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Gaming the pension systems then using the money to destroy benefits

Thursday, Sep 26, 2013

* Rhode Island has been held up as a national model for pension reform. But within Matt Taibbi’s fascinating account of how some businesses and groups are taking money they’ve made from pension fund management and using it to lobby for reductions in pension benefits is this astounding segment

Hedge funds have good reason to want to keep their fees hidden: They’re insanely expensive. The typical fee structure for private hedge-fund management is a formula called “two and twenty,” meaning the hedge fund collects a two percent fee just for showing up, then gets 20 percent of any profits it earns with your money. Some hedge funds also charge a mysterious third fee, called “fund expenses,” that can run as high as half a percent – Loeb’s Third Point, for instance, charged Rhode Island just more than half a percent for “fund expenses” last year, or about $350,000. Hedge funds will also pass on their trading costs to their clients, a huge additional line item that can come to an extra percent or more and is seldom disclosed. There are even fees states pay for withdrawing from certain hedge funds.

In public finance, hedge funds will sometimes give slight discounts, but the numbers are still enormous. In Rhode Island, over the course of 20 years, [Edward Siedle, a former SEC lawyer] projects that the state will pay $2.1 billion in fees to hedge funds, private-equity funds and venture-capital funds. Why is that number interesting? Because it very nearly matches the savings the state will be taking from workers by freezing their Cost of Living Adjustments – $2.3 billion over 20 years.

“That’s some ‘reform,’” says Siedle.

“They pretty much took the COLA and gave it to a bunch of billionaires,” hisses Day, Providence’s retired firefighter union chief. [Emphasis added.]

* And this

On Wall Street, people are beginning to clue in to the fact – spikes notwithstanding – that over time, hedge funds basically suck. In 2008, Warren Buffett famously placed a million-dollar bet with the heads of a New York hedge fund called Protégé Partners that the S&P 500 index fund – a neutral bet on the entire stock market, in other words – would outperform a portfolio of five hedge funds hand-picked by the geniuses at Protégé.

Five years later, Buffett’s zero-effort, pin-the-tail-on-the-stock-market portfolio is up 8.69 percent total. Protégé’s numbers are comical in comparison; all those superminds came up with a 0.13 percent increase over five long years, meaning Buffett is beating the hedgies by nearly nine points without lifting a finger.

* The Illinois Teachers Retirement System started pumping huge amounts into hedge funds a couple of years ago. From a 2011 Crain’s article

Springfield-based TRS, the state’s largest pension provider, plans to allocate about a third of its $37.8-billion portfolio to alternative investments such as private-equity and hedge funds, a four-month Crain’s investigation of TRS holdings and practices finds. These unconventional assets typically dangle the potential for higher returns, but only because they also carry greater risks and fees. TRS is shifting its portfolio while it’s still developing an in-house risk-management system.

Gunning for bigger returns exposes the plan to the possibility of bigger losses, further jeopardizing the pensions of 362,121 former and current teachers. The system, which has just 46.5% of the assets it needs to cover promised payments to retirees, is counting on an 8.5% annual return, which many portfolio managers and investors, including Berkshire Hathaway Inc.’s Warren Buffett, say is unrealistically high. If TRS banked on a 7.75% return — the rate that two other Illinois public pensions lowered their forecasts to this year — its assets would equal only 43% of obligations. That would swell its shortfall to $50.1 billion from $43.5 billion.

* And Bruce Rauner’s former investment firm GTCR also takes a 20 percent fee, plus extras

GTCR has managed money for years for the Illinois Teachers’ Retirement System and the Illinois State Board of Investment, the largest and third-largest, respectively, in Illinois, as well as state and municipal pension plans from the San Francisco City and County Employees’ Retirement System to the Massachusetts Pension Reserves Investment Management Board. Its funds have delivered above-average returns for Illinois, according to Preqin Ltd., a London-based investment data provider.

For its work, GTCR takes a slice of returns it reaps from business sales, typically about 20 percent, and charges management fees, up to 1.5 percent. The Illinois State Board of Investment, for instance, reports it paid $280,000 in fees last year on $85 million it has in two GTCR funds.

Combined, TRS and the ISBI have committed $252 million with GTCR since 1993.

