It might behoove CalPERS Vice Chair of the Board and Investment Committee chair Theresa Taylor to heed folk wisdom, like “People in glass houses should not throw stones” and “When you are in a hole, stop digging.”
But the saying that appears most fitting for Taylor’s idiotic intervention in the scandalously rapid exit of CalPERS CIO Ben Meng is “You can’t fix stupid.”
Taylor just executed a multi-level backfire in attacking fellow board member Margaret Brown when she publicized an article in Buyouts Magazine which gave prominent play to Brown’s concern that Meng’s private equity conflicts potentially tainted not just the fund’s $500 million investment in a Blackstone fund earlier this year, the apparent trigger for Meng’s high velocity exit, but the private equity program broadly, and that CalPERS therefore needs to rein its private equity investment in until it has performed an investigation and implemented new oversight policies. 1Until the Board understands what actually happened, it cannot make prudent decisions about how to proceed.
As we’ll review, first by attacking Brown, Taylor gave the Buyouts story more prominence than it otherwise would have had. Second, Taylor is under investigation for similar abuses to the ones Meng engaged in, specifically, for multi-year failures to report significant income on her Statement of Economic Interest (Form 700), California’s required annual financial form for public officials. That means Taylor is not a credible spokesperson on any matter that relates to propriety or legality. Having her speak up for CalPERS is about as credible as having Trump’s former attorney/fixer, the felon Michael Cohen, defend Trump.
As an aside, the election committee for Taylor’s 2018 campaign is also under Fair Political Practices Commission investigation (case 2020-00074)
Taylor sticking her head above the CalPERS parapet simply calls more attention to the allegations that Taylor hid income, despite the Forms 700 requiring an attestation under the penalty of perjury. Taylor has confirmed the charges by amending some of her Forms 700 four years after the fact to include the income that the FPPC complaint said she failed to report.
Third, Taylor predictably misrepresents facts and issues, possibly due to her lacking the intellectual capacity to discern what is relevant. After all, even though Taylor is a tax collector, she apparently didn’t know what income was and hence managed not to include a lot of it in her Form 700 filings. Now that the press has woken up and started doing actual reporting on CalPERS, uninformed bluster no longer cuts it.1
Finally, Taylor, who has the backing of SEIU, apparently does not understand that investing in private equity is buying the rope that billionaires like Blackstone’s Steve Schwarzman are using to hang labor.
Now to the substance of the squabble. Buyouts, a publication whose readership is private equity professionals, published a story today by Justin Mitchell titled CalPERS board member calls for hold on PE investments after CIO resignation. Nearly all Buyouts pieces are tightly paywalled, but Buyouts apparently chose to make this story available to the great unwashed public. From the top of the article:
As you can see in the story, CalPERS declined to comment, but provided a general statement that it was “moving forward” with the private equity, private debt, and fund level leverage plans hatched on Meng’s watch. Board President Henry Jones also backed the “all systems go” stance: “I believe our strategy must go forward.”
Before going any further, notice that Brown felt it necessary to reiterate Controller Betty Yee’s call for an investigation:
I believe the Board has an obligation to CalPERS members to determine whether Mr. Meng’s carelessness violated any laws or caused financial and reputational damage to the pension system…While the CIO’s resignation was appropriate, the Board’s obligation to CalPERS members does not end there. Rather, it calls for a swift and thorough inquiry into this matter and potential actions needed.
Brown and Yee presumably mean an independent investigation, under board direction, since Institutional Investor reported that CalPERS had already conducted an internal investigation.
Also note that Brown is making her call after CalPERS emergency closed session meeting on August 17. The fact that Brown is now joining Yee’s demand strongly suggests that either the board was briefed on the internal investigation and it was inadequate in key respects, or in what would be a stunning governance breach, staff was not fully forthcoming about what was in the report.
A noteworthy bad feature of the August emergency board meeting was that the board had no legal representation whatsoever; the fiduciary counsel, Ashley Dunning, the board’s only advisor, was not listed on the agenda as a participant.
Finally, Brown appears to have reason to be concerned, as we were, that Meng’s private equity conflicts of interest extended not just to the stocks he had invested in, but to private equity generally. Or was the board told Meng’s has more or more extensive private equity stakes than he reported on his Form 700s?
