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California Dumps the Hedge Funds

I have to confess that my promised weekly “good news” posts have been infrequent of late. This is partly due to a slowdown in posting, but mostly due to a dearth of good news, what with the U.S. about to get itself embroiled in another unwinnable war and all. But, here is some good news: CALPERS, the agency that administers the State of California's pension system, is going to exit all hedge funds.

The decision, after months of deliberation by the pension fund’s investment committee, comes as public pensions across the United States are beginning to assess their exposure to hedge funds. It is likely to reverberate across the investment community in the United States, where large investment funds look to Calpers as a model because of its size and the sophistication of its investments.

..
A growing number of pension funds and institutional investors have expressed concern that the fees that hedge funds charge are too high. While there is a range, hedge funds typically follow a “2 and 20” model where investors pay management fees of 2 percent of the total assets under management and 20 percent of the profit.

via The New York Times

It must be good to be a hedge fund manager. When you fuck up, which they mostly do, based on historical performance, you make extremely good money. When you perform well (totally optional, of course) you make even better money. Meanwhile, unless you do extremely well, your client's get porked, but what of that?

Unfortunately, this good news comes too late and from too far away for the pensioners of Rhode Island, who face the prospect of a Democratic governor (Gina Raimondo) who, as state treasurer cut their benefits while she handed their pension money over to hedge funds while refusing to release details about those investmentsmlz to the people of Rhode Island. As Dean Baker has repeatedly pointed out, it is passing strange that people like Raimondo believe it is perfectly okay to break contracts with retired workers but would never think of breaking contracts with, say, the hedge fund managers they are enriching.

Sorry, I'm veering away from the good news aspect. The good news is that the CALPERS decision may, indeed, mark the beginning of a shift away from hedge funds by institutional investors, which would be a good thing for the people those institutions are supposed to serve, such as retirees, and a profound hit on the hedge funds, which rely on the vast sums and onerous terms they extract from such investors. There is nothing the hedge funds offer that a large fund with billions of assets like CALPERS has can't do for itself. There is nothing to prevent CALPERS from devising it's own investment strategies that hedge against losses. You actually don't need to pay someone a billion dollars a year to get reasonably good investment advice.

Fixed Delusions

Without going into details, I have lately, in my role as an attorney, had a frustrating time trying to get a mental health agency to help a client deal with a tenant who is mentally ill, paranoid and delusional. We think she is at risk of harming herself, but they say that while she has a “fixed delusion”, she is otherwise high functioning and until she actually does harm herself, there's nothing they can do.

It has been frustrating, because we truly believe she is at risk, but as I said to my client, they may have a point. If we were going to seek some sort of protection for everyone with a fixed delusion, we'd need a caseworker for almost every Republican in the country.

Think about it. Birthers, tenthers, sovereign citizens, religious zealots and now, there's this:

From a post at Kos, an extended quote:

Tonight, at a local candidate forum, the Republican candidate for Pueblo County Commissioner essentially endorsed the Sandy Hook truther position.

The guy's name is Dr. Tom Ready, a dentist, and his Democratic opponent is the incumbent Sal Pace, who's served in various elected positions including the Colorado state legislature.

Ready began an answer to one of the moderator's questions by talking about the ludicrously high electric rates in Pueblo county (they are) and then stated his belief that we should go back to coal because “coal is clean” (eye roll). During his two minute statement, Ready declared that the reason rates were so high was that a bill Pace voted for at the state level forced the local utility to dump coal plants for natural gas. Pace explained that he spoke directly with representatives of the utility in question before he voted, and they told him that they were planning to close their coal plant anyway, so the switch to natural gas wouldn't alter their rate structure.

