Do you have life insurance? You do? Boy, do I have a deal for you!Let's say your life insurance policy will pay your beneficiaries $100,000 if you keel over. Well, I'll give you $60,000 now, and all you have to do is assign that policy to me. Your kids don't need that money anyway. Of course, once you sign away, I'll be calling you once a week to make sure you're still feeling well. I'll also be giving you lots of drinks to try, even if you complain they taste a little funny.
This is what's known in the alternative investment biz as a "life settlement." Believe it or not, it's one of the more ridiculous "hedge funds" in Bethlehem's pension fund. I told you about that yesterday. Bethlehem is playing "You bet your life!"
Why not just take all that dough and play craps at the casino?
Two Pennsylvania Counties - Westmoreland and Allegheny - have been crazy enough to get mixed up in this morbid scheme.
After all, who could possibly complain? Dead people? Senile seniors? Well, the Government Accountability Office (GAO), for one, is concerned about a "lack of clear, consistent state oversight." Another little group called The Securities and Exchange Commission (SEC) wants life settlements classified as securities.
Senator Herb Kohl (D-Wi), who chairs the U.S. Senate Special Committee on Aging, is a little more concerned about the pitfalls faced by seniors:
"Most seniors don’t know that when they sell their policy, their health records can be passed off to multiple third parties as their policy is resold time and again. Most seniors are also unaware of what their tax liabilities are, or that they may be uninsurable in the future. Furthermore, most seniors may not know that they are participating in insurance fraud if they purchase life insurance with the intent of flipping it for a life settlement. Known as stranger-originated life insurance, or “STOLI,” such scams have led to a spike in litigation since 2005. In Florida alone, insurers have filed three multi-million dollar federal lawsuits in the past year alleging that the true nature of the life insurance transactions were misrepresented."
In their quest for a quick buck, Callahan's crew has turned a blind eye to the warnings of the GAO, SEC and Senator Kohl. Moreover, there's something inherently distasteful about a public pension investing in funds based on the hope you die soon.
What's next, Soylent Green?
Other Little Details
(1) Hedge funds make up a whopping 12% of Bethlehem's pension fund. Even alternative investment cheerleaders would probably agree that percentage is simply too high.
(2) Mike Shone, a pension fund manager for many of our Counties, tells me only a handful throughout the state - about three or four - are willing to take the risk of investing in hedge funds.
(3) Northampton County's Director of Fiscal Affairs, Vic Mazziotti, tells me most hedge fund managers are paid 2 and 20, i.e. they get 2% of the investment up front, followed by 20% of whatever is earned. Thus, they have an incentive to take risks, hoping for a big payout. And if they lose, it's only money.
Your money.
you're really going over the top with your dent-love. while exotic, these are typically fairly stable investments.
ReplyDeletebut is the city stable. i think not
ReplyDeleteDoes this Vic guy have the city's best interests at hand?
ReplyDeleteBernie,
ReplyDeletePermission to Post: It's still about politics. Did you see this?
Bloomberg to back Sestak. Campaigns are getting interesting.
Bernie, Someone Who Knows here,
ReplyDeleteIf done correctly, to have up to 20% of your assets in alternative asset classes - hedge funds, private equity, commodities - is not unreasonable, so a 12% investment in this asset class is not taking some horrible, undue risk. I cannot comment on the "life settlement" issue as you present no evidence that this is true or in what percentage of total investments of the funds in question it represents. Having 12% is much different than having 0.25% of your assets in such investments.
And, just because other counties do not invest in this asset class does not mean Bethlehem has added risk. As I have stated previously, there are many low volatility strategies available, as well as a fund of funds strategy that is an amalgam of investment styles.
To your final point on manager pay: your statement assumes that every hedge fund manager is basically out to screw his investors and retire at a young age if he/she gets lucky investing unsuspecting investors money. And, yes, that does happen on occasion, but that is not the exception and not the rule. And the same thing can and does happen with mutual funds sold to the general public.
What is more important is that you have competent, knowledgeable people making the investment decisions. There needs to be proper due diligence and those who have responsibility need to adhere to the prudent man rule.
The problems faced by all public and private pension funds these days have nothing to do with hedge funds, they have to do with the assumptions they are based on and the economy we are in.
And how exactly are you defining the word "risk?" I ask because there are many different risks involved in investing and all investments have risks attached to them. What risk are you referring to?
