressive way to raise substantial revenue without damaging the markets. A new study by researchers at the nonpartisan Tax Policy Center has found that a 0.1 percent tax rate could bring in $66 billion a year, with 40 percent coming from the top 1 percent of income earners and 75 percent from the top 20 percent. As the rate rises, however, traders would most likely curtail their activity. The tax could bring in $76 billion a year if it was set at 0.3 percent, but above that rate, trading would probably decrease and the total revenue raised would start to fall.

 The burden of this tax would be concentrated at the top, because that’s where the ownership of financial assets is concentrated. However, individuals who buy and hold investments, including those who invest in index funds that trade infrequently, would be largely unaffected. Pension funds that devote a portion of their portfolios to speculative trading, often through hedge funds, would be hit, but some pension funds have already stopped using hedge funds because the returns do not justify the costs. A financial transaction tax that encouraged other pension funds to follow suit could actually benefit pension participants in the long run.

 Such a tax would also bring the United States more in line with other countries. There are already financial transaction taxes in Britain, Switzerland and South Korea as well as in Hong Kong and other developed markets and emerging nations, generally at rates of 0.1 percent to 0.5 percent on stock transfers. In addition, 10 countries in the European Union, including Germany and France, have agreed to apply a common financial transaction tax starting in 2017, though relentless lobbying by investment banks and hedge funds threatens to delay and even derail the effort.

There are a number of arguments against this.

The strongest one is that it will collect less revenue than expected, because it would disincentivize speculation.

As if that were a bad thing.

Headline of the Day

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Michael Bloomberg decides to hold a gun to the head of American democracy

It’a an interesting, and probably accurate assessment, that Bloomberg is making an implicit threat to the Democratic Party: That if Sanders wins the nomination, then he will queer the general in favor of Donald Trump or Ted Cruz:

According to this morning’s New York Times, former New York Mayor Michael Bloomberg has decided that there are not enough billionaires trying to sway the outcome of the next presidential election: “If Republicans were to nominate Mr. Trump or Senator Ted Cruz of Texas, a hard-line conservative, and Democrats were to pick Mr. Sanders, Mr. Bloomberg—who changed his party affiliation to independent in 2007—has told allies he would be likely to run.”

………

Bloomberg’s intent is clear: He’s considering running not because he has a viable program he wants to promote, but because he wants to exercise a veto over the already existing parties—especially a veto over whom the Democrats pick. His gambit makes Sanders’s path to the White House much more difficult but also explains why Sanders’s campaign is necessary.

Yet another Wall Street narcissist throwing a tantrum.

Vote Sanders, and tell Michael Bloomberg to go Cheney himself.

Well, Isn’t That Special

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In response to a request for transcripts of her extremely well remunerated speeches to Goldman Sach is a dismissive laugh:

After Hillary Clinton spoke at a town hall in Manchester, New Hampshire, on Friday, I asked her if she would release the transcripts of her paid speeches to Goldman Sachs. She laughed and turned away.

Clinton has recently been on the defensive about the speaking fees she and her husband have collected. Those fees total over $125 million since 2001.

Her rival Democratic presidential candidate, Bernie Sanders, has raised concerns in particular over the $675,000 she made from Goldman Sachs, an investment bank that has regularly used its influence with government officials to win favorable policies

………

During one of her paid speeches to Goldman Sachs, Clinton reportedly reassured the crowd and told them that banker-bashing was unproductive and foolish, according to a Politico report based on accounts offered by several attendees.

………

When asked by the Des Moines Register on Thursday if she regretted her decision to make money from speaking to various interest groups, Clinton compared herself to President Barack Obama, noting that significant campaign donations from Wall Street did not stop him from passing the Dodd-Frank reform law.

But the Obama administration did in fact go easy on Wall Street by refusing to criminally prosecute the major financial institutions responsible for the 2008 economic crisis. And Dodd-Frank, many critics say, does not go far enough in preventing systemic risk.

Clinton does not want a transcript of that speech released.

It is almost certainly something that she does not want to see the light of day, because it almost certainly a declaration of common cause with the banksters.

I rather do hope that someone recorded a cell phone video of her speech.