It was in Ready's back-and-forth rebuttal comments that he nuked his candidacy. Again he went after Pace for his vote on that bill, which also mandated a minimum percentage of electric generation from green sources, like solar or wind, which gave the utility an excuse forced the utility to raise its rates. (my strike)

At this point I thought, “Ruh roh, he's got Pace on that one.” It was going take a deft answer to squirm around that shot, since it's hard to tell low income folks that they must pay more for electricity so it will be cleaner. Further, the host of the debate, The Pueblo Chieftain (which is the local, decidedly conservative newspaper with massive market penetration) had been hammering that very point for months.

I was caught off guard when Pace completely ignored the expensive clean energy attack by stating that the two candidates had agreed to keep it clean before the debate started, but since Ready went there… Pace proceeded to ask him about stuff on Ready's Facebook page dealing with Sandy Hook being faked so a gun ban could be passed. Oh, and Pace pointed out that he has a connection to someone whose kid was murdered in that school shooting.

I expected Ready to deflect this easily with a quick, “Why are you talking about nonsense on Facebook, I asked you about voting to raise rates on low income Puebloans for the sake of "clean energy”. Explain that vote.“

But no.

Ready went for it, and began to claim that there is no proof that Sandy Hook actually happened. Unbelievable.

That was when the crowd erupted. There for a second I thought they were going to drag him out in the street and tar and feather him like he was a Wall Street banker. I've never seen spontaneous public outrage come out of left field like that.

Then he started talking about a video that showed the father of one of the "victims” walking into a meeting laughing and joking and coming out crying. “Explain to me why he would do that!” This yahoo actually tried to make the truther argument while his own people were jeering him.

Stunning.

When the moderator asked Pace if he had a rebuttal Pace quietly said, “I have no further comment.” I swear I saw him wag his tail as he swallowed a canary.

He's tried to back off, saying he was only “putting it out there for discussion”. Sort of the way you'd put the shape of the earth “out there for discussion”. The right wing local paper has covered for him as well, and if I had to bet, I'd say he'll still get elected. So there you have it. People with fixed delusions can continue to function quite well in this society, in fact they can thrive, so who were we to try to get the social service system to help an old lady who thinks there's someone under her floorboards? What we should have done is contact the Republican party to see if they want to nominate her for Congress.

The Fed gives a gift to American corporations

This is a bit of a mashup from some recent posts from the ever valuable Wall Street on Parade blog.

Today's Fed may be more consumer friendly than it has been in the past 30 years, but that's apparently not saying much. The Fed has announced rules requiring the big banks to hold liquid assets, so that the next time they bring down the economy, they'll have some spare change left as a downpayment on the next bailout. The Fed has defined those assets which it considers to fit the bill. One of them is corporate bonds, with which Pam Martens of said blog has issues. You should read the whole thing. Suffice it to say that she argues convincingly that corporate bonds are not liquid in the Wall Street sense (easily convertable to cash with little or no loss of value at the time of sale) and that in the event of a market sell off, they are quite likely to spiral down in value. A taste:

Just six weeks before the Fed anointed non-exchange traded corporate bonds as liquid assets, all the way down to investment grade, the Financial Times ran this opening paragraph in an article by Tracy Alloway:

“The ease with which investors can trade corporate debt has declined sharply in the five years since the financial crisis according to research that is likely to feed fears over the prospect of an intensified sell-off in the $9.9 trillion US market.”

Then there is this 2010 paper by Jack Bao (Ohio State) Jun Pan and Jiang Wang (both of MIT Sloan School of Management), aptly titled “The Illiquidity of Corporate Bonds.” It starts off like this: “The illiquidity of the US corporate bond market has captured the interest and attention of researchers, practitioners and policy makers alike.” (Apparently, everybody but the researchers at the U.S. central bank.)

Meanwhile, the Fed has decided that municipal bonds are not sufficiently liquid to qualify.

This, rightfully, has state treasurers in an uproar. The five largest Wall Street banks control the majority of deposits in the country. By disqualifying municipal bonds from the category of liquid assets, the biggest banks are likely to trim back their holdings in munis which could raise the cost or limit the ability for states, counties, cities and school districts to issue muni bonds to build schools, roads, bridges and other infrastructure needs. This is a particularly strange position for a Fed that is worried about subpar economic growth.