And Charlie Dent voted for bailouts.
ReplyDeleteBoth of these guys are fiscal imbeciles.
Can we please get a candidate who can count past ten without having to drop his pants?
Look, If the SEC & GAO argue for tighter controls, I vonsider them risky. Plus, they are downright creepy.
ReplyDelete"Does this Vic guy have the city's best interests at hand?"
ReplyDeleteProbably more than anyone on bethlehem's pension board. This is insanity.
"And how exactly are you defining the word "risk?""
ReplyDeleteLike - It all depends on what the meaning of the word "is" is.
12 % is not necessarily a bad number. What was the beginning number? If all other asset types decreased in value and the hedge fund increased in value, the hedge fund's percentage would be higher in relationship to the total portfolio.
ReplyDeleteShone and his company, Pierce Park, are consultants. They operate to provide performance results and analyze those results. Problem is investments are becoming more sophisticated demanding a different type of employee to manage. Shone's business is something of the past as governments begin to hire the sophistication.
Government Finance Officers Association at its 2008 meeting estimated that hedge funds and alternative investments would eventually make up 25% of all public pension fund portfolios. Time to get on board. If governments are going to continue to discount returns at 8% to determine unfunded liabilities, they will have no other choice but to consider alternative investments. Otherwise the taxpayer gets socked with incredible costs.
Face it b...u only consider them risky because callahan did it. If dent backed them u'd be fine with them.
ReplyDeleteI pointed out, in a comment yesterday, that most county pensions don't include hedge funds. The hedge fund cheerleaders countered that what most counties do is no indication of good investment strategy. Now you're argument it's time to get on board with what some goofy collection of "government finance officers" proposed in 2008.
ReplyDeleteNo public pension fund should have a 12% investment in hedge funds unless you plan on seeking another bond to make up your losses. They are too risky.
It has been pointed out, not by me but the GAO & SEC, that this particular investment is risky. A US Senator just convened hearings bc of the dangers that this particular practice poses to seniors. And you're saying get on board?
"Face it b...u only consider them risky because callahan did it. If dent backed them u'd be fine with them."
ReplyDeleteI say they are risky bc they are risky. I have linked to numerous sources pointing to the risk. I have spoken to several high finance experts (Mazziotti, Shine and others) who agree they are risky. And in the case of these "life settlements," they are downright creepy.
Callahan is arguing for tighter controls on Wall Street, yet he puts 12% of the city's pension funds in crap like this? It is little wonder the City missed last year's payment.
If something is stupid, it is stupid, regardless of where the idea originates. Investing 12% of a public pension in hedge funds is stupid. Investing in the anticipated death of seniors is downright creepy.
Bailouts were risky.
ReplyDeleteDent voted for bailouts.
It is not whether county pension funds have hedge fund positions, it is what is happening to the investment markets. The traditional investment, a basket full of equities, is not going anywhere. You would be better off putting your money in a bank savings account and letting go of the Shones and Maziottis. Pension fund investments are changing. The alternatives are much more sophisticated. The volatility of commodity markets and weakened dollar positions do not make traditional equity investments work. Choosing investment groups based on market capitalization levels and underperformance was the way of the past, not the way of the future. Our economy has changed. The trends are established by outfits like CALPERS. We need to examine where they are going. Sorry, your advisers are not strong in this area.
ReplyDeleteBernie, you are still way off on this and are missing the big picture issues with pension plans and how they are run.
ReplyDeleteThe problems all start with the underlying assumptions. Currently, your average pension plan is assuming an 8% return per annum. This is not based on reality, but based on what some highly paid "consultant" tells the plan what it wants to hear. But just a little knowledge and math can help you understand the problem with this 8% assumption.
If you look at the bond markets you will see that a 10 year Treasury pays approx. 2.6% today and a 30 year Treasury pays 3.75%. Highly rated corporate bonds do not pay much better, maybe 5.5%. So let's use the 5.5% number for our example.
If you have a 50/50 stock/bond allocation, you will need to have a 10.50% return from your stock portfolio to meet your expected 8% return. The situation gets much, much worse if you have had exceedingly large losses in any given period of time (say 2008 for example).
Now let's look at reality over the past decade. From 2000-2009, your high-side realistically expected return on a bond portfolio would be a 7% total return. Thus, you would need an 8.92% return on equities. Unfortunately, the reality was a negative return over that time-period of approx. negative 1.5% per year(using S&P500 as a proxy). As a result, your average return would be 3.52% per year.