La Cebolla

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Univision has taken a controlling interest in the satirical publication The Onion:

The Spanish-language media giant Univision Communications announced Tuesday that it had acquired a large stake in The Onion, the comedy and satirical digital media group, as part of the company’s efforts to extend its digital reach and strengthen its portfolio of comedy outlets.

Terms of the deal were not disclosed, but the transaction was said to be for a 40 percent stake, valued at less than $200 million, according to one person briefed on the deal.

“Comedy is playing an expanding role in our culture as a vehicle for audiences to explore, debate and understand the important ideas of our time,” said Isaac Lee, chief news and digital officer of Univision. “It has also proven to be an incredibly engaging format for millennial audiences and is expected to play a key part in the 2016 presidential election process via our robust content offerings in Spanish and English.”

Univision’s digital portfolio is undergoing a flurry of changes, part of an effort to build its footprint and reach as diverse a group of millennials as possible. News emerged last month that Univision was in talks with the Walt Disney Company to take full control of their joint venture Fusion, the English-language digital news service and cable channel. In November, Univision named Mr. Lee to a new position with responsibility for overseeing digital functions, leading multicultural efforts and creating a music strategy. He also is chief executive of Fusion.

According to NPR 40% is a controlling interest.

I have no f%$#ing clue how Univision plans to make a coherent business plan out of this.

My guess is that they don’t have a plan, and notwithstanding promises to have a light touch, management will eventually feel compelled to bring it under the corporate wing, when they don’t experience the requisite “Synergies”, and then they will ruin it.

Some History Perspective on Bank Failures

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FDIC Data


Data from 1921

The good folks at Calculated Risk have put together some very interesting on bank failure going back almost 100 years.

It should be noted that the current bank failures are dwarfed by the failures during the S&L crisis, (Also known as the bailout of the Texas banking industry) but that we routinely saw more failures than that before the creation of the FDIC.

The next time that someone complains about how excessive regulation constrains the dynamism of the US economy, show them these graphs.  (click for slide show)

Bought and Paid for by the Vampire Squid

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It appears that during his first campaign for the Texas Senate, Ted Cruz got a million dollar loan from Goldman Sachs, and then in contravention of campaign finance laws, did not report it to the Federal Election Commission:


As Ted Cruz tells it, the story of how he financed his upstart campaign for the United States Senate four years ago is an endearing example of loyalty and shared sacrifice between a married couple.

“Sweetheart, I’d like us to liquidate our entire net worth, liquid net worth, and put it into the campaign,” he says he told his wife, Heidi, who readily agreed.

But the couple’s decision to pump more than $1 million into Mr. Cruz’s successful Tea Party-darling Senate bid in Texas was made easier by a large loan from Goldman Sachs, where Mrs. Cruz works. That loan was not disclosed in campaign finance reports.

Those reports show that in the critical weeks before the May 2012 Republican primary, Mr. Cruz — currently a leading contender for his party’s presidential nomination — put “personal funds” totaling $960,000 into his Senate campaign. Two months later, shortly before a scheduled runoff election, he added more, bringing the total to $1.2 million — “which is all we had saved,” as Mr. Cruz described it in an interview with The New York Times several years ago.

A review of personal financial disclosures that Mr. Cruz filed later with the Senate does not find a liquidation of assets that would have accounted for all the money he spent on his campaign. What it does show, however, is that in the first half of 2012, Ted and Heidi Cruz obtained the low-interest loan from Goldman Sachs, as well as another one from Citibank. The loans totaled as much as $750,000 and eventually increased to a maximum of $1 million before being paid down later that year. There is no explanation of their purpose.

Neither loan appears in reports the Ted Cruz for Senate Committee filed with the Federal Election Commission, in which candidates are required to disclose the source of money they borrow to finance their campaigns. Other campaigns have been investigated and fined for failing to make such disclosures, which are intended to inform voters and prevent candidates from receiving special treatment from lenders. There is no evidence that the Cruzes got a break on their loans.

He should take a hit for this, particularly because much of his personal story is about how he risked it all to run for the US Senate, but it won’t make a difference in the primaries, because the Republican Party base has drunk too much Flint municipal tap water.

