Is CalPERS suing ratings agencies to mask its own negligence?
Jul 15th 2009 12:20PM
Updated Dec 4th 2009 6:13PM
The $173 billion California Public Employees Retirement System (CalPERS) is suing ratings agencies because they gave AAA ratings to Structured Investment Vehicles (SIVs) in which CalPERS parked $1.6 billion of its pensioner's money in 2006. In 2007 and 2008, the SIVs collapsed and now CalPERS is putting the blame on the ratings agencies.
But here's the thing -- CalPERS had no idea what was actually inside the SIVs. In fact, the vendors who sold the SIVs said that they would not reveal what was inside of them in order to protect their trade secrets. I am assuming that CalPERS employs investment professionals to make investment decisions. If so, those professionals were either incredibly stupid or were simply not doing their jobs when they decided to "invest" $1.6 billion in an investment that they were prohibited from understanding by its seller.
But its non-performing investment professionals are not stopping CalPERS from suing the ratings agencies who put AAA ratings on the SIVs. Specifically, CalPERS is suing Moody's (MCO) and S&P for giving AAA ratings to SIVs sold by Sigma SIV and Cheyne Capital Management in London, and Stanfield Capital Partners in New York.
To be fair to CalPERS, these firms paid the ratings agencies fees ranging between $300,000 and $1 million to rate the SIVs. And the agencies "won" the fees by AAA rating them. As I posted two years ago, without these conflicted ratings agencies, there would have been no investors willing to buy all that toxic waste.
But the simple fact remains that a pension fund owes a fiduciary duty to those who depend on it to know a huge amount about its investments. And CalPERS failed miserably in fulfilling that fiduciary duty when it came to investing in those SIVs.
A pox on both their houses -- the ratings agencies and CalPERS.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.