To put this into hard numbers, for every $1,000,000 invested in 2000 it was expected to have $2,158,925 in value a decade later. Unfortunately, in the above scenario there would only be $1,413,441, for a shortfall of $745,484.
Granted, this does not take into account cashflow in or out, but I think my point is clear that there is a much bigger problem(s) that you are clearly overlooking. And FYI, if used properly, a basket of hedge funds would have mitigated some, but not all of the problems.
In conclusion, the problem is that public pension funds are not managed in a proper manner and the advice they are getting from the advisors is not based on reality. We all need to be realistic about where we are and what the future will bring.
We cannot stick our heads in the sand and ignore this or suggest that a hedge fund manager caused all of these problems. We need to decide soon how we will address these issues. Benefits will have to be reduced and taxes will have to be increased. And this is just not in Bethlehem, this is everywhere.
Please Bernie, stop trivializing and politicizing this serious issue. Please step out of your personal bias' and use your forum for enlightenment on such serious problems.
- Someone Who Knows
Point of order:
ReplyDeleteDid Dent vote for risky bailouts?
To All -
ReplyDeleteBelow is a link to the AIMA Due Diligence Questionnaire. Good source if you are looking at the kind of questions any fiduciary should be asking regarding hedge fund investments.
www.hedgefundprofiler.com/AIMA%20Due%20Diligence%20Questionnaire.pdf
- Someone Who Knows
Bernie
ReplyDeleteWho is the man in the photo?
Did anyone hear the feds are now talking about bailing out the teamsters pension fund.
ReplyDeleteThe prior poster was right; too muck politics on this issue. Blame is not on the mayor. From Bethlehem ordinances:
ReplyDeleteThere is created a City of Bethlehem Pension Fund Board of Managers, to be comprised of the Mayor; the Business Administrator; the City Treasurer; the City Controller; and all members of the Firemen's Pension Fund Board of Managers, Police Pension Fund Association, and the Officers' and Employees' Retirement Board, as they may exist at any time
The Mayor is in a minority on this board. What about standing? I would suggest that you complain about the fund to the appropriate agencies, but you would have to be either a resident/tax payer of Bethlehem or a retiree to have standing.
This is not a topic for little boys. Pension returns cannot make the required 8% levels. There needs to be an examination of all investment alternatives. If you want to be secure, then expect to pay more in taxes. Your knowledge of these issues is limited to several phone calls with Maziotti and Shone. They are not experts in these investment alternatives.
This is nothing but another lame attempt to make the congressional race all about a confidence vote on John Callahan as Mayor. There are major national issues that are being buried.
The City of Bethlehem Pension Fund Board of Managers may appoint a Trustee or Trustees to invest and manage the aggregated funds under the control of the City of Bethlehem Pension Fund Board of Managers, in such a manner as the Board of Managers shall direct. The Pension Fund Trustee shall report to the Board of Managers at each quarterly meeting, and provide detailed and accurate records of the investment and management of the Funds under the control of the City of Bethlehem Pension Fund Board of Managers.
ReplyDeleteHow exactly is this under the control of John Callahan
"Who is the man in the photo?"
ReplyDeleteThat's Paul Bearer.
Bethlehem is still one of the nicest cities in PA. Callahan can't be too bad.
ReplyDelete"Please Bernie, stop trivializing and politicizing this serious issue."
ReplyDeleteUmm, I'd argue that this became trivialized when the pension board made the idiotic decision to buy life insurance policies of seniors, hoping they keel over. That's downright creepy, and the practices in that unregulated industry cry out for control.
A public pension board has an obligation to invest the public's money in a way that creates a return of 7.5 or 8%, but it also has an obligation to be ethical. I find this kind of investment repulsive and contrary to the interests of many senior citizens, who are already subjected to enough predatory practices.
My basic purpose is to draw attention to a poor and unethical investment strategy, something that will eventually end up costing Bethlehem taxpayers. I do not think most people know that 12% of Bethlehem's pension is tied up in hedge funds. I also do not think most people knew about this ridiculous investment. It was enough to concern the lead auditor, and the public should know exactly what is going on
because Bethlehem has been making poor financial decisions over the past several years.
