Le Show; 2017-06-25

From deep inside your audio device of choice, ladies and gentlemen, I don't know if you've been following the news from London as I have because I've been here in London in self-said London, self-same London, a four-said London, but it's beginning to sound familiar. This week, the London Metropolitan Police tested the cladding, the external surface layer that was applied to the Grenfell Tower Highrise apartment block in North Kensington in its refurbishment just a year or two ago and found that the materials did not pass the test of being fireproof. That's the building that you probably know became an instant inferno when a freezer refrigerator had an electrical problem about 10 days ago and killed at least 79 people by current measure. Now we learn in latest reporting that the company that

manufactured the so-called cladding had at least three different varieties of the stuff, only one of which was fireproof. The others were decorative and were not recommended by the company for buildings higher than a fireman's ladder can reach. The contractor and the county or borough council that owned the building decided to use the non-fireproof version. It's not a natural disaster by any means. It's a result of at least official and probably corporate misconduct. Now news of AFPAC, drug addiction and Afghanistan once mostly limited because we pride ourselves on the progress that women have made during our 16 years in Afghanistan, we the United States of America. This will be interesting

that drug addiction in Afghanistan once mostly limited to men has exploded into a nationwide scourge that affects millions of people including a growing number of women and children. What do we tell the children? This from Washington Post over the past five years, programs of crop eradication and substitution have been largely abandoned because foreign funding has ended and insurgent attacks have increased. As a result, tens of thousands of farmers have returned to the really only money making business they know growing opium poppies. Last opium production rose 43% last year over the previous year to 48,000 tons. That's according to the UN office that counts drugs, I guess. Most Afghan opium is sold for export to the heroin trade in Europe and Russia. That's how we're getting back at Russia right there with an estimated revenue value of nearly a billion. But the boom is also led to a sharp drop in domestic prices while widespread unemployment and anxiety created by years of war have fueled demand for drugs. In 2010, UN experts estimated there were about 1 million regular

drug users in Afghanistan. They warned that addiction was following the same hyperbolic growth of opium production. By 2015, they reported the number of addicts in the company had soared to three million and more of them were using heroin. The problem has burst into the open now, overwhelming police and public health agencies. The most startling aspect of it is still largely out of sight. Tens of thousands of Afghan women can find to their homes by tradition. Often dependent, unaddicted men are succumbing to creating a growing phenomenon of drug-centered households where family relations, economic stability and social traditions can easily collapse. Job well done. Mission accomplished. And now… News of the Olympic Movement. Produced by Jim Eversall, Jr. Well here's good news for North Korea. They haven't had a lot this week. South Korea's

sports minister Do-Jong-Wan has suggested that the host country for the 2018 Winter Olympics starting next February may look northward to its neighbor for help in staging the events. The Olympics come to North Korea. It's a movement. It's moving. On a trip this week to Pyong Chang to check out preparations for the Games, Minister expressed his desire for a combined effort to make the international competition a success. You need North Korea to make it a success. Of course you do. Quote hopefully will be able to thaw lingering tensions as we try to bring North Korea on board. He said, according to the Korea Herald, I know him. The minister said Pyong Chang 2018 could be the peace Olympics if North Korea was to participate. Of course the athletes would come home in a coma, but this follows reports that South Korea's new president Moon Jae-in has suggested the two countries lead an Northeast Asian bid to host the 2030 World Cup. It's hands across the thing. Everyone from the central government to Gwang-wong province

and the organizing committee should come together for a successful Olympic said, Do, we need to create more buzz for the event. So it'll be a festival for everyone from around the world. It has created that suggestion, a buzz in the media with tensions around the South Korea running high following the recent death of Otto Wormbeer. But Do has already begun discussions with the International Olympic Committee about possible ways to ensure North Korea's participation. So far North Korea hasn't had any athletes qualified to compete at the Winter Games. Its last chance is a pair of figure skaters. The country North Korea has at less than fruitful record at the Winter Olympics having only one silver and one bronze in eight appearances. Don't even participate in the most recent Winter Games in Sochi. It wouldn't be the first time the two countries have joined forces to host sporting events earlier this year. They hosted a women's football tournament in the North Korean capital Pyong-gang and a women's hockey competition in South Korea. The Olympics bringing the careers together

