No wonder the California Public Employees' Retirement System (CalPERS) is suing the ratings agencies for making "negligent representations" about the credit-worthiness of the complex financial investment opportunities that were all the rage just the other side of the Great Recession. CalPERS, the largest public pension fund in the United States, announced on Tuesday that it had lost a staggering $57 billion on its investments in fiscal year 2009 -- representing 23 percent of its total portfolio. When you get burned that bad you start looking for someone to kick -- and the ratings agencies are an alluring target.
A loss that big -- CalPERS' single worst year ever -- is an anti-stimulus package all by itself.
CalPERS, which manages retirement and health-care benefits for 1.5 million current and retired public workers, has said its losses for the fiscal year ended June 30 are so severe that it likely will ask taxpayers to contribute more to ensure it has enough money to pay benefits. The state and hundreds of local governments pay a percentage of their payrolls each year into the pension.
So even as California state employees are facing furloughs and pay cuts, they'll also be paying higher taxes to ensure that they get their benefits. Sweet.
But there's one thing about this whole story that bothers me. CalPERS is well known for its aggressive shareholder activism, which focuses on improving corporate governance and a wide array of social issues. So what exactly was the fund doing investing its money in "structured investment vehicles" that were, by design, completely opaque to outsiders. CalPERS is claiming that the ratings agencies were negligent, but so too was the pension fund that represents 1.5 million workers. Just like everybody else, CalPERS wanted the fat returns, and threw sound risk management out the window.