No, the FBI Won’t Investigate Questionable Pension Fund Deals

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It appears that pensioners have finally begun to realize private equity and its ilk are robbing their funds blind while underperforming the market, but I predict that their calls for an investigation of private equity and hedge fund  practices will go largely unanswered:

Diane Bucci and her fellow retired Rhode Island schoolteachers were angry about a deal last year to cut their promised retirement benefits. For 28 years, the elementary school teacher devoted between 7 and 9 percent of her paycheck to the state’s pension system. In return, the 72-year-old had been promised a consistent cost-of-living increase to make sure her retirement stipend kept pace with inflation. Now, though, state officials were trimming her check in the name of replenishing the depleted pension fund.

There was, however, a sliver of hope — or so it seemed: If the pension system could generate better investment returns and amass 80 percent of the money needed to pay current and future retirees, the annual cost-of-living increases would return.

“There was a lot of unrest and anger among teachers, but at that point we buckled down and focused on how we could get to solvency,” said Bucci, who is on the board of the 700-member Rhode Island Retired Teachers Association. “So even though we aren’t Wall Street experts, we just started to ask questions about how the pension fund was managed, and what it was invested in. That’s when we realized the fees we’ve been paying to the investment companies were the problem.”

Those levies — which hit $79 million last year — were the product of the state’s recent investment strategy. Following a controversial national trend, Rhode Island pension officials led by then-General Treasurer Gina Raimondo shifted roughly a quarter of the state’s pension portfolio into high-fee hedge funds, private equity firms and other so-called “alternative investments.”

The shift by Raimondo, a Democrat who is now governor, has generated big revenues for Wall Street firms, but only middling returns for a $7.6 billion pension fund on which more than 58,000 current and future retirees rely.

When Bucci and the members of her organization began asking questions about those results, they learned of a federal review showing that roughly half of all private equity firms are charging hidden fees, and they saw a hedge fund industry whose returns have failed to keep pace with the stock market. When they dug deeper, they stumbled onto an even more disturbing revelation. What they found, they say, is evidence that some investors can obtain special rights that may let them secretly siphon money from the state pensioners’ retirement savings.

The retirees are now petitioning federal law enforcement officials to investigate whether the widely used provisions are violating laws designed to make sure all investors are treated fairly. In a letter sent last month to the Securities and Exchange Commission and the FBI, the retirees’ adviser — former SEC investigator Edward Siedle — pointed out that some of the firms managing Rhode Island pension money claim the right to offer different fee rates, inside information and cash-out rights to some investors but not to others.

Raimondo f%$#ed her pension fund, and she did so knowingly, both because they are “people like her” (Ivy league graduates) who are supposed to be “exceptional”, and because she knows that this behavior gets her a 7 figure payday at the end of the rainbow.

It’s corrupt tribalism, and it’s harming our country.

Bank Failure Friday, 2015 Wrap

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The year in review was good, only 8 bank failures and 13 credit union failures, the final one being First Hawaiian Homes Federal Credit Union​, of Hoolehua​, HI.

That’s the fewest since I started keeping track in 2010.

It was also a weird, because it’s the first time that credit unions out failed banks, and they did so by over 50%.

It’s a small sample size, but it’s still weird.

The count for both remains at 0 so far for 2016.

Bad Day at the Big Casino

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In China, they had to halt trading on the exchanges following a massive selloff, with oil hitting a 7 year low and the Dow dropping by almost 1½%:

China accelerated the devaluation of the yuan on Thursday, sending currencies across the region reeling and domestic stock markets tumbling, as investors feared the Asian giant was kicking off a virtual trade war against its competitors.

 Trading on China’s stock markets were suspended for the rest of the day, for the second time this week, as a new circuit-breaking mechanism was tripped less than half an hour after the open.

 The People’s Bank of China again surprised markets by setting the official midpoint rate on the currency at 6.5646 yuan per dollar, the lowest since March 2011.

 That was 0.5 percent weaker than the day before and the biggest daily drop since last August, when an abrupt near 2 percent devaluation of the currency also roiled markets.

And:

Wall Street experienced another mini panic attack on Wednesday after North Korea claimed to successfully test a hydrogen bomb. The markets were already being spooked by the financial and economic turbulence out of China and the latest plunge in oil prices below $34 a barrel.