Some folks were understandably upset with the Dixon lawyers’ big cut of the Rita Crundwell settlement yesterday, but we need to talk more - a lot more - about these insanely high fund fees. They’re essentially robbing the pension funds of needed dollars and pushing to use benefit cuts to make up the difference.

Ridiculous.

…Adding… From Bruce Rauner’s campaign spokesman…

Rich - saw your post on fees and returns provided by alternative investment vehicles.

There a few important clarifications that would provide context for your readers:

1. GTCR performance for Illinois has far exceeded the pension funds’ returns: “William Atwood, who leads the Illinois State Board of Investment and has invested the state employee pension fund’s money with GTCR…. says the board’s investments with GTCR have generated annual returns of 17.2% since 1984.” Pension fund over that same time period has been closer to 7-8%. Those are annualized returns, so GTCR has made the pension funds a lot of money.

2. Hedge funds and firms like GTCR are different types of businesses. Hedge funds are typically sophisticated (and leveraged) trading entities. GTCR invests directly in private companies and builds them for the long term.

3. The 20 percent fee is only received if/after they sell a company for profit.

Bottom line is comparing GTCR’s performance for Illinois to that of hedge funds in other states is like comparing apples and oranges.

Also, worth pointing out, as one of your commenters did, that the rate of return for pensions is after fees.

Thanks,

Mike

- Posted by Rich Miller        

78 Comments
  1. - LincolnLounger - Thursday, Sep 26, 13 @ 12:16 pm:

    Stunning. And, Squeezy not withstanding, I don’t see the word “hisses” enough.


  2. - Soccermom - Thursday, Sep 26, 13 @ 12:21 pm:

    Love Matt Taibbi. One of the best reporters in America.


  3. - A guy... - Thursday, Sep 26, 13 @ 12:22 pm:

    History teaches if you let it.


  4. - Soccermom - Thursday, Sep 26, 13 @ 12:22 pm:

    Rauner, withdraw. You cannot possibly dodge this one. Twenty percent. TWENTY PERCENT.


  5. - Soccermom - Thursday, Sep 26, 13 @ 12:24 pm:

    And OW — I know you’re all about the Payton Prep thing. But that hurt one kid, who almost certainly went to another good high school. This — this is appalling. And it makes it very clear that your tax dollars, and mine, are lining Rauner’s pockets. So he can then beat up on those same pension funds that have helped make him a zillionaire.

    Shame.


  6. - Chicago taxpayer - Thursday, Sep 26, 13 @ 12:32 pm:

    Key question is: what is the net (post-fees) rate of return on hedge funds used by pension funds vs. the net return on simple index funds that mirror the market? That will tell you everything you need to know.


  7. - Mr.Big Trouble - Thursday, Sep 26, 13 @ 12:33 pm:

    hey folks, none of this is truly news. 2/20 has been the benchmark for years; only recently has it been under pressure due to poor performance. That’s what the marketplace bore, and analysts/financial planners/financial advisors have been touting adding alternative investments ( hedge funds/private equity/managed futures/structured products) to portfolios as a way to diversify risk. Shockingly, it doesnt always work, and perhaps , even more shockingly, there tend to be large fees associated w/ certain asset classes. Stick w/ index funds, avoid the latest Wall Street product, and you will be fine.
    Rauner’s former employer charged 2/20.. so what.. thats what the market bore, and I am sure someone, somewhere, knew the terms before signing on the dotted line. Find another reason to dislike him; this one isnt enough.


  8. - Dan Johnson - Thursday, Sep 26, 13 @ 12:34 pm:

    That’s the funny thing about Wall Street and the 1% financiers — a lot of their money comes from public coffers in the form of these absurdly high fees. Bond deals are a bit like that as well.

    This is the part of the pension debate that hasn’t gotten nearly enough attention: how to reduce the fees the pension funds are paying *and* ensure a better return.

    Getting more into investing in our own infrastructure would be a good place to start.


  9. - drew - Thursday, Sep 26, 13 @ 12:34 pm:

    It should be pointed out that since the Crain’s article, TRS lowered it’s expected rate of return from 8.5% to 8.0%.


  10. - Rich Miller - Thursday, Sep 26, 13 @ 12:35 pm:

    ===That’s what the marketplace bore===

    OK, but we have a ton of money in those funds which can influence a market. And we should.