because it's a movement and we all need one. Every day. This is La Show and we devote a substantial part of this broadcast to a subject that was last examined here a couple of years ago with a frequent guest to this program. The world of private equity, it's I think opaque, if not mysterious, to most of us. A couple of, I guess, definitional terms up front. Public equity is the stock market where anybody can go in and plunk your money down and kiss a goodbye or celebrate your victory. Private equity, you have to be invited to the party. It's not open to everybody and it's become a go-to investment medium for among others the public employee pension funds and our guest will explain why that is and what's happened subsequently. The aforementioned

guest is none other than Eve Smith, founder and proprietor and proprietor and editor and everything good about nakedcapitalism.com and she has done a remarkable series of reports, of original reporting on the world of private equity and its relationship to public employee pension funds, particularly the California public employee retirement system and we're going to go deep in the weeds with her today. Welcome Eve. Right, Terry, thanks so much. Deleted to be here. So first of all, why do public employee pension, the one that in question CalPERS manages the pension into which teachers, no not teachers, everybody but teachers. Fireman policemen, nurses in California who are on the public payroll have paid in their contributions over the years. It is still the largest public employee pension fund in the United States. That is correct, yes.

And the next biggest is its California sister CalSTRS which does handle the teachers. That's the teachers pension fund in California. Now in olden times there was this monopoly called AT&T which was the phone company and they wouldn't let you connect any other equipment to their precious phone lines and it was the kind of stock that was regarded as a widow as an orphan's stock. You was the safest thing you could buy and pension funds I think invested in it too for the same reason. It was ultimately the safe stock. We're a long way from that now, aren't we? Right, right, right. Yeah, there's a whole long history here and I'm hoping I can sort of simplify it as to sort of how we got to where we got. It used to be to your point that pension funds remember historically private companies, if anything, had more pension funds of the same type of the public employee funds are now sort of the dominant players. What they call defined benefit plans where you would work a certain number of years. There would be a formula

in terms of how many years you worked. You'd get a certain percentage of your pay based on your years of service and your paying your final years and you'd get that for the rest of your life. That was the old defined benefits program. Most companies have abandoned that approach and switched over to 401k type programs to the extent that they have any so that they're not promising pension payment in the future. Instead, they're putting some money aside and you're the one who's taking basically the market risk. Now, again, in the old days of the pensions, they were managed extremely conservatively. In fact, very similarly to the way life insurers manage their risk where they would project out, they would use actuaries to project out what the future payments are going to be. They wouldn't even invest in stocks. They would match them with bonds. They would have these, as they call, lattered, lattered by when the bonds would mature to match very precisely, given how precise you can know the future and when people are going to, you know, how many people

are going to die when. But to match as precisely as they could, the expected exposures. In 1974, there was a law passed called Arissa, which systematized how private pension funds were to be managed as a Department of Labor rules set of rules. And even though public pension funds are not legally required to follow Arissa, they all do basically. They either they're states of formerly adopted rules that require them to comply a lot to Arissa or as a matter of practice, they comply with Arissa. In 1978, the Department of Labor adopted a rule change to bring what they thought was bring the practice of in managing pension funds in line with what was considered to be modern finance theory, which was to allow them not to look at the risk of investment on literally like a bond by bond basis, but to look at it across their entire portfolio. Although that doesn't sound like a big change, it was actually a huge change and it had been

lobbied for by the, you know, then baby venture capital industry to allow for investment and venture capital. It allowed for investment stock. It allowed for it allowed for this approach that finance people call asset allocation, where you pick what are called asset classes. You know, and the idea of an asset class is that it it behaves in a distinct enough manner that its return patterns are not that closely correlated with another asset class. So in the old days, all the studies were done on cash, real estate, stocks, bonds, maybe foreign stocks, you know, those were all considered to be discrete asset classes. Now around the time when venture capital was growing up, so too was this industry, which is now lumped in with private equity. They rebranded it later on of leverage buyouts. And in the mid-1980s, KKR, which was an early big success story in the then the leverage buyout industry, persuaded the state of Washington to invest in private equity