Since CalPERS taking a strong stance either for or against the economics of major private equity firms would reverberate though the investment community, just as its repudiation of hedge funds did. As we wrote:
Meng holds positions in three private equity fund managers…CalPERS lost 5.1% in private equity last year, worse than the SP 500 and worse than CalPERS’ own public equity portfolio. No less than the Financial Times has decried the industry’s fee grifting as “the real ‘Money Heist’”.
These investments create a general conflict of interest against Meng building up capabilities in house to make private equity investments in house to cut out fees and costs that CalPERS has estimated at 7% per year. That is the course of action recommended by CalPERS’ own private equity expert, Dr. Ashby Monk, as well as others.
But if CalPERS were to announce such a move, it would have as dramatic an impact as former CIO Ted Eliopoulos’ 2014 decision to get CalPERS out of hedge funds. This legitimated and accelerated an exit that was already under way.
In other words, Meng has put himself in and continues to remain in a position where doing the right thing by beneficiaries would hurt his personal balance sheet.
Taylor went after Brown on Twitter:
It’s secrecy that hurts the fund not transparency. The CEO & a few Board members knew for months & hid it from the rest. Worse yet, the CEO let Meng push Private Equity (More Better Assets) while knowing of conflicts. I may be one vote, but I’m the ONE who will get to the truth.
— Margaret Brown, CalPERS Board Member (@saveyourpension) August 27, 2020
Someone needs to tell Taylor that she’s really crappy at the “lying for CalPERS” game.
It takes less than 30 seconds on Google to establish that the Board had not even approved the “more private equity” plan 1.0, the since abandoned “Pillars Three and Four” strategies, until AFTER Meng joined. And Meng influenced the design of that scheme, by pushing for an even larger private equity commitment than has been underway under Ted Eliopoulos, consistent with Meng’s widely reported exhortation: “We need private equity, we need more of it, and we need it now.” From the Wall Street Journal in March 2019:
A new strategy to invest more deeply in private equity is roiling the nation’s largest public pension fund….
Its latest proposal is a departure from the way most public pension funds invest in private equity. Instead of investing alongside other limited partners in funds run by outside firms Calpers intends to be the sole backer of at least two limited liability companies. The companies will be overseen by outside managers, which will act as general partners.
How much could be invested is still not known. Officials have said it could be as much as $20 billion over the next decade but Mr. Meng in a February presentation to the board included a slide showing a hypothetical scenario in which the Calpers invested as much as 16% in private equity. That would amount to a $57 billion commitment to private equity and would make Calpers the third-biggest such investor in the world, according to Preqin data.
As we chronicled at length at the time, the private equity scheme that the CalPERS board approved in spring 2019 went nowhere. We could not determine whether it died under the weight of its own contradictions, because Meng slow-walked it, or both.
Meng did not announce his plans to go whole hog on private equity risk, including launching a new private debt initiative, until June 2020. And even though Meng had indicated he might also add leverage across all of CalPERS’ investments, the level he had previously indicated was a mere 1/4 of what he set forth in June. On top of that, Meng called it “The 7% Solution,” a bizarre reference to the 1970s best-seller The Seven-Per-Cent Solution, a novel about Sherlock Holmes’ cocaine addiction. So CalPERS has a substance abuse problem? From our June 2020 post CalPERS Plans to Blow Its Brains Out: Seeks to Increase Risk by Boosting Private Equity, Private Debt, and Leveraging the Entire Fund:
CalPERS is acting exactly the way traders on Wall Street do when they are sitting on serious losses, or in CalPERS case, underfunding so deep that they can’t earn their way out of it. They put on desperate, high risk positions in the hope they can climb back out of their hole. Pros will tell you that this is just about always a fast path to ruin. CalPERS’ version of swinging for the fences is to increase its commitments to its riskiest strategy, private equity, embark on investing in a new risky category, private debt, and leverage the entire fund.
The fundamental outlook is so poor that even Warren Buffet, known among other things for astute contrarian plays, can find nothing to buy. Yet CalPERS thinks that now is the time to load up on risk. It not only plans to add to private equity but also to load up on another speculative investment, private debt, while also leveraging the entire portfolio. Did CalPERS miss out on the finance lesson that leverage increases losses as well as profits?