Sure, there's been some municipal bankruptcies, but the fact of the matter is, those bonds are far safer than corporate debt.

So, the net effect of this is to push the bank’s money into those risky corporate bonds and out of municipal bonds. Borrowing costs will go up for cities and down for corporations. As Martens points out, this is the equivalent of the Fed imposing austerity budgets on towns and cities across America, which will likely have the same result, albeit not so starkly, as the imposition of those measures in Europe.

Martens can't understand why the economists at the Fed don't see what everyone else who has studied the corporate bond market is seeing.

Sinclair Lewis said that “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”. I would submit that it is even harder for him to understand it when his hoped for future salary depends on him not understanding it.

Charity begins at home, and stays there

The rich certainly are different than you and me. When they give money to charity, they have the option of having their cake and eating it too. 

I stumbled on this article at the New York Review of Books (most of it is behind a paywall, I subscribe so could read the whole thing).

It’s be Lewis B. Cullen, a seriously rich individual who has given a lot of money away, and is a little incensed that his peers aren’t following suit, but are getting charitable deductions anyway, at our expense, of course:

Writing in The New York Review back in 2003,1 I explained how a donor gets a tax deduction for all of the money put into a private foundation, yet the foundation is required to spend only 5 percent of its assets per year. That doesn’t mean “donate 5 percent to charity”—it means the 5 percent can be used for “administrative costs.” And I’ve commented on how these administrative costs may include generous salaries for family members and lavish all-expenses-paid tours to foreign countries for board members and administrators, all in the name of “research.” A recent article by Pablo Eisenberg in The Chronicle of Philanthropy disclosed payments made by the Otto Bremer Foundation to three of its board members amounting to over $1.2 million. Operating charities like the New York Public Library and the Metropolitan Museum of Art, on whose boards I serve, pay no trustee fees

So, if I’m rich enough, I can create a foundation, and hire Junior to run it at an inflated salary and never actually funnel a dime to good works of any sort.

But here’s a scam I can’t quite understand, as I can’t see what’s in it for the donor, though the Wall Street types (here they are again) make out like the bandits they are:

The more aggressive game in philanthropy I have in mind, one with a soothing but misleading name, is called Donor-Advised Funds (DAFs). Back in 1991, the Boston-based Fidelity Investments applied to the Brooklyn IRS and got a ruling that drastically changed the tax landscape governing charitable donations. Donors get the same tax benefits when they give to a DAF that they would get by contributing to a museum, soup kitchen, university, or any other federally accepted charity. But rather than having the gift made directly to a charity, the funds can simply sit in the account awaiting instructions from the donor. If the donor never gets around to making distributions, they stay in the account earning substantial fees for investment managers. Recently, mutual fund management companies such as Fidelity, Vanguard, and Charles Schwab have set up separate charity accounts to compete for funds. 

 These funds can provide such tax benefits because the donor must give up all legal control over his or her money when the transfer is made to a DAF. The control is transferred to the administrators of the DAF. Here’s a good example of what can happen. I’m a considerable supporter of a major cultural institution, and on its board of trustees. That institution had been receiving a sizable donation each year from a particular donor. When that donor had died, he had given his money to a DAF administered by a community trust. When the institution in question paid a call to the community trust, seeking confirmation about the continuation of the annual donation, it was told, “We’re not necessarily continuing to give that gift.” Note the use of the word “we”—nothing to do with the past practices of the late donor

So I can’t figure out that one, unless the people setting up these DAFs have far more money than brains. Then again, it’s primarily the rich that are being fleeced by the hedge fund managers. 

Doomed to repeat?

The New York Times reported yesterday morning that the latest beheading of an American journalist “raised the pressure on the president to order military strikes on the group in its sanctuary in Syria.” The Boston Globe had an article that made a similar point.