funds or then leverage buyout funds. And the state of Washington basically became an evangelist to all of the public pension funds. Private equity is really not a separate asset class. It's colloquially referred to as a separate asset class. And it does have some very distinctive features. It means it really needs to be managed differently, you know, in that it's got very high fees. The agreements are very complicated. You're stuck in it. You know, you don't have any control over when you get your money back. Unlike the stock market. You the investor. You the investor. You sign a contract. They have the right to demand the money. It's called a capital call. So even though you've committed, you know, say for CalPERS and numbers are often very big, $500 million to a fund, the fund manager says, well, here, send us, send us $50 million and literally you have to send it in five or ten days. You know, it's send us $50 million because we're going to buy something. And then they also decide when they're going to sell it based on when they think the time is best.

And so you don't know when you're going to get your money back. So for instance, you know, the funds that were raised right before the crisis, you know, they expect to get their money, all their money back in ten years. And many of those funds clearly are not going to pay out on a 10-year time frame because after the crisis, nobody was selling things. I mean, the market was so crappy. And there were years where where they just weren't that many deals done either on the buy side or the sell side. But the point is to cycle back to the night. That's the story now, to cycle back to the 1980s. Historically, despite all the problems with the strategy, which we'll assume we'll get to in due course, you know, historically, people made a lot of money. I mean, quite a lot of money. You know, if you were old enough to remember that time period, it was actually, it was even sort of sexy in a creepy way because you had these like swashbuckling young private equity guys riding in to these sleepy, undermanaged companies. There were huge number of companies that over-diversified. And we're trading in the public market at what they call a conglomerate discount. The sum of the parts was greater than the whole, the value of the sum of the parts.

So making money in that business at that time was easy, provided you could take over the company. The hard part was getting the takeover lawyers and mounting the attack against the hostile management to take it over. But if you could take it over, it was just a slam dunk. You know, you would buy it with lots of debt. You'd sell off the pieces and you'd make a fortune. You could pay off the debt and still have profit left over, right? Lots of profit left over, right. So in those days, it was just egregiously easy if you did the breakup analysis to make money. And so the people who invested in that strategy did very well. Then they had a big bust in the recession, the same recession where we had the SNL crisis. And because of the early 1990s recession, and interestingly because the SNL crisis was so terrible, basically, the fact that there was a leverage buyout loan crisis and the later deals did really badly has not been in the collective consciousness anywhere near the same degree. But like some of the late deals, you know,

were famous turkeys. Like there was one called the Campo deal, which was just dreadful. There was another one, Ohio mattress, which was later called the Burning Bed. In the early 90s, they had a great deal of difficulty raising money. But the funds raised money after that bad recession, the ones that were able to raise funds and raise money, they had a period where they could buy things that were very cheap because the stock market still hadn't recovered from that bad recession. And again, you had another tremendous run in private equity just for basically cyclical reasons from 1994 to 1999. So again, people who caught that wave, you know, did well. What's happened basically in the 2000s and starting in, you know, we had another sort of takeover boom right before the crisis, 2005 to 2007. And one of the differences in the character of that boom relative to the earlier ones was the share of private equity, relative to global equity has now gotten to be very high. It literally doubled between 2004 and 2013. And now we've seen much more of the phenomenon of too much money chasing too few

deals. You know, until right now, we've got, you know, people have been acknowledging, you know, even people, even the people, even the investors like, this is, this is what Calcester said with the same way to apply to Calper. So multiples that they're now paying for these companies, the multiples are how you determine the price. The multiples are just at these nosebleed high levels. And people are using phrases like the deals of price to perfection, which means anybody who's who's buying now, everything has to work out right for them to do okay. And yet big firms like, you know, the KKR we mentioned before, Blackstone is another huge player, a firm called Carlisle is a big player, TPG's another name, Bane, Apollo, those are some of the big fish in that space. They've all been raising funds. So people have been committing more money to this, even though these, you know, what's the reasonable prospect of this going forward? Now I have to credit Calper's, even though I criticize Calper's a lot. One of the things that I think Calper's has sort of doing right, although they're probably going to suffer in the short term,

