This Labor Day: the difference between honest labor and fraud ... by gimleteye

There is something positive and joyful about labor, getting paid for a hard day's work. What has considerably added to the national cycnicism is that there seems to be a dismal, almost institutionalized lack of accountability in many sectors of the economy-- like finance and banking, for instance-- and enough parts of government to make the whole, suspect. Today, wage inflation is rampant. It manifests in the scandal of local government pay hikes in the face of the worst budget crisis in a century.

A specific example: the performance of managers of the Florida State Board of Administration. The SBA is the non-descript agency that manages the pension fund of over 1 million Floridians who work or retired from state or local government; from firemen to educators to office workers. The St. Pete Times published a report of an investment in Manhattan real estate at the top of the market, that resulted in a $266 million write down. This fiasco adds to billions of dollars in risky investments-- like buying Enron as the stock was swirling down the drain, or, untold billions in derivative debt sold by Lehman Brothers to Florida tied to the same crappy housing developments that are killing Florida's economy.

What is so remarkable is that no one at SBA has lost their job over the latest loss; in fact, the managers have been rewarded with bonuses. In the entire financial sector where hundreds of billions of taxpayer dollars have bailed out banking executives/laborers; name a single instance of accountability besides Bernie Madoff. The Sunday New York Times reported that taxpayers are backstopping more than $6 million in legal fees generated by the former Fannie Mae CEO who took down hundreds of millions in compensation by cooking the Fannie Mae books.

In the City of Miami, a political hack with a no-show job is allowed to retire with a full pension-- after her lazy schedule was documented by a private investigator hired by a union leader. City managers surely knew she was exploiting government, and getting well paid: they did nothing to stop her.

When accountability of labor vanishes in a cloud of cynicism, there is lots of trouble. Conservatives love to blame labor unions for all manner of affliction to the national spirit. The Democrats deserve their share of blame, but the worst result of nearly a decade of Republican control of the White House and Congress was the imposition of a false reality -- "we're history's actors"-- that created serial financial and economic bubbles whose results plunged the nation into a near Depression.

This Labor Day, don't forget where we have come from. I pray conservatives find their footing and that voters and taxpayers can discern the difference between honest labor and fraud.



State pension fund's $266 million investment disappeared in 2 years
By Sydney P. Freedberg l St. Petersburg Times
Sunday, September 6, 2009

TALLAHASSEE — This is the story of how the Florida board that invests public money bet $250 million on a huge Manhattan real estate deal and lost every last penny of it.

A number of others didn't do too badly, however. On top of the money lost, Florida paid $16 million in fees to real estate developers, bankers and Wall Street money managers who persuaded the state to make the deal.

State elected leaders with potential influence over the pension funds' investments received campaign contributions from some of those same corporate giants. And state pension managers in the real estate unit got performance bonuses.

The big loser was the State Board of Administration, which invests more than $105 billion for 1 million current and future retirees. On the Manhattan real estate deal, its $266 million is now worth a grand total of $0.00.

How the Florida agency wound up in the ill-fated real estate gamble is also a story of lessons learned, as the pension agency's executive director, Ash Williams, put it when he informed the state's top officials of the loss.

"To the extent we have failures, we will be honest with ourselves, our beneficiaries, and constituencies,'' Williams said. "We will identify mistakes made, learn our lessons, and move on.''

The St. Petersburg Times asked Williams what mistakes were made, what lessons were learned.

His key lesson: Good processes can produce bad results.

The backstory

Between 2000 and early 2007, four SBA internal reports and a watchdog group identified problems with the real estate investment process — including a lack of risk control.

Nonetheless, the managers shifted assets into higher-risk real estate deals, often by joining private partnerships that used borrowed money.

Investing borrowed money, known as leverage, boosts returns in boom times, but amplifies losses in bust times.

In August 2006, at the height of the real estate bubble, a senior acquisitions manager in the SBA's real estate unit, Steve Spook, received two overtures to join investment firms bidding for adjoining apartment complexes in Manhattan.

The complexes — Peter Cooper Village and Stuyvesant Town — were iconic housing communities, a "city within a city'' on 80 prime acres overlooking the East River. Metropolitan Life built the apartments for returning WWII veterans in the 1940s. They became an oasis for teachers, nurses and retirees on small pensions, one of the last refuges for the middle class in Manhattan.

In 2006, an average rent-controlled apartment in Peter Cooper Village went for about $1,340 a month, about 40 percent of the average rent in the surrounding area.

New York's rent-control rules limited increases to 7.25 percent over two years, with some exceptions. Tenants could be ousted if their primary residences were elsewhere or if they illegally sublet their unit at market rates.

