Daily Archives: March 1, 2015

Enron all over again: Why Wall Street’s pension investments are a disaster in the making

boehnerkiss

Congress aims to reduce regulatory scrutiny of private equity firms, exposing public employees and tax payers alike

To the casual observer, the investment returns recently announced by the California pension system might seem like cause for celebration. The state’s investments in firms that buy private companies generated a 20 percent return in 2014.

California’s $30 billion worth of private equity investments did not come cheap, incurring almost $440 million worth of annual management fees paid to financial firms. But the double-digit gains helped the system generate some of the best overall pension returns in the nation — positive news for taxpayers and for state workers who rely on the system in retirement.

Across the United States, similarly robust returns have proven key elements in the Wall Street sales pitch that has persuaded state and city pension overseers to entrust vast sums of money to private equity managers. The private equity industry has successfully portrayed itself as no less than a savior for underfunded pension systems. By one estimate, $260 billion of public money is now under the management of these firms.

But as Congress now considers reducing regulatory scrutiny of private equity firms, one problem complicates the narrative: A lot of the gains the private equity industry purports to have achieved are of the on-paper-only variety. Far from cash in the bank, they are instead estimates of the value of assets that have yet to be sold. Not only that, the estimates are largely self-reported by the private equity firms themselves — and new research suggests that the firms may be embellishing those estimates.

That is the conclusion of a paper by investment banker Jeffrey Hooke and George Washington University researchers. They essentially created a portfolio of publicly traded companies that they say closely resembles the kinds of privately owned companies that private equity investors buy. They then weighted their portfolio’s returns to reflect the same level of debt that private equity firms typically impose on their portfolio companies.

The researchers argue that their portfolio should show roughly the same returns as the private equity industry. Yet the private equity industry’s stated returns were noticeably less volatile than the publicly traded companies’ returns. The researchers assert that this suggests the private equity industry uses its latitude to self-value its own portfolios in order to make its returns look “smoother” than they actually are.

Read on.

Borrower files sprawling suit against Nationstar

RESPA news:

Proving that “everything is bigger in Texas,” a borrower from the lone star state filed a monster of a complaint to save his Dallas home from foreclosure. The suit includes more than 11 named defendants along with some unnamed ones, and at least six causes of actions, but is missing a few key elements. Read on for the details.

U.S. Is Set to Sue a Dozen Big Banks Over Mortgages – Yeah, sure.

Deadly Clear

So, what’s this? Another charade? Did Geithner or Bernanke suggest, “Hey Barack we’ll fix it, we’ll just file a big lawsuit against everybody and then we’ll cut a deal that let’s the banks off the hook for everything for the $20 billion the AG’s won’t settle on…”

New York Times

By NELSON D. SCHWARTZ
Published: September 1, 2011

The federal agency that oversees the mortgage giants Fannie Mae and Freddie Mac is set to file suits against more than a dozen big banks, accusing them of misrepresenting the quality of mortgage securities they assembled and sold at the height of the housing bubble, and seeking billions of dollars in compensation.

The Federal Housing Finance Agency suits, which are expected to be filed in the coming days in federal court, are aimed at Bank of America, JPMorgan Chase, Goldman Sachs and Deutsche Bank, among others, according to three individuals briefed on the…

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