  11. - Bill White - Thursday, Sep 26, 13 @ 12:39 pm:

    === I am sure someone, somewhere, knew the terms before signing on the dotted line ===

    Perhaps, and such people should NOT remain in a position of public trust.

    2/20 may well be legal, however, anyone other than a billionaire who votes for Bruce Rauner is a fool.


  12. - Dan Johnson - Thursday, Sep 26, 13 @ 12:40 pm:

    We can set the terms of the marketplace. We just haven’t yet. It’s time we start.

    There are lots and lots of would-be money-managers in the state (and the country). We should cap those fees. And we should pay the professional staff who run the funds as much as we pay coaches or university presidents to attract the best talent. But giving an outside firm a piece of the upside is crazy.

    Canada seems to be doing it right, especially Ontario.


  13. - Dan Johnson - Thursday, Sep 26, 13 @ 12:42 pm:

    Here’s a good article and the model we ought to be emulating (much lower costs, far more well-paid staff to do world-leading deals in house):

    http://www.reuters.com/article/2012/01/12/us-pensions-idUSTRE80B1C620120112


  14. - Really Illinois? - Thursday, Sep 26, 13 @ 12:43 pm:

    I’m not arguing for against the use of hedge funds, but if all they charged was a flat asset based fee, where’s the incentive to maximize growth? If they get to share in the returns, they are inspired to do an even better job. However, I think they should also share in the losses by, if nothing else, forgoing the 2% base fee. It’s why commissioned sales people are always more motivated and more productive. It’s why the most successful lawyers are always personal injury attorneys.

    As far as the Buffet bet, it concludes in 2017. How many super bowl champs have been losing at halftime? Interesting to note that the Hedge funds only lost 24% the first year, 2008, compared to Buffet’s 37%. If there is no “adjustment” in the market, Buffet might win. If there is another “adjustment” in the market, which is expected, he might not.


  15. - too obvious - Thursday, Sep 26, 13 @ 12:44 pm:

    It is ridiculous, especially considering pension funds are very limited in investments and strategies, as one would hope as essentially “widows and orphans” territory. Point is, fat cats like Rauner really don’t have to work that hard.

    Rauner is crazy if he honestly thinks he can sell this snake oil. You can get really rich from exorbitant fees managing pension funds, or you can be governor. You really can’t do both. March will prove this again.


  16. - Oh well - Thursday, Sep 26, 13 @ 12:46 pm:

    Effective redistribution of wealth.


  17. - wordslinger - Thursday, Sep 26, 13 @ 12:47 pm:

    –… but we need to talk more - a lot more - about these insanely high fund fees. They’re essentially robbing the pension funds of needed dollars and pushing to use benefit cuts to make up the difference.–

    That’s exactly what they’re doing. And there’s your negative Rauner spot.

    “Billionaire Bruce Rauner wants to cut promised pension payments to retirees so he can pay himself millions from the pension funds.”

    Now these same guys want a piece of the action in K-12 schools in the name of “reform” and “the children.”

    Over the last 25 years, the average annual return on the S&P 500 was 9.28%. No juice required.

    Buffett knows a little bit about investing. Berkshire Hathaway has posted annual average returns of 20% for 48 years.


  18. - girllawyer - Thursday, Sep 26, 13 @ 12:49 pm:

    Just to be clear Really Illinois, by “most successful lawyers” you mean the wealthiest? Because wealth is the only standard by which success can be measured.


  19. - Anonym - Thursday, Sep 26, 13 @ 12:50 pm:

    Hedge funds are Wall Street chicanery. Never could understand why pension funds drink their Kool-Aid. They should stick to a 60/40 mix of index funds and they would be miles ahead. Read Jack Bogle.


  20. - Bill White - Thursday, Sep 26, 13 @ 12:51 pm:

    @Really Illinois

    The question to examine is whether index fund investing - essentially without fees - returns more than traded investing with high fees.


  21. - Bill White - Thursday, Sep 26, 13 @ 12:54 pm:

    === “They pretty much took the COLA and gave it to a bunch of billionaires,” ===

    Yep, pretty much . . .

    ===

    In other news, has Bruce Rauner found a Lt Gov yet?

    It will need to be someone willing to have this kind of thing added to his or her reputation.


  22. - wordslinger - Thursday, Sep 26, 13 @ 12:57 pm:

    ===That’s what the marketplace bore===

    And as Stu Levine taught us, that marketplace is always transparent, free of political influence and on the square.