About a quarter of the apartments paid market rate rents when MetLife put the complex up for sale in August 2006.

The insurer's whopping asking price — $5 billion — made clear that to make a profit, the buyer would have to convert most of the remaining rent-stabilized apartments into market-rate units.

A raft of debt

On Oct. 17, 2006, MetLife announced the winning bid, an eye-popping $5.4 billion — $400 million more than the asking price — by Tishman Speyer Properties and BlackRock Realty.

The buyers put in $225 million of their own money, then passed much of the risk to others.

Enter Florida.

Tishman Speyer and BlackRock each had business and political friends in the state.

Tishman Speyer had vast real estate holdings in South Florida in the 1980s and early '90s and was looking to get back into the market. The company contributed $5,000 to the Florida Republican Party in 2002. Two of its executives donated the maximum $500 to the 2006 political campaign of Gov. Charlie Crist.

BlackRock, which is 49 percent owned by Bank of America/Merrill Lynch, gave $500 to Chief Financial Officer Alex Sink during her 2006 campaign.

Crist and Sink, who serve as pension fund trustees, declined to be interviewed for this story. Their aides said there was no connection between political contributions and the investment in the Peter Cooper Village venture.

BlackRock already managed more than $300 million in Florida pension money. They wanted more business.

On Jan. 9, 2007, five BlackRock executives visited Tallahassee to make their case. Among those they met with were Steve Spook; Doug Bennett, the senior investment officer in the SBA's real estate unit; and Kevin SigRist, the agency's deputy executive director.

A few weeks later, BlackRock sent the real estate unit a confidential document outlining the strategy for achieving double-digit returns on the Peter Cooper Village project.

The 92-page memo revealed that Tishman Speyer and BlackRock planned to weed out rent-regulated tenants and turn the units into a "market-based environment'' in seven years. They would woo young, affluent renters and "position the asset for a value-maximizing sale.''

Ash Williams, who took over as the SBA's executive director in October 2008, concedes that in hindsight, the projections made by Tishman Speyer and BlackRock may have been "overly aggressive.''

But the documents provided to the SBA show that the agency's managers were made aware of the risks all along.

Line by line across 13 pages, the confidential memo lays out the risks. They included the possibility that Tishman and BlackRock could fall short of cash to pay off debt.

"Unless net operating income from the property increases materially,'' the memo said, "the partnership will not be able to meet its interest payment obligations in which event it would default.''

Due diligence?

Spook evaluated the Peter Cooper Village deal for the SBA. The analysis relied heavily on the owners' statements.

• The report stressed the apartment complex's "excellent physical condition'' and "competitive advantages.'' But some prospective renters were turned off by the plain brick buildings that looked like a low-income public housing project.

• The report spoke of the "favorable fundamentals'' in the Manhattan apartment market. But some experts were predicting a weakening market.

• The report noted the owners' "extensive experience'' in managing rent-regulated apartments. Tishman Speyer had limited experience managing multi-family rental properties. Its expertise was in office towers like Rockefeller Center in New York City.

Spook's report also highlighted "issues'' with the investment, including possible cash flow problems, contaminated soil beneath the property and concerns about "liquidity,'' meaning Florida could have trouble unloading the investment if it declined in value.

Spook also noted a "lack of full Townsend due diligence.'' Townsend is the Townsend Group, a firm that Florida paid $200,000 a year for real estate advice.

SBA spokesman Dennis MacKee said that Townsend doesn't normally do due diligence. He said the SBA thoroughly vetted the investment.

On March 12, 2007, Spook recommended investing $250 million. Two weeks later, Doug Bennett concurred. In a three-paragraph memo, Bennett acknowledged that the deal could be a "risky proposition'' but said Florida would benefit from increasing its New York City exposure.

Kevin SigRist concurred with Bennett, and then-executive director Coleman Stipanovich approved the deal.

The real world

The Peter Cooper Village sale fueled a political uproar in New York City over the future of affordable middle class housing.

New York City Council member Dan Garodnick said the high selling price put pressure on the owners.

"They started sending legal notices to many perfectly legitimate longtime tenants claiming they were not using their apartment as their primary residence,'' said Garodnick, himself a resident of Peter Cooper Village.

Garodnick helped tenants fight eviction and supported a lawsuit. It contended that the owners had improperly raised rents after getting special tax breaks. The tenants sought $215 million in rent they overpaid.

BlackRock and Tishman Speyer's confidential memo to Florida's pension fund had warned that a lawsuit could cripple the deal.

The owners said they thought the tenants' claims were without merit. But if the residents were to prevail, the memo said, the owners would "suffer an immediate and very substantial loss of revenues and would be unable to carry out a significant part of its plan to convert rent-stabilized units to market rate.''