The Dow dropped 252 points, closing below 17,000 for the first time since mid-October. The S&P 500 fell 1.3% and the Nasdaq lost 1.1%.

It marks the Dow’s worst start to a trading year through three days since 2008. The index also fell 276 points on Monday due to worries about China.

If the economy and the markets continue in this direction, get used to saying President Trump.

How Did This Company Get Any Backers?

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Looks Like VC Pump and Dump Bullsh%$to Me

In the continuing revelations regarding the Silicon Valley-eaque medical startup, I have come to the conclusion that it’s investors, and its market cap, are more a product of its founder is an earnest attractive blond who dropped out of Stanford.

First it was repeated reports that their technology failed to work even in highly scripted dog and pony shows for potential investors, now we discover that the company was doing of this while using regulatory loopholes to avoid FDA oversight:

This suggests one of two possibilities: either Theranos’ customers received test results generated by equipment that no federal official checked for accuracy, or Theranos wasn’t using the proprietary technology behind its $9 billion valuation to return results to patients. A recent report from The Wall Street Journal pointed toward an extreme version of option number one: that Theranos actively hid its proprietary technology from lab inspectors, which would explain why the inventions were never checked. And Theranos has publicly proclaimed it used its technology on patients, which means either that the company’s lying or patients received tests that had not been validated by any federal authorities.

“CMS did not inspect the Theranos proprietary technology.”Theranos first came under scrutiny after a report in the Journal in October, which said that Theranos’ inventions were only used on a small number of tests sold to patients. On Sunday, the paper reported that during an inspection by Centers for Medicare and Medicaid Services auditors, employees who worked in the “Normandy” section of the Theranos lab were told not to enter or exit the lab; the inspectors toured the section of the lab that housed traditional lab instruments Theranos bought from other companies but never saw the Edison machines — Theranos’ highly publicized blood analyzers. This account fits with lab inspection documents that The Verge obtained from CMS, which do not mention Theranos’ proprietary technology at all. There’s a reason for that: “CMS did not inspect the Theranos proprietary technology,” a spokesperson for CMS told The Verge in an email. Consequently, at no point between Theranos opening its first wellness center in 2013 and a surprise inspection by the FDA in August did any federal official examine the company’s proprietary technology — either its Edison machine, which reads samples, or its “Nanotainer” device, which stores blood from pinprick testing.

The lack of inspection was possible in part because Theranos registered its technology in categories that have minimal oversight. Theranos sold its tests under a designation that even the US Food and Drug Administration calls a regulatory loophole: the “lab-developed test.” Under this designation, no pre-market FDA approval is required for the company’s blood tests — as it typically is for most drugs and devices. The category was meant for research hospitals, which sometimes adapt commercial tests to suit patients’ needs, and Theranos is one of several companies using the loophole to sell its tests to the public. Instead of the FDA, regulation of Theranos’ labs fell to the Centers for Medicare and Medicaid Services.

Theranos also registered its blood containers as FDA Class I medical devices in 2013, according to the FDA. That category of medical device doesn’t require an FDA inspection. No FDA inspectors entered a Theranos facility until August of this year, during a round of surprise inspections. In the FDA’s inspection report, it referred to Theranos’ Nanotainer as an “uncleared medical device” and altered its registration to a Class II medical device, which requires greater oversight.

CMS declined to provide us with additional information about Theranos. The FDA provided some information about Theranos’ regulatory status — including the fact that Theranos registered its containers as Class I in 2013 — but declined to reveal anything further about the company.

I’m beginning to think that the whole startup culture is a code word for some sort of charity for overpriviliged white boys.

Bernie Sanders Nails It

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Writing in the New York Times, Bernie Sanders talks about the elephant in the room, that the Federal Reserve has been completely captured by the financial industry:

Wall Street is still out of control. Seven years ago, the Federal Reserve and the Treasury Department bailed out the largest financial institutions in this country because they were considered too big to fail. But almost every one is bigger today than it was before the bailout. If any were to fail again, taxpayers could be on the hook for another bailout, perhaps a larger one this time.