    That’s why guys like Rauner drop millions on politicians over the years. For good government.


  23. - GOP - Thursday, Sep 26, 13 @ 1:00 pm:

    Bruce Rauner=pension rip off…no wonder he had to pay Stu Levine $25,000 per month…it takes a lot of money to rob pensioneers I guess.


  24. - Precinct Captain - Thursday, Sep 26, 13 @ 1:01 pm:

    Pension reform pushed by big money Wall Street dealers might not actually be good for retirees or the body politic but will end up lining the pockets of Wall Street dealers? I’m shocked! SHOCKED!

    ==OK, but we have a ton of money in those funds which can influence a market. And we should.==

    This was one of Eliot Spitzer’s main points in his campaign for NYC comptroller. If the public (through pension funds for public workers) has major marketplace interests, they should be actively exercising them for the benefit of the public.

    ==As far as the Buffet bet, it concludes in 2017. How many super bowl champs have been losing at halftime?==

    Very few.

    http://www.pro-football-reference.com/super-bowl/


  25. - Pat C - Thursday, Sep 26, 13 @ 1:03 pm:

    Gosh, wasn’t I the guy who suggested a few years ago that we should use T.Rowe Price or Vanguard and their low fees? And I was told that “private” does deals that bring better returns?

    Any why not improve Bond offerings also? Lots of “patronage” in doing bond work, that, in fact, is pretty standard….


  26. - Really Illinois? - Thursday, Sep 26, 13 @ 1:03 pm:

    Of course girllawyer, the wealthiest.

    The pension crisis was/is not being caused by investment related fees. It is/was caused by unsustainable promises made to unions by pols to buy votes. You can’t pay a teacher or anyone else for 70 years when they only worked 30 years, but that’s what was promised to them. It was also caused by pols who used a 10%+ return projection to reduce state contributions. Why would they do that? Of course, to free that money up to buy more votes. 8% is still an awfully lofty expectation. As an index, the Dow Jones has only returned 3.5% since 1999, the first time it crossed 10,000.


  27. - Pat C - Thursday, Sep 26, 13 @ 1:06 pm:

    As an index, the Dow Jones has only returned 3.5% since 1999, the first time it crossed 10,000.

    Of course the S&P 500 is a much better index, as it’s 80% of the US economy, not 30 firms.

    Also, 1999 is near the peak of the internet boom, choose 2001 and see the returns :)


  28. - OneMan - Thursday, Sep 26, 13 @ 1:07 pm:

    Two things… For those complaining about the fees as in
    “this is appalling. And it makes it very clear that your tax dollars, and mine, are lining Rauner’s pockets”

    Sorry, when it comes down to it, like it or not the state is considered a sophisticated investor and these fees are known, if the state (or anyone who qualifies as a sophisticated investor) decides to pay these known fees I don’t feel any pitty for them. Hell if you were on the other side of this would you say no to investors and say “Hey I will charge you less?”

    However, it seems to me the various state pension funds could and should negotiate a lower fee position, they are big players in this market and big players have leverage with providers.

    Hell create your own index fund more or less, long term you will do just about as well.


  29. - Bill White - Thursday, Sep 26, 13 @ 1:10 pm:

    @OneMan

    Who cares about pity? The voters simply need to replace those who made these types of decisions:

    === if the state (or anyone who qualifies as a sophisticated investor) decides to pay these known fees I don’t feel any pity for them ===

    As was linked elsewhere, Canadian pension managers seem to get good returns without paying huge fees.


  30. - skeptical spectacle - Thursday, Sep 26, 13 @ 1:14 pm:

    Obviously it is nauseating to read much about how these hedge funds work, and the “inside people” on wall street.

    However this is not news. We have known this is going on for quite some time.

    The heads of the pension funds bear as much blame for getting into bed with these hedge funds. No on forced them to and it wasn’t a very smart move in retrospect.

    Wall Street smells bad when you stand too close. The heads of the pension chose to get in bed with them.


  31. - skeptical spectacle - Thursday, Sep 26, 13 @ 1:17 pm:

    The pension funds should be able to get better terms with their huge amounts of money they control. And they should not take unnecessary risks.


