To avoid another financial crisis, a group of public employee pension funds led by CalPERS and CalSTRS proposed regulatory reforms earlier this month that include an independent agency to monitor “systemic risk.“
When U.S. Treasury Secretary Timothy Geithner proposed regulatory reforms last week, the part of his plan put in the spotlight was an independent regulator to address “systemic risk.”
Is this an idea whose time has come, or is President Obama’s financial point man listening to the pension funds?
“You’ll have to ask him,” said Sherry Reser, a CalSTRS spokeswoman.
The public employee pension funds have pushed since the mid-1980s to improve the performance of individual companies through better “corporate governance,” urging shareholder rights, reforms of the selection of boards of directors, and executive pay based on performance.
Now the historic stock market crash, wiping out about a third of the value of many investment portfolios, is causing the public employee pension funds to take another big step and seek regulatory reform of the financial system.
One sign of the change is that CalPERS and CalSTRS are not making their push for regulatory reform through the Council of Institutional Investors, created by the late California Treasurer Jesse Unruh and others in 1985.
So many CalPERS board members, eight of 13 (plus six staff members), plan to attend a three-day council convention in Washington, D.C., next week that notice was given of a possible CalPERS board meeting, complying with open-meeting law.
Five of the 12 CalSTRS board members (plus five staff members) plan to attend. It’s a big money gathering. The public, corporate and union pension funds in the council were said to have assets totaling more than $3 trillion before the market crash.
The council has been focused on improving corporate governance. One of the theories is that big pension funds often have huge holdings and cannot sell the stock of a company without driving down the price or disrupting the market.
“And if they cannot sell, then they must ‘care,’” is the way James Hawley and Andrew Williams put it in “The Rise of Fiduciary Capitalism,“ their book in 2001 on the growing role of institutional investors in overseeing the managers of public companies.
The pension funds also tend to make their huge stock investments in a way that tracks a broad cross-section of the market, such as Standard & Poor’s index of 500 blue-chip corporations. This is a “passive” way to follow the market.
In response to a question, Michael Schlachter of Wilshire consultants told a CalPERS committee this month that switching huge pension holdings to “active” stock picking in an attempt to make up for losses could take years and disrupt the market.
“That would be one way to make it up, potentially,” Schlachter said. “But again, it would really change the way the market works if all the plans had to jump into active management. It certainly wouldn’t be anything you could do overnight.”
The council and CalPERS have both issued annual “focus lists” of underperforming companies. On the CalPERS list that came out this month: Eli Lilly, Hill-Rom Holdings, Hospitality Properties Trust and IMS Health.
CalPERS says it screens hundreds of companies each year, talking to them and urging improvements before they are placed on the focus list. (See Calpensions post on Jan. 19: “CalPERS & CalSTRS: New sheriff on Wall Street?”)
Studies have shown that after companies are placed on the CalPERS focus list, they have on average outperformed benchmarks. But CalPERS recently announced that it is making another run at a firm placed on its 2006 focus list.
This time CalPERS will be joined by CalSTRS as it seeks governance changes during the annual meeting April 15 of San Jose-based Brocade Communications, a data networking firm.
The two big pension funds announced last week that they have asked to be lead plaintiffs in a class-action suit against Bank of America, contending that shareholders were misled when asked to vote on the acquisition of troubled Merrill Lynch.
Is it a new era of CalPERS and CalSTRS teamwork?
Anne Sheehan, a former CalPERS board member, became the CalSTRS director of corporate governance earlier this year. She also is a leader of the group of pension funds pushing for regulatory reform.
In addition to CalPERS and CalSTRS, the group includes public employee pension funds in the city and county of Los Angeles and NewYork, Illinois, Colorado and Maryland.
The pension funds issued their principles for regulatory reform on March 10 under the broad headings of transparency, independence, corporate governance, investment opportunities and systemic risk.
Here’s part of what the funds said about “systemic risk,” the potential for widespread financial losses or market disruption:
“Mitigation of systemic risk in the financial markets appears best facilitated by an independent entity with funding autonomy, enforceable data collection powers, the capability to analyze the collected data to identify pending risks, and the duty to disclose the metrics indicative of the perceived risks.”
If “entity” sounds vague, it’s probably meant to be that way. There’s no specific target that can be easily attacked and plenty of room for negotiation, compromise and horse trading.
Geithner, who has not been drawing kudos for clarity, also issued a statement about containing “systemic risk” that was not specific about who would be regulating whom.
“A single independent regulator with responsibility over systemically important firms and critical payment and settlement systems,” said the U.S. Treasury statement.
Some observers predict a long battle in Congress. The pension funds, who do not make campaign contributions, may find that getting regulatory reform for well-heeled special interests is much tougher than governance reform for one company.
“Many of the past overhauls were really about deregulation, knocking down legal barriers that had prevented different segments of an industry from competing with each other,” a New York Times story said last week. “By contrast, Mr. Geithner’s plan marks the first attempt in decades to drastically tighten the restrictions on industry.
“It would create a new still-unidentified “systemic risk regulator” that would have the authority to scrutinize and second-guess the operations of bank holding companies like Citigroup or JP Morgan Chase, insurance conglomerates like the American International Group and other financial institutions that are deemed too big to fail.”
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 31 Mar 09