To rein in Wall Street, we should begin by reforming the Federal Reserve, which oversees financial institutions and which uses monetary policy to maintain price stability and full employment. Unfortunately, an institution that was created to serve all Americans has been hijacked by the very bankers it regulates.

The recent decision by the Fed to raise interest rates is the latest example of the rigged economic system. Big bankers and their supporters in Congress have been telling us for years that runaway inflation is just around the corner. They have been dead wrong each time. Raising interest rates now is a disaster for small business owners who need loans to hire more workers and Americans who need more jobs and higher wages. As a rule, the Fed should not raise interest rates until unemployment is lower than 4 percent. Raising rates must be done only as a last resort — not to fight phantom inflation.

What went wrong at the Fed? The chief executives of some of the largest banks in America are allowed to serve on its boards. During the Wall Street crisis of 2007, Jamie Dimon, the chief executive and chairman of JPMorgan Chase, served on the New York Fed’s board of directors while his bank received more than $390 billion in financial assistance from the Fed. Next year, four of the 12 presidents at the regional Federal Reserve Banks will be former executives from one firm: Goldman Sachs.

Just read it.

CalPERS Blinks

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After an increasing chorus of criticism the largest pension fund in the nation, CalPERS, has abandoned its plans to relax standards in order to favor private equity:

The state’s biggest public pension fund has repeatedly missed a key performance goal for its controversial private equity investments.

But a CalPERS committee said Monday that the fund’s staff could not strip language from a written policy that required them to aim to meet that benchmark – returns roughly 3% higher than the stock market to compensate for private equity’s risk.

By voice vote, the committee defeated the proposal to change the policy so that the new objective would have been simply “to enhance” the pension fund’s private equity returns.

………

The suggested policy change had been criticized by financial experts who said it would clear the way for CalPERS to continue to invest in the complex Wall Street sector – the buying and selling of companies — without requiring higher returns to compensate for the added risk.

“This is outrageous,” Eileen Appelbaum, a senior economist at the Center for Economic and Policy Research, a Washington think tank, said before the meeting. “CalPERS can’t get over the goal, now plans to do away with goal post.”

………

The proposed policy change came after many years where CalPERS failed to meet the so-called “risk-adjusted” benchmark.

For the year ended June 30, for instance, private equity earned a seemingly healthy 8.9%, but that was lower than the 11.1% goal.

A recent report by a CalPERS’ consultant acknowledged that the private equity investments had also failed to beat benchmarks over the last three, five and 10 years.

Appelbaum said that CalPERS would have made the same amount over the last 10 years if it would have just invested in the stock market – but without the added risks or high fees.

(emphasis mine)

I would note that the abuse of private equity by CalPers, and the increasing furor over its backflips to favor private equity is a direct result of the investigations, and aggressive use of freedom of information act requests, by Yves Smith and the Naked Capitalism team, who have been on this like white on rice.

One think that I have not figured out yet is why CalPERS has been so insistent in pursuing a failed strategy.

The cynic in me assumes that there is some sort of corruption involved.

The realist sees this being driven by blind panic as a historically underfunded institution flails around searching for a magic bullet.

I’m not sure which analysis frightens me more.

MERS is In the News Again.

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I am referring to the Mortgage Electronic Registration Systems, not Middle East Respiratory Syndrome.

To refresh your memory, it is an electronic registry created by the big banks.

They created it to evade registry fees when they sliced and diced mortgages, and sold them to greater fools.

Additionally, it creates a shell game where all sorts of skulduggery is hidden in a labyrinth of obfuscation.

The banks, and MERS, have claimed that it does, and does not, own the mortgage, and now the Tennessee Supreme Court has ruled that they have no property interests in the mortgages that they transfer:

Chattanooga, Tennessee — The Chattanoogan.com news site is reporting that in a lawsuit filed to set aside a tax sale of mortgaged land in Hamilton County, the Tennessee Supreme Court has held that Mortgage Electronic Registration Systems, Inc. was not entitled to prior notice of the sale because MERS did not have an interest in the land that is protected under the Due Process Clause of the U.S. Constitution!

READ THE OPINION HERE: MERS v DITTO_TN Supreme Court rules against MERS! The Tennessee Supreme Court is the first to rule in such a manner!