  32. - PublicServant - Thursday, Sep 26, 13 @ 1:20 pm:

    At Teachers’ Retirement System, the investment rate of return during the last 30-year period through fiscal year 2013 is 9 percent. The assumed rate of return is currently 8 percent. It was set at 8 percent in September of 2012. It was 8.5 percent between 1997 and 2012.


  33. - so... - Thursday, Sep 26, 13 @ 1:23 pm:

    ==Love Matt Taibbi. One of the best reporters in America.==

    If by “best” you mean “most reflexively anti Wall Street” then, yes.

    Speaking to the larger point, there is no question that private equity (which is what GTCR is) takes a big cut of the profits and tends to be quite expensive fees-wise. Yet pension fund and university endowments nationwide continue to invest in private equity. Why? Well, take a look at the annualized return by asset class from TRS’ most recent CAFR (I’m using the five year window because TRS hasn’t invested in some of the asset classes long enough for them to have a ten year window):

    U.S. Equities (stocks): -.6%
    International Equities (stocks): -4.3%
    Fixed Income (bonds): 8.2%
    Real Estate: -2.2%
    Private Equity: 4.6%
    Real Return: 5.0%
    Absolute Return: 1.9%

    (source: http://trs.illinois.gov/pubs/cafr/FY2012/fy12.pdf page 61)

    Those returns are all “net of fees” which means that’s the profit TRS realizes after the investment managers are paid.

    So even after private equity takes its very expensive fees, it’s the third most profitable asset class TRS invests in.

    If you look at private equity’s performance over 10 years, it is the most profitable asset class for TRS, with a 8.9% annualized return. Again, this is profits after the fees are paid.


  34. - Jimmy - Thursday, Sep 26, 13 @ 1:23 pm:

    20% of the profits and 0% on losses - these financial “geniuses” need to get a little skin in the game.


  35. - Grandson of Man - Thursday, Sep 26, 13 @ 1:24 pm:

    What sickens me is that these people are trying to portray government employees as the fat cats. I say trying because many people don’t buy their propaganda.


  36. - hisgirlfriday - Thursday, Sep 26, 13 @ 1:27 pm:

    This and the EDGE credits story are illustrative once again of the way that corporate welfare is a cancer on both govt. and our economy.

    Get the money out of the corrupt cronies at the hedge funds and set up our own state bank like North Dakota has. At the very least we could cut out the parasitic middlemen and the quid pro quo campaign donations for bond business. At best we could use pension dollars to invest in infrastructure and economic enterprises here that benefit this state and create a favorable business climate overall instead of just begging companies to stay in a race to the bottom well surely lose with so many worse states having a head start on us.

    Whatever we do we need a NEW strategy now.


  37. - Steve - Thursday, Sep 26, 13 @ 1:28 pm:

    Bruce, Bruce, Bruce.


  38. - Jimmy - Thursday, Sep 26, 13 @ 1:33 pm:

    What is a hedge fund “placement agent?” My bet is that they are probably an unregistered lobbyist getting an illegal (at least in Illinois) contingency fee.


  39. - dupage dan - Thursday, Sep 26, 13 @ 1:38 pm:

    So long as there is a gov’t entity holding onto huge sums of cash, there will be some citizen out there figuring out how to relieve said entity of some of the case. Either thru graft or thru fees. Maybe the gov’t shouldn’t be trusted with holding my pension funds and controlling same. I know, some will say that individuals will make bad decisions with their investments but that, in my mind, would be the other guy - and he wouldn’t be able hurt my portfolio, just his.


  40. - Robert the Bruce - Thursday, Sep 26, 13 @ 1:40 pm:

    TRS might have gotten lucky over the last decade; I’ve never seen a good long-range study that concludes that hedge funds are a good investment, post-fees, relative to simple index funds.


  41. - Norseman - Thursday, Sep 26, 13 @ 1:40 pm:

    Sigh!


  42. - hisgirlfriday - Thursday, Sep 26, 13 @ 1:41 pm:

    @Jimmy: Haven’t heard the term “placement agent” before but have a hunch you could get a good definition by googling bob kjellander.


  43. - Seriously - Thursday, Sep 26, 13 @ 1:41 pm:

    Can you say conflict of interest, Mr. Rauner? You are what we thought you were!


