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Brandon Sawyer: Wall Street on the Willamette

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Monday, April 26, 2010

Now that the The Oregonian has tip-toed into international luxury suites and pulled the drapes on obscene travel perks enjoyed by our state's Treasury officers on the dime of the slick firms that want their money…

Now that intrepid reporters Ted Sickinger and Les Zaitz have tag-teamed to roll the obese double-dipping accomplice —reimbursed by taxpayers for free meals — out to his Beautyrest and riled a local epidemic of populist ire…

Now that Treasurer Ted Wheeler is holding a "media availability" today announcing new travel guidelines, and every candidate for state treasurer, Oregon Speaker of the House Dave Hunt, Governor Kulongoski and your neighbor's sister's gardener's poodle have all called for more answers and tighter restrictions, it's worth asking:

Does it matter?

According to our online readers it does. More than half, 53% cited "Public employees at $500/night resorts" as the thing that annoys them the most, when compared with Goldman Sachs, China's currency scam, the Air Force blocking wind farms and Toyota's stonewalling.

The funny thing is, it's quite possible Oregon's multi-billion-dollar purse suffered calamitous losses in the last couple years from shenanigans like those alleged by the SEC against Goldman, in which a portfolio of bundled mortgage securities, ripe with the sub-prime, were devised by a hedge fund betting against them, then sold to clueless investors such as state pension funds.

Could it be the hoopla over world-class golf resorts, limousines and phony per diem expenses is diverting our attention from more fundamental problems at the Treasury?

I recently asked local investment advisor, Bill Parish, a corporate governance advocate and long-time critic of prevailing market soothsayers, both in the media and on his blog, if all the first-class jet-setting and 29-year-old scotch may have clouded the financial vision of Oregon's investment officers.

"If there's anything that's clouded, it's how their returns are calculated," he retorted, saying that the financial results by which the officers repeatedly defend their job performance are often calculated by the same investment firms that have been wining and dining them.

This raises questions about the quality and value of investments held by the Treasury, widely reported by media sources and touted by the state as having stellar returns.

They might not be as empty as a Bernie Madoff handshake, but Parish says many of these deals are not liquid enough to easily assess their worth. He says genuine transparency is needed for Oregon's pension fund investments, a near impossibility when state invesment officers are in cahoots with the private equity firms cruising financial district back alleys.

One outrage he points to is $800 million of investments with Dallas-based private equity investor Lone Star Funds, headed by John Grayken, a secretive gobbler of distressed debt and equity assets who renounced his U.S. citizenship years ago. Lone Star's been aggressive in residential real estate, buying foreclosures.

Parish says that some of the state's investments are held by several funds of the same firm trading with one another, potentially hiding losses or inflating profits, as was made famous by the Enron scandal. But even if Oregon's investments aren't concealing a speck of fraud or abuse, he thinks the portfolio mix is all wrong.

"I just think it's reckless to have 70% of investments in equities and real estate," argues Parish. "It's too aggressive for a public pension."

More transparency would make Treasury more accountable to the citizens of Oregon, and Parish thinks it would likely reveal questionable investments not in the interest of state pensioners or the economy of Oregon. Little is invested in Oregon companies and even the investment firms are mostly outside the state – hence the need for so much travel.

"More than 50% of their investments are managed by firms whose headquarters are based outside the U.S." And the main real estate consultant is based out of Geneva, Switzerland he notes.

Parish is optimistic that Ted Wheeler can be a "superb state treasurer" but he's tired of a small group of insiders passing favors around. A pension should reflect its participants, he says, in this case teachers, nurses and civil servants.

"The portfolio is out of balance with its constituency. It's subjecting its participants to periodic losses that result in significant benefit cutbacks. It's just been too aggressive."

And he's fed up with astrophysicists getting involved in finance. "Enough already with financial engineering. Put together a solid well diversified portfolio."

Weaning Oregon's treasury staff off the taste of gourmet dinners and the comfort of Swiss chalets is the right thing to do in light of their reckless personal behavior, but maybe our public officials and pension stakeholders should also wean them off the taste for private equity firms, leveraged buyouts, high-risk real estate deals and exotic derivative securities that no one really understands until the money's gone.

Brandon Sawyer is research editor for Oregon Business magazine.

 

Comments   

 
eye on the ball
0 #1 good points, well made!eye on the ball 2010-04-27 12:29:17
the last paragraph above says it all. Let's focus on the right things. What's worse, having the state invest its workers retirement fund in places that may be too risky, possibly costing us all hundreds of millions if they go south....and having the investment companies keep us in the dark with fuzzy math reports of returns.....or a few expensive dinners, hotels and rounds of golf? That the world these people operate in. It may be obscene....but it is a great gig to get if you are one of the lucky ones. Let's not complain about the ants while the elephants are trampling the garden. If the state was posting 15% returns on investments, would anyone give a crap?
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