NOW THAT’S FUNNY
New Jersey’s pension funds are kind of a laughing stock. First of all, we were the first state ever to be sued for pension fraud by the Securities and Exchange Commission. The SEC is not exactly a go-getter when it comes to ferreting out financial criminals (Madoff!), so the fact that they actually found the fraud in New Jersey means it was REALLY obvious.
The fraud began in 2001 when New Jersey increased pension benefits to teachers and state workers but didn't put the money in to fund them. Oops. Then the state issued bonds on those funds, neglecting to mention to investors that the pensions were not adequately funded. New Jersey didn’t even fight the SEC on the charge; they settled immediately.
Contributions to pension funds have been getting the short shrift in New Jersey for a long time. Our governors have been skipping payments for years, and last year Christie did the same, skipping a required $3 billion payment.
Into this climate of rock-solid fiscal judgment comes a new idea: riskier investments for the pension funds. The traditional mix of stocks and bonds is just not performing very well: the funds have only gained an average of 3% a year for the past ten years, but they need to be averaging 8.25% a year to stay in line with expectations of growth.
So, since the stock market has been so lousy, the State Investment Council has voted 8-3 to let as much as 38% of the pension funds invest in so-called alternative investments: hedge funds, private equity, real estate and commodities.
Hey, how about some mortgage-backed securities? What could go wrong there?
These alternative investments can lead to higher rates of return, but they are riskier, and, in general, less regulated than the traditional products. The now-famous derivatives market is supposedly going to be more transparent since Wall Street reforms took place, but the SEC is still responsible for keeping watch. Congress, who is not crazy about the reforms, wants to cut the SEC’s budget so that they have less manpower, and therefore be less effective than ever. If that’s possible.
One of the new investments announced will be a $100 million investment in Centerbridge Capital Partners, a private equity firm run by Mark Gallogly, a major fundraiser for President Obama. The firm is investing in companies in trouble with the expectation that they will turn around.
That sounds like a sure thing!
State officials say that Centerbridge is a top-performing private equity fund. The unions are opposing these new investments, saying undue risk is being taken with their pensions.
Based on what we’ve learned from recent events, if Centerbridge and the investment firms end up losing the state money, it will be too bad for the pension holders. But the investment bankers will still get their bonuses and the taxpayers will have to make up the difference to the pension fund. I think I’ve seen this movie before.
The stock market has been rotten, and the governments keep raiding the pension funds, so the pensions are desperate. They NEED to make money, and are very susceptible to the get rich quick ideas from Wall Street.
Ironically, the pension funds have posted a 15% gain in the last eight months as the stock market has soared. Maybe we should just stay put for a while. Then again, who can resist a hedge fund?
Apparently, no one.
Pam Lobley writes the “Now That’s Funny” column. Sign up for her mailing list at www.pamlobley.com.