  44. - wordslinger - Thursday, Sep 26, 13 @ 1:43 pm:

    –Maybe the gov’t shouldn’t be trusted with holding my pension funds and controlling same. I know, some will say that individuals will make bad decisions with their investments but that, in my mind, would be the other guy - and he wouldn’t be able hurt my portfolio, just his.–

    So you want a 401K rather than a defined pension benefit plan? Can’t really understand your arithmetic, but Farmer Bruce is your guy.


  45. - Jake From Elwood - Thursday, Sep 26, 13 @ 1:43 pm:

    Illinois pension funds (and 40 ILCS) require the institutional investment managers (including hedge funds) to make full disclosure of fees regardless of source. So unless the fees are not disclosed as legally required, the fiduciary pension trustees are agreeing to pay these fees voluntarily. Some years they win, some years they lose. 200 basis points for showing up is outrageous however.


  46. - OneMan - Thursday, Sep 26, 13 @ 1:47 pm:

    Part of my always did wonder why the unions didn’t deal with the pensions instead of the state. If you had a contracted contribution it seems harder for the state to back out on that.


  47. - wordslinger - Thursday, Sep 26, 13 @ 1:49 pm:

    –So unless the fees are not disclosed as legally required, the fiduciary pension trustees are agreeing to pay these fees voluntarily.–

    Of course they knew the fees. But given what we learned from Stu Levine on how pension business was awarded, getting the best deal on fees didn’t necessarily play into who got the business.


  48. - Ready To Get Out - Thursday, Sep 26, 13 @ 1:51 pm:

    Everyone seems to be hung up on the fees part of this. What about Rich’s first statement:

    “…some businesses and groups are taking money they’ve made from pension fund management and using it to lobby for reductions in pension benefits…”

    I have HUGE problem with that!


  49. - Nearly Normal - Thursday, Sep 26, 13 @ 1:57 pm:

    Rolling Stone has an article about this as well. I have just started to read it.

    http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926


  50. - OneMan - Thursday, Sep 26, 13 @ 1:58 pm:

    “…some businesses and groups are taking money they’ve made from pension fund management and using it to lobby for reductions in pension benefits…”

    I have HUGE problem with that!

    Is your problem with the folks who give them money or the people spending the money.


  51. - facts are stubborn things - Thursday, Sep 26, 13 @ 2:05 pm:

    As I have said many times on this forum, follow the money.


  52. - facts are stubborn things - Thursday, Sep 26, 13 @ 2:08 pm:

    How is SERS invested and by whom? What is the cost that is incurred? An index fund with a company like Vanguard charges about .15% total.


  53. - skeptical spectacle - Thursday, Sep 26, 13 @ 2:14 pm:

    You guys realize that the heads of the pension funds are willingly giving this money to the hedge funds, that everyone is so infuriated about (with good reason).


  54. - dave - Thursday, Sep 26, 13 @ 2:21 pm:

    **Rolling Stone has an article about this as well. I have just started to read it.**

    Umm… try clicking on Rich’s first three links in the story, and the first two excerpts.


  55. - Rich Miller - Thursday, Sep 26, 13 @ 2:21 pm:

    === are willingly giving this money to the hedge funds===

    Of course. We ain’t stupid.


  56. - Ready To Get Out - Thursday, Sep 26, 13 @ 2:33 pm:

    One Man…if you don’t understand the statement I can’t explain it to you any better. I could care less about who is specifically doing it. It’s the process man! It.is.wrong!

    “groups taking money they’ve made from pension fund management and using it to lobby for reductions in pension benefits”


  57. - reformer - Thursday, Sep 26, 13 @ 2:42 pm:

    == what is the net (post-fees) rate of return on hedge funds used by pension funds vs. the net return on simple index funds that mirror the market? ==

    I’d like to hear the answer from our pension fund trustees who hired Rauner and company.


  58. - Anonymous - Thursday, Sep 26, 13 @ 2:50 pm:

    Reducing fees, and abolishing worthless intermediaries for the state’s bonds, should be the number one concrete platform idea for the Treasurer’s race.

    One hurdle is that many of these intermediaries and bond counsel types are highly politically connected, or retired politicians.

    To say that “sophisticated” sellers and buyers in this market should expect to pay these fees is nonsense. The legal and offering processes are not that difficult or operationally costly, don’t change much over time, and are done in some other states more directly between the State in-house lawyers and the actual market makers. Some states also have a ceiling on state bond fees, that is way below the regular commercial market, and players still play because it’s easy money either way.