I've criticized Obama quite often, but on foreign policy he has generally done a good job, as he has up to now, kept us out of major conflicts. (Has anyone kept count of the number of wars we'd be in right now if we we're fighting everywhere John McCain and Lindsay Graham think we should?) Hopefully, Obama will resist the calls to get us involved in Syria. The desire for war may be intense among the punditocracy and the calls for action popular with Republicans in Congress (although they are of course resisting a vote on the issue), but the American people don't seem especially hot to send their sons and daughters over there.

If we do go, then they'll have fooled us twice, by a charitable count. Osama bin Laden couldn't have gotten a better reaction from the U.S. had he written the script himself. We spent billions of dollars, thousands of lives and for our trouble we got an Iraq headed toward partnership with Iran or worse and, in the Arab world, enhanced reputations for the people we are now being pressured to attack. Are they shaking in their boots? No, all the signs are that they want us to attack. Sure some of them might be killed, but they don't care about that. In the long run, they win by provoking us into attacking them, and we lose, by getting mired in yet another un-winnable war. Let them fight each other to the death. We should stay on the sidelines.

As to the journalists, the beheadings are of course barbaric. But journalists who go into those areas assume certain risks. We can't let the fate of individual Americans who put themselves in harm's way dictate our foreign policy. The fact is, the most effective way to deal with these people is to ignore them. That may not be entirely possible, but the closer we can come to that policy the better off we'll be.

The Supreme Court: Always entitled to its own opinion, not entitled to its own facts

I follow what the Supreme Court is doing, but I don't read their decisions, unless I must for some work related reason. My blood pressure is in a very good range, but why take chances. Even if I did read their decisions, I'm not sure I would have caught on to this.

A little background. The Supreme Court is an appellate court (except in those rare instances where it has original jurisdiction). Appellate court's do not find facts. They take the facts found by the lower court and decide whether the law requires a different result based on the facts found. As a crude example, if an appellate court is hearing an appeal of a case involving a motor vehicle accident, and there was sufficient evidence that a traffic light was green at the time of the accident, the court cannot decide that it was in fact red. For the most part, an appellate court cannot fill in factual gaps by taking new evidence or engaging in surmise. If, for instance, there was no evidence about the traffic light at the time of the accident, the court cannot assert as fact that it was green. There are exceptions. It is not necessary, for instance, that a litigant prove that a human being deprived of air will die. The court can take “judicial notice” of some facts.

This Supreme Court has apparently been accepting factual assertions contained in amicus briefs, even when those briefs cite unreliable sources for those facts, or no source at all:

Some of the factual assertions in recent amicus briefs would not pass muster in a high school research paper. But that has not stopped the Supreme Court from relying on them. Recent opinions have cited “facts” from amicus briefs that were backed up by blog posts, emails or nothing at all.

Some amicus briefs are careful and valuable, of course, citing peer-reviewed studies and noting contrary evidence. Others cite more questionable materials.

Some “studies” presented in amicus briefs were paid for or conducted by the group that submitted the brief and published only on the Internet. Some studies seem to have been created for the purpose of influencing the Supreme Court.

In a 2011 decision about the privacy rights of scientists who worked on government space programs, Justice Alito cited an amicus brief to show that more than 88 percent of American companies perform background checks on their workers.

“Where this number comes from is a mystery,” Professor Larsen wrote. “It is asserted in the brief without citation.”

In a 2012 decision allowing strip searches of people arrested for even minor offenses as they are admitted to jail, Justice Anthony M. Kennedy cited an amicus brief to show that there are an “increasing number of gang members” entering the nation’s prisons and jails. The brief itself did little more than assert that “there is no doubt” this was so.

via The New York Times

The article implies that the phenomenon is not restricted to the conservative judges, who, indeed, have decried the practice when they are not themselves employing it. However, all the examples but one involve the conservatives, including the truly outrageous exemplars.