The site is reporting that the purchaser of the Hamilton County land borrowed money from a MERS member lender, signing a promissory note secured by the property by a deed of trust, which was recorded in the Hamilton County Register of Deeds office. The deed of trust described MERS as “a separate corporation that is acting solely as nominee for [the lender]” and said that MERS was the beneficiary of the deed of trust “solely as nominee” for the lender and any successor to the lender. As is customary in the MERS® System, the originating lender sold the note to another lender. Subsequent to that, the property owners failed to pay their 2006 property taxes, so Hamilton County initiated tax foreclosure proceedings.

The county sent notice of the foreclosure and the tax sale to the borrowers and to the original lender, but not to MERS. Eventually, the property was sold at a tax sale to Carlton Ditto. Just like in the Cabrera, Robinson and Johnston cases in California, after learning of the action, MERS filed a lawsuit to set aside the tax sale, naming Hamilton County and Mr. Ditto as defendants. MERS argued that Hamilton County violated its constitutional right to due process of law by selling the land without notifying MERS. This crap is the same argument propounded in the California cases, where MERS claimed that the deed of trust gave MERS its own independent interest in the Hamilton County property, so it was constitutionally entitled to prior notice of the tax sale. In California, MERS also wanted the courts to rule that the California Quiet Title Statutes were unconstitutional and that the judges who rendered the quiet title judgments in all three cases were civil co-conspirators, something this blogger has learned has infuriated the state judges! (I sure hope MERS doesn’t show up in front of one of them any time soon! LOL)

………

The Supreme Court considered whether Hamilton County was required to give MERS prior notice of the tax sale. The Court recognized that the Due Process Clause of the U.S. Constitution generally applies when the government sells a taxpayer’s land to satisfy unpaid taxes, so if the government fails to give the taxpayer such notice, the sale is unconstitutional and void. The Court then considered whether MERS had an interest in the land that was protected under the Constitution. The Court first noted that the deed of trust for the Hamilton County transaction used contradictory language to describe the role of MERS in the property loan transaction; it described MERS as a “beneficiary” but also said that MERS acted “solely as nominee” for the lender. Considering the parties’ roles in the loan transaction, the Court also held that MERS was not in fact a beneficiary but only an agent for the true beneficiary, the note holder, and that MERS acquired no independent interest in the Hamilton County land. Because MERS did not have an interest that was constitutionally protected, Hamilton County was not required to give MERS notice before it sold the land to pay the unpaid tax obligation. For this reason, the Supreme Court affirmed the trial court’s judgment in favor of Hamilton County and the tax sale purchaser, Mr. Ditto.

………

From gandering at the opinion issued by the Court, it appears they quoted MERS’s own counsel on company policies! Many attorneys have told me, as have certain legislators in DC, that just because MERS has a “business model” doesn’t mean: (1) it’s perfectly okay to rip off 3,007 counties across America in denying fees while obfuscating the real parties in interest from the borrowers; and (2) it should be accorded the same interests as the Lender, especially when the Lender doesn’t have a recorded (perfected) interest that still could be challenged.

(emphasis original)

Mortgage and property law has developed over hundreds of years through trial and error.

This process was pushed along by the very real need for property owners, lenders, and local governments to have certainty and protections on a process that would otherwise be rife with criminality and risk.

MERS was developed to short circuit that process, and it’s nice that some courts are recognizing that just because someone in Wall Street comes up with a way to make money, it doesn’t mean that it is legal.

FYI, you can also read a somewhat more sedate account of these cases, you can go here.

Quote of the Day

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Here’s what U.S. state and city pension funds are getting this year for the hundreds of millions of dollars in fees they’re forking over to hedge funds: almost nothing.

—Bloomberg Business

Private equity and hedge funds have earned lots of money capitalizing on the panic of underfunded public pensions seeking higher returns to deal with chronic under-funding.

There have been no higher returns, but Wall Street has gotten its vig, some of which, of course, gets recycled back to the campaign funds of politicians who might otherwise provide oversight of the pension funds.

As Yves Smith is wont to say, It’s a, “Self licking ice cream cone.”