This scheme smacks of CalPERS yet again going for fads after their sell-by date. Remember how the giant fund was gung-ho to get into late-stage venture capital, as in unicorns, right before their valuations started to plunge? The only reason CalPERS didn’t go ahead was press and beneficiary criticism, particularly since the plan was so badly thought out….
Key points from the Financial Times account:
Calpers is to move deeper into private equity and private debt by adopting a bold leverage strategy that the $395bn Californian public sector pension fund believes will help it achieve its ambitious 7 per cent rate of return.
In a presentation to the Calpers board, Ben Meng, chief investment officer, said the giant fund would take on additional leverage via borrowings and financial instruments such as equity futures. Leverage could be as high as 20 per cent of the value of the fund, or nearly $80bn based on current assets. The aim is to juice up returns to help the scheme, the largest public pension in the US, achieve its growth target.
Taylor is trying to pretend that Meng doesn’t own this? Seriously?
On top of that, Taylor makes her lack of sophistication all too evident. Taylor lays into Brown, effectively for Brown having the temerity to exercise her First Amendment rights and more important, to do everything in her power to make sure that CalPERS exercises its fiduciary duty.
Brown is not acting in the capacity of “one board member” any more than Taylor herself is in trying to bash Brown on Twitter, save in Brown’s willingness to ignore CalPERS’ efforts to gag board members. Brown is exhorting for CalPERS to adhere to the law and watch out for beneficiaries. If this really is a one person position at CalPERS, its board should be burned to the ground.
Taylor also airbrushes out that other supposed lone wolf board members, like Treasurer John Chiang, who called for an investigation into Marcie Frost’s resume inflation, and Betty Yee’s call for an investigation into l’affaire Meng.
Finally, Taylor appears to be so badly informed as to recognize that she is support Trump by supporting private equity. As an exasperated retiree said with respect to Taylor via e-mail:
Like, hey, ya bonehead, while you’re amending four years of FPPC Form 700s that to include tens of thousands of dollars in union slush-funds that you “forgot” to include, you didn’t notice that giving my hard-earned money away to Private Equity funds Trump’s GOP voter suppression efforts: https://truthout.org/articles/billionaires-are-funding-trumps-voter-suppression-lawsuits/
Indeed, did Taylor manage to forget that Blackstone CEO Steve Schwarzman has been a huge Trump donor and served as chairman of Strategic and Policy Forum? And even though Schwarzman has not given as much (yet) in this election cycle to Trump as he did in 2016, his firm is one of Team R’s biggest backers? From the Wall Street Journal:
Employees of New York-based Blackstone Group Inc., the world’s largest private-equity firm, have shelled out the most on the 2020 elections, spending $21.5 million, mostly in favor of Republican candidates and conservative groups, according to the Center for Responsive Politics.
I received a second upset beneficiary message about how Taylor’s tweets make clear she’s incapable of minding the CalPERS money store:
Who is talking about Private Equity?
This idiot still hasn’t figured out that Private DEBT is a completely different animal than Private EQUITY — or that the “distress financing” that Meng announced on June 15 is with Mesa West, paying them a 1% fee to make interest-only distress loans to borrowers with Debt Service Ratios of less than 1.0 — meaning that there is no serious prospect of recovering principal unless the borrower is liquidated. An unacceptable risk for a fiduciary, but a terrific asset-stripping strategy for a borrower — and the middle man. https://mesawestcapital.com/lending-programs/
These high-interest loans may pump-up short term “returns,” but that’s a cheap accounting trick, because they are guaranteed to wipe-out those interest payments if the go under and lose the trust funds already contributed by employers and workers. Taylor is smoking crack telling employers that the fund can hit 7-percent when the current PERF return is in the loss column.
Start losing trust funds to speculative investments and contributions will go through the roof! Why doesn’t SHE ask employers if they would rather have a SOLVENT trust fund that hasn’t squandered THEIR contributions on speculative strategies that disclosed up front that they would eventually LOSE their investment?
You can see why CalPERS tries to keep captured board members like Taylor on a short leash. They are strongly discouraged from expressing independent opinions because their instincts and values are so terrible.
1 Contacts that have been “on the record” and “on background” sources for recent CalPERS stories have told us that the journalists are volunteering that they see the CalPERS PR department as telling flagrant lies and often unpleasant to deal with.