  59. - Demoralized - Thursday, Sep 26, 13 @ 2:56 pm:

    ==Reducing fees, and abolishing worthless intermediaries for the state’s bonds, should be the number one concrete platform idea for the Treasurer’s race.==

    The Treasurer’s office doesn’t handle bond sales.


  60. - Old and In The Way - Thursday, Sep 26, 13 @ 2:59 pm:

    Really Illinois
    It’s why commissioned sales people are always more motivated and more productive. It’s why the most successful lawyers are always personal injury attorneys.

    If you want to believe that fine but the facts don’t support you. Perhaps you are confusing the most visible with the highest paid. Year in and year out the highest paid lawyers work for banks, Wall Street, and corporations. That’s where the serious money is. Oh, and by the way they most work on incentives and bonuses too.


  61. - x ace - Thursday, Sep 26, 13 @ 3:01 pm:

    These investment scams made Rauner rich, Emanuel rich , Daley rich, Cellini rich……………..and left George and Rod doing time.
    Whata State !


  62. - Ghost - Thursday, Sep 26, 13 @ 3:03 pm:

    SO we can afford raising taxes for health insurance for all, because that is taking somone elses money from them….but taking 20% of somone elses money, and charging them a fee for the work which basically represent say a salary or actual cost for the work on top of that, is ok?

    So if I am a private person, its ok for me to charge a tax (without deudctions) and then make you additionaly pay me for the work, so long as its not called a tax…. but if you are a government seeking to provide basic helath care, why that is an outrageouse and unfair taking…..


  63. - Old and In The Way - Thursday, Sep 26, 13 @ 3:05 pm:

    Really Illinois
    The pension crisis was/is not being caused by investment related fees. It is/was caused by unsustainable promises made to unions by pols to buy votes. You can’t pay a teacher or anyone else for 70 years when they only worked 30 years, but that’s what was promised to them.

    What color is the sky in your world? You need to read up on this a bit! The problem was caused by the legislators and governors skipping payments to keep you taxes unrealistic ally low. Besides your math doesn’t add up.unless a tracer plans on living to 120……do the math!


  64. - wordslinger - Thursday, Sep 26, 13 @ 3:05 pm:

    ==Reducing fees, and abolishing worthless intermediaries for the state’s bonds, should be the number one concrete platform idea for the Treasurer’s race.==

    You mean the governor’s race.


  65. - walkinfool - Thursday, Sep 26, 13 @ 3:09 pm:

    ===The Treasurer’s office doesn’t handle bond sales==

    Yes, you’re right.

    But the Treasurer’s office doesn’t enforce the requirement to produce a balanced budget either. It’s still a campaign message that can have impact.


  66. - Old and In The Way - Thursday, Sep 26, 13 @ 3:10 pm:

    Oops! Spell checkers and small screens…….
    Unrealiticly low……

    Unless a teachers plans on living to 120…..

    Sorry!


  67. - Kwark - Thursday, Sep 26, 13 @ 3:17 pm:

    By the way, pension funds are only a part of the story for how Rauner used his clout network. Dartmouth College alums have been complaining for years that influential alums use their influence (generated by donations, of course) to get Dartmouth’s endowment to invest in their hedge funds, venture funds, PE funds, etc. And Rauner is one of those guys. He earned an estimated $7m on fees from his alma mater.

    Here’s a Reuters article talking about the New Hampshire AG investigation: http://www.reuters.com/article/2012/05/29/dartmouth-endowment-idUSL1E8GT9CS20120529 .

    And here’s a damning article by the Dartmouth alumni and faculty, with Rauner featured on page 2: http://www.dartblog.com/AG%20Letter.pdf .


  68. - Third Reading - Thursday, Sep 26, 13 @ 3:19 pm:

    Excuse me for asking something so seemingly fundamental…but….

    Do we really need to farm out most (if not all) of our lucrative (very lucrative) pension and bond business?

    Why can’t we set up (or control) our own broker dealer shops, and have them do some of what the glorious Wizards of Funds do?

    In other words — why can’t the retirement funds (or the Treasurer’s office, for that matter) effectively do some of the investing (1) from in-house, or (2) through either a captive or a state-affiliated entity? Particularly with plain vanilla financial products.

