Another Pension Scandal – The Crony Love Affair Between North Carolina, Credit Suisse and Erskine Bowles

Another Pension Scandal – The Crony Love Affair Between North Carolina, Credit Suisse and Erskine Bowles

Michael Krieger | Posted Wednesday Oct 22, 2014 at 12:10 pm
http://libertyblitzkrieg.com/2014/10/22/another-pension-scandal-the-crony-love-affair-between-north-carolina-credit-suisse-and-erskine-bowles/

In North Carolina, managing the retirement savings of teachers, police officers, firefighters and other public employees is big business. As the sole fiduciary of the state’s $90 billion pension fund, Treasurer Cowell, a Democrat, was recently named the world’s 18th most important institutional investor by the Sovereign Wealth Fund Institute. The State Employees Association of North Carolina (Seanc) estimates that North Carolina is on track to spend a billion dollars a year of retirees’ pension money on fees to private financial firms. Roughly half of all North Carolina pension deals involve placement agents, and Seanc estimates that has generated roughly $180 million in placement agent fees — costs that are effectively paid by the pension fund, according to critics.

Credit Suisse’s own internal regulations say the company aims to “establish a management organization that avoids the creation or appearance of conflicts of interests.” But the North Carolina agreement (the provisions of which were secret until Seanc’s open records request earlier this year) explicitly allows Credit Suisse to engage in “actual and potential conflicts of interest.” The agreement noted Credit Suisse could receive “placement fees” from the firms in which it invests North Carolina pension money.

– From David Sirota’s excellent piece in Investors Business Daily: Pension Deal Spotlights ‘Placement Agent’ Business, Raises Conflict-Of-Interest Questions

When it comes to how the U.S. economy of fraud functions in 2014, the following article has it all. A government official, a global investment bank and a businessman/politician, all working together to enrich themselves at the public’s expense. It demonstrates how big bucks are really earned by insiders in the new American Dream, characterized by extreme cronyism and corruption.

As might be expected, this post highlights another excellent piece by David Sirota, who has been doing the best investigative journalism on the topic of public pension corruption. In this article, he zeros in on what’s known as “placement agents,” which are often large financial firms with connections across the political spectrum, and are often money managers themselves, such as private equity giant Blackstone. However, they don’t need to have any expertise in financial matters, they simply need to be connected. As such, placement agents are sometime even former NFL stars.

These agents are paid by money managers to recommend their funds to huge pools of capital, such as public pension funds. In this article, global investment bank Credit Suisse plays the role of placement agent. The investment pool is played by the North Carolina state pension fund, led by Janet Cowell, while the asset manager looking to earn pension fund fees is played by Carousel Capital, a firm run by Erskine Bowles.

As a refresher, Janet Cowell is no stranger to this site. I covered her cronyism back in June in the post, Meet Janet Cowell – The North Carolina Treasurer Desperately Pushing to Keep Criminal Public Pension Fees Secret. Here’s an excerpt:

Given the exposure of the Pando and Naked Capitalism articles,people started asking questions, something the folks running these public pensions clearly do not want happening. Some of those folks happen to reside at the State Employees Association in North Carolina, which has helped introduce a bill to require more disclosure about deals with Wall Street firms hired to manage alternatives to stocks and bonds. Seems reasonable enough, right? After all, this is a publicpension.

So how does Janet Cowell, the North Carolina Treasurer who controls the $87 billion pension react? Naturally, she throws her support behind a bill that would conceal details for five years after a contract is completed. Why five years you ask? Well, the employees association’s general counsel, Tom Harris, notes that “the five-year period of secrecy the treasurer supports would mean the statute of limitations for securities fraud claims would expire before documents are made public.”

As expected, she has close ties to the financial services industry, and nearly 20% of her campaign contributions in 2012 came from such donors. She received more money from folks in New York City, than she did from Charlottle, North Carolina’s largest city. You can’t make this stuff up.

What about Erskine Bowles? I’m sure you’ve heard that name. In case you forgot, in 2010 he was appointed as as the Democratic co-chair of Obama‘s National Commission on Fiscal Responsibility and Reform. Yep, you read that right, responsibility and reform. It’s as if Barack Obama intentionally surrounds himself with the biggest cronies he can find from sea to shining sea.

With that out of the way, here are some excerpts from Sirota’s excellent piece at IBD:

On the day it was publicly unveiled in March 2010, the North Carolina Innovation Fund was billed as a way to put the state’s pension money to work as seed capital for a new crop of cutting-edge local businesses. As State Treasurer Janet Cowell described the plan, the new undertaking would invest a slice of the state’s $90 billion pension fund in North Carolina firms that seemed poised for profitable expansion.

To underscore that transformation, Cowell made the announcement inside a restored textile mill in Durham. She stood next to Erskine Bowles, the former chief of staff to President Bill Clinton and a longtime financial industry executive.

But in the four-plus years that have followed, the North Carolina fund has emerged as an example of a different variety of innovation — the financial kind. More than an artery of finance for startups, critics say, the fund has come to function as a private source of wealth for the savvy, politically connected financiers who have managed it, using it to capture lucrative slices of public pension money for themselves.