Lawrence Longua, a real estate professor at New York University, said the Manhattan gamble reveals some investment mistakes and truths about pension plans.

They are driven to make "goofy investments'' like the Manhattan deal, Longua said, because with low interest rates and aging baby boomers, it's getting harder for states to meet their pension promises.

"So public pension funds now have to go up the risk curve to meet those obligations.''

Running out of money

On June 7, 2007, with the real estate market about to head south, the SBA sank $266,780,948 into the Peter Cooper Village partnership with other investors: $250 million for the investment plus $16,780,948 in fees.

By September 2008, the investment was in deep trouble. BlackRock and Tishman Speyer were having trouble converting the rent-regulated apartments to market-rate units. Expenses were higher than expected, income,lower. The new owners were running low on cash to cover payments on their $3 billion mortgage.

On Dec. 4, 2008, at a meeting of the group that advises the Florida pension fund on investments, a member questioned why nobody at the SBA had mentioned the troubled Peter Cooper Village investment.

"I think this should have been on the agenda,'' said Jim Dahl, a Jacksonville investor. "Let's make sure we talk about 'em so we don't repeat mistakes. … This is a serious, serious problem and we almost went through the meeting without discussing it.''

Dahl said many investors thought the deal was based on "pie-in-the-sky'' assumptions and was "going to have a bad ending.''

The SBA said otherwise.

"This is a long-term investment,'' SigRist said in an interview a few weeks later. "The view here is, as a long-term investor, we're uniquely qualified to hold these investments.'' He blamed problems not on inadequate vetting but on the changing financial world.

For months, the SBA did not respond to information requests from the Times about the Peter Cooper Village deal. They did not disclose documents the newspaper requested in December 2008, again in January 2009 and again in March.

Prompted by a fourth request, in April the agency released copies of appraisals and two redacted reports. Information about fees, expenses and investment issues was blacked out. The agency is still withholding documents about the deal, saying the legal department is reviewing them to determine if they can be released.

Worth zero

After a New York court ruled for the tenants, SBA managers exchanged e-mails and acknowledged their investment had been "wiped out.''

On July 28, Doug Bennett authorized the SBA's director of accounting to write off the entire $266,780,948.

In a memo last month to the three trustees who oversee the SBA — Gov. Crist, CFO Sink and Attorney General Bill McCollum — Williams blamed the loss on the recession, slow income growth and leverage.

In an interview, he deflected questions about whether the SBA needed to change policies or add checks and balances to property investment decisions.

"I don't want to be overly sunny,'' Williams said of Peter Cooper Village. But when the economy comes back, the rents could go up and the property could regain its value. "That's what America is all about.''

Damage control

As SBA trustees, Crist, Sink and McCollum have had a mostly hands-off style of oversight. Under their watch, the agency has been bruised by risky investments tied to the subprime mortgage crisis.

None of the trustees agreed to be interviewed about the Peter Cooper Village problem.

Last Tuesday, however, Sink brought up the real estate deal at a public meeting in Tallahassee. It was the first of the quarterly meetings they ordered after a Times investigation found deceptive and misleading practices by some SBA officials.

Williams told the trustees that investors besides Florida got hurt. He said the SBA staff followed all procedures. "To the extent we had a bad experience,'' he said, "that's unfortunate; we regret it, and we've endeavored with all our hearts to make sure we don't do that again and we understand how it happened.''

But overall, Williams said, the agency's real estate holdings are doing well. Worth $9.7 billion last year, their values tumbled to $7.8 billion for the fiscal year that ended June 30, 2009.

With stocks starting to rebound, Williams emphasized the uptick in the value of the entire pension fund. It hit $138 billion in September 2007, dropped to $83 billion in March 2009 and now is up to $106 billion.

Meantime, the SBA managers are bracing for additional real estate hits, especially in their higher-risk, commercial property holdings, like hotels and office buildings. Tanking values are making it tough for their owners to refinance mortgages.

For Doug Bennett's performance during the peak of the market in 2006-07, on top of his $135,000 annual salary, the SBA last year awarded him an $11,000 bonus.

Spook, who analyzed the Manhattan investment and last year made about $87,000, received a $7,000 bonus.

Two other real-estate employees who had a role in the Peter Cooper Village investment also got bonuses last year for their work in 2006-07.

The SBA said the bonuses were reward for good performance of the entire pension fund.

Times computer assisted reporting specialist Connie Humburg and researcher Shirl Kennedy contributed to this report.

[Last modified: Sep 06, 2009 03:48 AM]