As far as the slams at Shone ad Mazziotti are concerned, they identified themselves. The anons here have not, and for all I know, one could be hedge fund manager for Bethlehem's pension.
It is also fair to note that Callahan's association with this misadventure. Last time I checked, he is the Mayor. Last time I looked, he still chaired the pension board. He has to have seen the same investments that caught the eye of the lead auditor, and that even troubles someone like me, who is smugly told to stay out of this high finance. What is most baffling is that Callahan is encouraging investment in groups that are largely unregulated while clamoring for more regulation on Wall Street.
Which is it?
What I can say as one of the "little boys" is that there are other ethical investments that do provide a return and don't involve fleecing seniors. REITs are one example. They have grown, even as the stoock market has suffered. In fact, that's been the biggest winner in NC's pension.
There is no need to invest in risky hedge funds.
is acting inconsistently with his own Wall Street campaign chatter.
"Bethlehem is still one of the nicest cities in PA. Callahan can't be too bad."
ReplyDeleteIt was one of the nicest cities in Pa before he was there and will remain one of the nicest cities once he is gone.
Not really. Bethlehem has more going on now than just a few years ago. The spread in quality of life between Easton/Allentown and Bethlehem has grown under Callahan. Granted, some of this is a result of lower quality of life in those towns.
ReplyDeleteBoth politicians have made poor economic decisions. Politicians usually do.
I do not do business with the city of Bethlehem.
ReplyDeleteI suggest that if you want to know something about hedge funds that you need to ask someone who is in the business. This query should not be aimed at Shone or Maziotti, This is not their business. And, my statements should not be taken as a slam against them.
My issue is that Callahan is not the person who makes decisions for investing this money. The decision is made by a board. If the board has abrogated its responsibilities to Callahan, then they need to be replaced.
You have a bias against Hedge Funds. You cannot explain how a fund works, what are the advantages and what are the disadvantages. I would agree that many Hedge Funds are wrong for a municipality. But, many of their features are becoming the investments of the future. It's time to learn about them, how to control them and when to use them.
I acknowledge I am leery of anything that is unregulated. I am especially leery of a life insurance scheme like the one being used in Bethlehem. I am also very leery of people who tell me to listen to the experts,. That's how we get stuck with swaptions.
ReplyDeleteWhat I've noticed in areas of high finance is that, if something looks goofy, that's because it is.
Callahan chairs the pension board, is the City's Mayor and has considerable say in how pension funds are invested. I'd be a fool not to wonder what the hell he could possibly be thinking. I'd agree that replacementrs should be seriously consideredd, starting with a business manager that has the City $8.5 MM in the red.
Finally, I am not the person who raised the red flag. That was an independent auditor of City finances.
Bernie, are the meeting minutes and voting records of the Pension Board public record?
ReplyDeleteI went to the City website and the Pension Board isn't even listed. I looked at the agendas for all Council meetings in 2010 and the Pension Board / Plan was not reference in any agenda. I also searched the City website and found references from 2003-2005 but nothing current.
Where is the oversight?
The Banker
The guy in the picture looks like Council clerk Frank Flisser
ReplyDeleteBanker, They do like to operate away from inquisitive eyes. I wonder whether they conduct public meetings.
ReplyDelete"The guy in the picture looks like Council clerk Frank Flisser"
ReplyDeletePaul Bearer used to escort the Undertaker to the ring. He's much more handsome than Flisser.
Great question - there seems to be alot of that (out of the public view) all over the place these days.
ReplyDeleteThe Banker
Of course, the meeting records are part of public record. And the auditor general would be all over the city if they were not having meetings.
ReplyDeleteThe make up of the board includes union representatives. I doubt very much that the mayor runs the board. It probably is the other way around.
Meetings. The Board of Managers shall meet once every calendar quarter at 9:30 A.M. Eastern Standard Time or Eastern Daylight Time, according to which Standard Time is prevailing, on the first Friday of the following months: February, May, August, and November, and at such other times as the Board of Managers may designate, for the transaction of such business as may properly come before it. All meetings shall be open to the public
ReplyDeleteIf they are not meeting, then Callahan is at fault
Anon 9:31, Thanks for the notation about public meetings. This would mean they met in early August. I just scoured MyPublicNotices and see no indication that the meeting was ever advertised.
ReplyDelete"Last time I checked, he is the Mayor. Last time I looked, he still chaired the pension board."
