This story is just so tragic. This did not have to happen. This is not supposed to happen. I will leave the reading and comments up to you because I don’t think I can go much further without profanities.
When reading this story, note that it makes it sound like the losses are known and it could get better. In a tumbling real estate market where everything is distressed, they likely do not have their holdings marked correctly and will experience much higher losses.
At least we know now why the CalSTRS and CalPERS were all over press, including all of the financial television media blaming short sellers. -Best, Mr Mortgage
By MICHAEL CORKERY, CRAIG KARMIN, RHONDA L. RUNDLE and JOANN S. LUBLIN
-one of its worst annual declines since its 1932 inception.
–Calpers has lost almost a quarter of its assets since July 1, the start of the current fiscal year.
-has been without its top two executives for nearly half a year.
Tax payer to bail out stupid, greedy moves:
–Calpers is now warning California’s cities, towns and schools that they may have to cough up more money to cover the retirement and other benefits the fund provides for 1.6 million state workers. Some towns are already cutting municipal services, and at least one is partly blaming the Calpers fees.
-Calpers in recent weeks said it expects to report paper losses of 103% on its housing investments in the fiscal year ended June 30.
-Calpers invested not only its own money, but billions of dollars of borrowed money that must be repaid even if the investment fails. In some deals, as much as 80% of the money invested by Calpers was borrowed.
-Calpers became much more aggressive than other pension funds in making nontraditional investments — real estate, foreign stocks, even forestland.
-Unless Calpers’s returns bounce back by June, the fund says it expects that the rates it charges governments to participate in the pension could rise starting in 2010, leaving them with less money to spend on other services.
–“Even under the best-case scenario…taxpayers are still going to have to put more money into pension funds.”
-Its real-estate portfolio fell 14.4% for the 12 months ended in September, underperforming its benchmark, which rose 5.3%.
There is always hope! That’s about all they have left
-Calpers stresses that it’s a long-term investor and can earn back the declines in the future, just as it erased declines suffered in the dot-com bust a few years ago.
In Denial – I knew not to invest in Real Estate and these areas were the worst long before this. Why didn’t they.
-“No one in the marketplace knew how swiftly the housing market would fall — not the Federal Reserve, not the Treasury,” said Ted Eliopoulos, head of Calpers’s real-estate portfolio, in an interview.
-The fund has also added “checks and balances” on property-investment decisions, Mr. Eliopoulos said. “Calpers has always attempted to learn from downturns,” he said.
In recent years Calpers gambled on:
-Three large parcels near Phoenix, one of the nation’s hardest-hit property markets. Last month, Calpers effectively walked away from one of the three, after having invested $140 million.
-On one of the others, to start earning a return, Calpers’s investment partner recently started selling ground water from the property.
-A massive block of land with room for about 8,000 units near the small town of Mountain House, Calif., the nation’s most “underwater” housing market by one measure. As of June 30, Calpers valued the investment at negative $305 million, reflecting the fact that it has repaid borrowed money used in the deal.
-About 10,000 acres near Jacksonville, Fla. The plan was to sell timber from the property, as well as residential lots. But as real estate collapses, it could take five years before the venture can start selling lots.
Big hit coming to tax payers
-Calpers recently estimated that if its declines for the current fiscal year are greater than 20%, it would trigger an increase of 2% to 5% of an employer’s payroll.
-A 5% increase in California’s rate would be the largest increase to hit public employers since the dot-com bust.
-Any rate increases aren’t a certainty, Calpers says, since the fund could still earn back its declines.
Real-estate losses aren’t the primary reason Calpers is taking a hit. Its biggest declines have been in the stock market: Its stock portfolio is down 41% so far this fiscal year.
-Robert Carlson, a former Calpers board member who left the board earlier this year, said publicly at that time, “We believe taking no risk is the biggest risk you can take.”
This is beyond ‘pushing the envelope’
-Amplifying the risk, many of Calpers’s land investments used borrowed money.
-“Calpers said, ‘If we can do it with 300 houses, let’s do it with 3,000.'”
-Between 2001 and 2002, it raised the amount permitted to an average 50% from 25%.
-in 2005, the trustees sanctioned use of borrowed money in residential deals at an average rate of 60%.
-some individual deals used as much as 80% borrowed money, Mr. McCook recalls. That level is more aggressive than many pension funds or land developers would use
Trusting the exact wrong people
-Home builders like to do this because it lets them essentially control land without having it weigh down their balance sheets. And Calpers hoped for big returns by selling that land to the builders in a booming market.
–By being guarantor, Calpers used its rock-solid reputation to obtain lower borrowing costs. But today, as projects struggle, the guarantees mean Calpers is pouring additional cash into projects from which it might otherwise prefer to walk away.
-Calpers teamed up with Lennar Corp., the giant Miami-based home builder. Lennar was known in the industry for its sophisticated use of land deals.
-“We based it on our research, our judgment and on MacFarlane’s track record,” he says.
Ya Think? Its About Time:
-Amid the losses, Calpers is making some changes in its investment-decision process. In February 2007, shortly after Mr. Eliopoulos became head of Calpers’ real-estate group, the fund set a new policy requiring deals to be vetted three times — by the internal investment committee, an independent fiduciary and, finally, by an outside consultant. Previously, much of the oversight came from Calpers’ staff and consultants.
–Calpers is creating a new computer database to more closely track “balance and diversification” in the real-estate portfolio. It also is proposing to reduce the maximum amount of borrowed money that can be used in housing deals, and cut back on loan guarantees.
Not Much Smarter Now:
George Diehr, vice-president of Calpers’ board, said that in the future the fund will have less of its money invested in residential property, although that’s partly because its current holdings have fallen in value.
Source: Wall Street Journal.