From its inception, the innovation fund was run jointly by Cowell and the multinational banking giant Credit Suisse. Within a year of its launching, a fundraiser for Cowell was held at Bowles’ home. Weeks later, the innovation fund awarded a contract to Bowles’ firm, Carousel Capital, to manage some of the fund’s money. Only three days after that, Carousel filed documents with the SEC showing that the firm had paid Credit Suisse $775,000 for the bank’s work as a so-called placement agent in helping Carousel attract investment money.

See how that works? Credit Suisse gets to choose how to allocate some of the state money, Erkine Bowels’ Carousel Capitals pays Credit Suisse to serve as a “placement agent,” and then it gets access to public pension money.

In other words, in its role ostensibly protecting North Carolina taxpayers’ interests, Credit Suisse steered state pension money to a politically connected firm that was paying the bank to help it land pension deals.

Financial and pension management experts inside North Carolina and beyond now say the deal can be viewed as a particularly pungent example of the dubious role of placement agents — intermediaries hired by private financial firms to help them secure fee-generating deals to manage public pension money.

“There is a very real risk that investment decision-making is corrupted by placement agent compensation,” former Securities and Exchange Commission attorney Ted Siedle said. Earlier this year he conducted an investigation for the State Employees Association of North Carolina that estimated that up to $65 million of the $230 million Innovation Fund has been spent on financial fees rather than on local entrepreneurs.

Carousel Capital did not respond to International Business Times request for comment, and Credit Suisse declined to comment.

Of course they didn’t.

Pension officials are bound by strict fiduciary statutes to base their investment decisions purely on financial considerations — not political calculations or personal relationships. Yet one job of many placement agents is to leverage personal relationships to help their clients obtain pension investments — regardless of whether those investments are the most prudent for the particular pension fund.

The lucrative placement agent business has drawn in an array of powerbrokers and celebrities who have little financial experience but who can open doors — from Democratic fundraiser Eileen Kotecki to onetime New York Comptroller H. Carl McCall to former NFL star Lynn Swann.

The agents often get a cut of the total pension investment, which, on a typical multimillion-dollar deal, can run the fees into the six or seven figures. And, critics argue, those fees are ultimately paid by the pension systems.

In North Carolina, managing the retirement savings of teachers, police officers, firefighters and other public employees is big business. As the sole fiduciary of the state’s $90 billion pension fund, Treasurer Cowell, a Democrat, was recently named the world’s 18th most important institutional investor by the Sovereign Wealth Fund Institute. The State Employees Association of North Carolina (Seanc) estimates that North Carolina is on track to spend a billion dollars a year of retirees’ pension money on fees to private financial firms. Roughly half of all North Carolina pension deals involve placement agents, and Seanc estimates that has generated roughly $180 million in placement agent fees — costs that are effectively paid by the pension fund, according to critics.

Credit Suisse’s own internal regulations say the company aims to “establish a management organization that avoids the creation or appearance of conflicts of interests.” But the North Carolina agreement (the provisions of which were secret until Seanc’s open records request earlier this year) explicitly allows Credit Suisse to engage in “actual and potential conflicts of interest.” The agreement noted Credit Suisse could receive “placement fees” from the firms in which it invests North Carolina pension money.

A little more than a year after Cowell hired Credit Suisse to run the Innovation Fund, the bank announced it was committing an undisclosed amount of Innovation Fund money to Carousel Capital, a private equity firm co-founded by Bowles and in which he is still listed as a senior adviser.

The investment was based on the Innovation Fund’s mission “to invest in companies with significant operations in or a nexus to North Carolina.” But days after Credit Suisse gave Carousel Capital the pension money, the firm filed SEC documents showing Carousel paid Credit Suisse $775,000 for placement agent services.

North Carolina’s state employees’ union has requested an SEC investigation into the fees paid by North Carolina, and into allegations that pay-to-play rules were violated when a fundraiser was held at Bowles home for Cowell just before the Innovation Fund invested in Bowles’ firm. (Bowles says his wife, not he, hosted the fundraiser.)

Credit Suisse is currently asking the federal government to waive sanctions related to its felony conviction that could prevent the bank from continuing to provide financial services to public pension funds.

The reason these crony deals are so sought after is because in the American fraud financial system, a sure thing beats taking a risk any day. By chasing assets and collecting fees, hedge funs and private equity firms no longer have to put up strong returns. They merely need to keep assets under management as high as possible.

As I noted in the post, Consultant the San Francisco Pension Fund Asked Whether it Should invest in Hedge Funds, Runs a Hedge Fund:

So in a world of poor performance, the hedge fund industry needs to earn more from the 2% and less from the 20%. In this reality, performance actually takes a backseat to assets under management. As long as you can get your assets under management high enough, you can earn hundreds of millions on fees alone. After all, 2% of $10 billion = $200 million per year in fees.

Placement agents help make this happen at the public’s expense. After all, as noted in the article above “an investigation for the State Employees Association of North Carolina estimated that up to $65 million of the $230 million Innovation Fund has been spent on financial fees rather than on local entrepreneurs.”

Almost 30% of the fund spent on fees? How is this not criminal.

In Liberty,
Michael Krieger

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