ReplyDeleteAnother interesting note, I think that the securities firm that represents the pension fund for the City is the largest donor to the Callahan campaign.
Do you have the name?
ReplyDeleteBernie @ 5:27 PM yesterday (8/17): Someone Who Knows here,
ReplyDeleteFirst off, I am not in any way associated with any hedge fund or money manager who does business with, or would like to do business with the City of Bethlehem. Nor am I a City resident or a contributor to Callahan or any other politician for that matter. I personally think that money corrupts and will never hand over any to a politician. I have posted here because I actually give a s@$t about the issue at hand.
My point of view is that there are these very large problems we face as a country and that we do not have any honest discussions/debates on the important matters. It is also my view that by throwing around the words "risk" and "unethical," as well as talking about "predatory practices against seniors" you are not getting to the core of the problem.
The core of the problem is that promises have been made that cannot be met. Either benefits need to be reduced or taxes need to be raised to meet current obligations. Unfortunately there is no one specific individual who can be blamed for the benefits owed, and no one wants to face the reality of lower benefits, higher taxes, or a combination of the two.
It is NOT UNETHICAL to invest in what is knows as alternative investments. Major universities like Harvard, Yale, Lehigh and Lafayette have been doing this for years. Harvard has no more than 25% of their assets in Equities and more than 50% in alternatives. Would you call Harvard unethical?
If you want to know what the GAO thinks, you can read this:
www.gao.gov/new.items/d08692.pdf
On page 16 of the above referenced document (pg 21 of the pdf) in table 1 it is shown that 24% of all public Defined Benefit Plans (read: pensions) invest in hedge fund strategies and 51% invest in private equity. These numbers are based on a study done in 2006 and include $3.6 Trillion in assets under management. I would bet that the percentages are currently higher today then they were four years ago.
You state that your purpose is to "draw attention to a poor and unethical investment strategy, something that will eventually end up costing Bethlehem taxpayers." There is a very strong argument that can be made that not investing in non-correlating asset classes would be a "poor and unethical investment strategy" given the recent track record of a long-only equity strategy over the last 10 years.
As for the Life Settlement thing, you still have yet to address what the hedge fund is that is investing in these settlements, what percentage of the pension assets they represent, and what the return has been from this strategy. Even though I am an ANON, I would still like some facts to back up your talking points.
Please, forget that I cannot sign my name and listen to what I have to say. If you cannot tell already, I am fairly knowledgeable on the subject and I have no ulterior motives. These problems are everywhere and cannot be put on any one person.
Has the paranoia about public finance gotten so severe that now we are condemning the basic premise of the whole life insurance model? Every time a whole life insurance product has been underwritten for the past two hundred years, part of its value to the underwriter has been the potential that the insured will not beat the mortality table. Early death is good for the life insurance business - no duh. And now that it is being considered as part of a defined benefit pension portfolio, it is somehow at reprehensible practice - get a grip. Keep in mind, the acturarial solvency of a fixed benefit pension plan is built on the same premise. Since first offered, we have been hedging on early death to limit public financial risk - a minority interest in life insurance does not somehow create this.
ReplyDeleteoops. I missed the "not" in front of "good for life insurance business" - duh for me.
ReplyDeleteAnon 11:10, There's a difference between a person who buys life insurance and some company that creeps around, buying policies from seniors. Abuses have occurred.
ReplyDeleteSomeone Who Knows,
ReplyDeleteAlthough I pretty much disagree with you and argue up and down with you, I appreciate your perspective and knowledge of the industry. I also appreciate that you share the disdain for the "fairy dust" that often makes these deals very suspicious. I'll agree that there probably are some worhtwhile hedge funds, although I think 12% is too high in a public pension. I do think "life settlements" should be avoided by a public pension because of the very real potential for abuse. I would also oppose hedge funds where payment is conditioned on performance. In a private pension, I would not resist hedge funds as strongly as I do with public pensions.
I also agree with you that we need pension reform big time. But that can only come from the land of midnight payraises.
B.O. @ 11:04 - Barroway, Topaz, Kessler, Meltzer & Check. http://articles.mcall.com/2010-04-07/news/all-c1.72306051apr07_1_bethlehem-steel-land-democrat-john-callahan-republican-charlie-dent
ReplyDeleteIncredible. Thanks.
ReplyDelete