    And why do we perpetually have to have outside counsel come in and slurp up megabucks on all of our bond business? Why can’t the AG’s office (or, instead, some sort of objective free-standing entity) be staffed up to do some of what the Ty Fahner types supposedly do?

    Oh, I forgot. Pinstripe patronage makes the world go ’round.

    I’m outta here.


  69. - Kwark - Thursday, Sep 26, 13 @ 3:25 pm:

    By the way, one need only pull on these threads a little bit until you get to even more expensive fund management services paid for by the state: “fund of funds”, where a whole new layer of fees is stacked on top of the ginormous fees charged by the hedge/PE funds. And all they do is select other hedge or PE funds–they don’t do the actual investing. Good business if you can get it. Exhibit A would be the uber-clouted Grosvenor, of Michael Sacks/Rahm Emanuel fame.


  70. - Ghost - Thursday, Sep 26, 13 @ 3:40 pm:

    Third thats a good idea, but we would need a better compensation package with good benefits to attract good people for these jobs…


  71. - Old and In The Way - Thursday, Sep 26, 13 @ 3:44 pm:

    Ghost
    - Ghost - Thursday, Sep 26, 13 @ 3:40 pm:

    Third thats a good idea, but we would need a better compensation package with good benefits to attract good people for these jobs…

    Maybe even pay them a pension………


  72. - Jake From Elwood - Thursday, Sep 26, 13 @ 4:27 pm:

    Maybe public funds just don’t belong in riskier and costlier investments like hedge funds, private equity funds and the like. I would argue that a smaller, safer and cheaper range of investment options makes sense for public funds.


  73. - CircularFiringSquad - Thursday, Sep 26, 13 @ 4:29 pm:

    So CousinBRUcey and his posse have hauled a ton of cash out of Illinois taxpayers funded pension systems….we don’t think he can really be called an “outsider” going forward
    Fire, Aim, Ready!


  74. - Ruby - Thursday, Sep 26, 13 @ 5:23 pm:

    Warren Buffett recommends index funds because they charge lower fees and have higher average investment returns over time. This is a good idea for pensions and for individual investors.


  75. - ejhickey - Thursday, Sep 26, 13 @ 5:54 pm:

    Buffet recently called the Fed, the world’s largest hedge fund.


  76. - Biker - Thursday, Sep 26, 13 @ 8:59 pm:

    This is the most important story in the United States


  77. - Federalist - Thursday, Sep 26, 13 @ 10:34 pm:

    I just hope this piece makes the MSM.

    But like the Ty Fahner/Civic Committee credit rating debacle, I doubt if it does.

    Once could almost believe in a conspiracy of silence on such issues if one did not know better.


  78. - wordslinger - Thursday, Sep 26, 13 @ 11:11 pm:

    Federalist, the silence about Ty and the Civvies — with the exceptions of Cap Fax, Charlie Wheeler, and public radio — has been strange.

    Nationally, Rolling Stone has been on the crimes of the Masters of the Universe since Lehman went don’t.

    And if you read the WSJ, NYTimes, Financial Times and Economist, they’re been on it, too. So has The Guardian. It hasn’t seeped down to lower levels in the media for some reason.

    Reading the WSJ every day the last few years is like reading your local police blotter, writ large, with billions at stake all the time.

    JPMorganChase makes the Gambino Family look like petty thieves. Libor, the Whale, worthless mbs, rigging energy markets, screwing credit card customers, hosing customers on overdrafts, illegally foreclosing on soldiers in the field — they are a crime wave.

    They’re the biggest bank in America. And supposedly, Jamie Dimon was a White Knight and they were the Good Guys.

    It will continue until a stop is put to it. The Obama Administration has been scared to put the wood to these crooks for fear of crashing the economy again. But they’re making fortunes while everyone else is stuck in the mud. What’s to lose?

    The Big Banks need to be broken up. You could be generous and say they’re too big to manage, or you could say they’re so big they’re beyond the law.

    I say the latter. If Teddy Roosevelt had RICO back in the day, they’d have all done a perp walk a long time ago.

    Somehow the Republic survived breaking up The Trusts that were a threat to democracy. Not only did the nation survive, it thrived as never before once there was a square deal at the table.


Sorry, comments for this post are now closed.


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