It would be a truly dangerous practice even if this were not already the most political court since 1795 or thereabouts. The fact is that it is very much the case that things “everyone knows” are often not true. That's why judicial notice should be used sparingly, and you certainly shouldn't take the word of a blogger or an unsupported assertion by a party or an amicus. I mean, even here, I try to provide links to reliable sources when I make factual assertions. The Supreme Court should be held to a higher standard than a blogger that nobody reads. In addition, as the article sort of points out, the opposing side often lacks the ability to take issue with facts asserted in amicus briefs, and is never on notice that the court will choose to rely on those facts to rule against it. (Also, I've never heard of citing a brief as authority for anything) If the fact in question was not at issue at the trial level, it should not be introduced at the appellate level, where it cannot be properly tested in the adversary process. It's bad enough that this court, even before Bush v. Gore was quite comfortable with making up the law, but it's truly frightening if it becomes very comfortable with making up the facts.

Yet another sign that the Republic is doomed.

Woodstock Fair

My wife and I went to the Woodstock Fair this morning. Among other activities, we watched some of the sheep and cattle judging, but it occurred to me that there really ought to be a competition to judge among the Italian Sausages on offer. I am not exaggerating when I say that there were at least 20 stalls offering them. Anyway, herewith a few pictures, starting with the giant pumpkins. It does my heart good to know that we in Connecticut are second to none in this field. The world needs half ton pumpkins, and we have them in quantity.

Back to the Sheep

Finally, a little Connecticut pride.

 

Both sides always do it

A great example of the “both sides are at fault” meme in today's Boston Globe.

The facts are really quite simple. Republicans have pulled out all the stops to obstruct Obama's diplomatic appointments. It matters not whether any particular nominee arouses their wrath; they will oppose anyone. Those are the facts on the ground, and they really won't go away, but they can always be ignored, which is what the reporter in question valiantly does in this piece.

It is not the Republicans that are at fault, it is “the Senate”. Republican obstructionism is portrayed as a by-product of impersonal forces that no one can truly control. Republican attempts to blame Democrats for their own obstructionism are passed along with nary a comment about their irrationality. We are supposed to accept that Republican obstruction is justified because Harry Reid changed the Senate rules to prevent even more thoroughgoing obstruction. This sort of thing has real consequences over time. The Republicans can avoid accountability for their crimes as long as they can count on a media that blames both sides.

A Labor Day Lament

Labor Day approaches, a day to honor the working person, who, nowadays, increasingly labors for the sheer emotional satisfaction work can bring, considering that the fruits of his or her labor increasingly go to the capitalist or the CEO. And surely labor can be its own reward, but when, increasingly, one's labor becomes more and more unrewarding, what can anyone do but exercise the right of every American to complain and blame his problems on someone (or everyone) else.

I have been writing this blog since the beginning of 2005, and it has sometimes been a labor of love, but lately it has been much labour lost. What left but to complain and blame someone else, namely Republicans, who, we all know, are to blame for everything.

Posting has been light of late. Partly this is due to personal factors; vacations, houseguests, etc., but also due to a decline in appropriate subject matter, or, more accurately, a decline in subject matter that can provoke original thought, for what's the point of repetition, particularly when you're talking mostly to yourself anyway. My iPad is littered with un-posted stuff that doesn't even measure up to the low standards of this blog.

When I started, the idiotization of the Republican Party was a newly recognized phenomenon, if not exactly a new phenomenon, dating as it does from the election of Saint Ronald. Pointing it out, skewering idiot Republicans, and mocking their hypocrisy and corruption was fun, because I sort of got in at the beginning, when a reasonably high percentage of the American people were just catching on to what was going on in the party of Lincoln (he who spins in his grave). One felt one was performing something of a public service by pointing out the hypocrisy, stupidity, irrationality and corruption that is at the center of the Republican Party. But all of that has been said a million times, and what's worse, modern Republican politicians are becoming such caricatures that analysis is useless. Has a Republican made a statement lately that makes no sense, flies in the face of well established science, reveals his or her status as a corporate pawn, or is saturated with bigotry? Is water wet?

Sure, there's always the beltway media, corporate Democrats, religious fundamentalists and the Catholic Church. But the same reasoning applies, though I admit not enough has been written to expose our PR pope. I miss Joe Lieberman. He was always good for some fresh invective. Don't get my wrong, I'm not blaming those folks for my woes. It's an article of faith here that Republicans are at fault for everything, but they're not helping. I mean, why even bother to skewer assholes like David Gregory?

Anyway, tomorrow is a day set aside to honor the poorly compensated drudges that 99.9% of us have become. Spare a thought for the uncompensated blogger, who struggles to mock a world so obviously gone mad that comment is superfluous.

Don't get your hopes up though. I intend to soldier on.

There’s still some bargains out there

The price of everything is going up (okay, not really, I know inflation is actually quite low, but lets put that aside), but the price for buying politicians has stayed remarkably low and stable. In fact, it may even be declining.

Politicians can be bought remarkably cheaply, considering the return on the investment. Consider our unlamented former governor, John Rowland. He steered millions in state contracts to his bribers, and what did he get? Some free repairs to his house. But Rowland, inexpensive as he was, was enormously costly compared to Chris Christie's New Jersey government. First, let's take a look at the return on investment:

David Sirota has carved out a much-needed niche lately by poking around in the unseemly deals between public pension funds and Wall Street predators, and he brings yet another scoop, this time in New Jersey:

Gov. Chris Christie’s administration openly acknowledged that more New Jersey taxpayer dollars were going to land in the coffers of major financial institutions. It was 2010, and Christie had just installed a longtime private equity executive, Robert Grady, to manage the state’s pension money. Grady promoted a plan to put more of those funds into riskier investments managed by Wall Street firms. Though this would entail higher fees, Grady said the strategy would “maximize returns while appropriately managing risk.”

Four years later, New Jersey has secured only half the promised results. The state has sent more pension money to big-name Wall Street firms like Blackstone, Third Point, Omega Advisors, Elliott Associates and Grady’s old firm, The Carlyle Group. Additionally, the amount of fees the state pays financial managers has more than tripled since Christie assumed office. New Jersey is now one of America’s largest investors in hedge funds.

The “maximized returns” have yet to materialize… Had New Jersey’s pension system simply matched the median rate of return, the state would have reaped roughly $3.8 billion more than it did between fiscal years 2011 and 2014, says pension consultant Chris Tobe.

The above-average costs for New Jersey are a direct result of Christie administration officials moving more pension money to Wall Street firms. The management fees those firms charge are far more expensive than the fees for passive index funds and the costs associated with equities being managed by in-house pension staff. Investments with Wall Street managers comprise less than half of New Jersey’s pension portfolio — but those investments’ attendant fees account for 96 percent of the pension system’s total overhead expenses, according to State Investment Council documents […]

via naked capitalism citing International Business Times.

Well, we all know the whole point of Wall Street is to make sure the rest of us get less and they get more. But bear in mind, we're talking billions skimmed from taxpayers here, and guess what it costs to get in on the action:

This amounts to Christie funding his presidential ambitions with New Jerseyite’s taxpayer money. He funnels that money to Wall Street managers, and they recycle a chunk of it back to him and his causes. As Sirota points out, the donations line up with when the firms got the contracts to manage the pension money. In one case, a contract went to the venture capital firm General Catalyst Group right after one of their partners made a $10,000 donation to the state Republican Party.

$10,000.00? Even if we assume the General Catalyst Group has only been able to skim a million dollars (and that's probably a fraction of what it actually got), their investment in the Republican Party would have cost them only 1% of their eventual return. The money is getting recycled back to Christie, but all he's asking for is the chump change falling out of their pockets. Who says America isn't a great country?