is they have been reducing their allocation to private equity. Now in general, you know, the people who advise them, you know, say, you know, you should make market timing bets. And this is, you know, effectively they're making a timing bet on private equity. Basically saying the prices are so high, we're going to pull some money off the table and reduce our allocation. So, but that's not the trend of the entire industry. Oh, and to back up, back up one more key point on the public pension funds, what isn't recognized back to that historical story about Washington sort of evangelizing to the industry. The reason for tying the funds like Calper's to private equity is that they are the biggest, collectively, the biggest investors in private equity. In fact, we had an insider write one of our first posts on private equity back in 2013. We started covering it and he called it a government sponsored enterprise. That's how significant the public pension fund contribution is. And of course, the second part is that because they use leverage, they're very dependent on the tax breaks. You know, it's really, you know, one of one of my friends

is a tax expert, Lee Shepherd, she's sort of a world recognized tax expert. She is as close to an exact quote I can get. She called it, she said private equity often resembles a tax shelter with an acquisition attached. Now, in the current era, correct me if I'm wrong, but I understand that one reason that public employee pension funds like Calper's have been heavy in private equity is because we've been in a low interest rate environment and they're chasing higher yield wherever they can find it, right? That is correct. And this is one of the bad, you can almost call the bad effect by design of the way the various central banks around the world, including our Federal Reserve handled the crisis. What they did is they dropped, you know, they dropped rates super low. They basically have a complicated explanation that it's going, it's supposed to stimulate economic activity by encouraging borrowing and encouraging a wealth effect. Well, wealthy people don't have the

same propensity to spend as poor people. You know, even when they make a lot of money, they're not going to go by 10 more yachts. You know, they might instead buy 10 more paintings and that doesn't really contribute to economic activity. And part of it, which, you know, pretty much everybody who is an informed financial commentator believes and economic commentators. Another big motivation was explicitly just to increase the prices of financial assets because the banks themselves were very much exposed to financial assets, a very, very source. You know, the bad mortgages defended by those directly contrary to popular perception. They bought better mortgages in their quantitative easing program. But the point, the idea was that if, you know, asset prices went up surely this would help all the financial players make more money and that would help the banking system and that would help get the banks to recovery faster. So that was kind of the logic, but the effect of these super low rates is that they drive everybody. I mean, not just the public

pension funds are a particularly visible example, but they've driven basically everybody into riskier assets and private equity is a particularly risky asset because of all the debt they use. You know, it's basically, informally, it's basically what you would call levered equity. You know, you and I could, you know, approximate private equity. The problems you can't, we can't get the same level of, you know, you know, broker loans against a, you know, if you were to have a buy stocks individually through brokerage and then, and then lever them up, we couldn't achieve the same leverage that the private equity firms effectively achieve, but that would be the approximation would be buying stock on margin. You mentioned the private equity contracts. They are opaque. You've had to go through various sources to make any of the contracts that public pension funds have with private equity firms public because even though public pension funds are by definition public, they are constrained by their friends on the private equity side not to make those agreements public. And you've, you've sort of forced some of them into the public view.

Right. Right. And as that's happened, there's been pushback at, at CalPERS, and you've, you've chronicled the adventures of a board member in trying to make more of this information public. Tell us a little bit about his story. The whole, the whole dynamic is just really quite remarkable. And, and, and it's a symptom. And again, again, as much as we're critical of CalPERS, their behavior is symptomatic of everybody in public pension funds. I really want to stress that CalPERS is not unusual in this. What is, and the reason that CalPERS is, is a focus is that they're an industry leader. And so what happens at CalPERS has a potential to move the entire public, you know, practice the entire public pension fund industry. But, um, the, the board member J.J. Jolensick also happens to be the most skilled board member at CalPERS because he has a peculiar role in that he is a member of CalPERS staff who ran for the board, which creates a few, a few conflicts that way. They have on elected board members. So he's actually the most technically

knowledgeable person on the board, which should be a plus and it's turning out to be a minus for him how peculiar in terms of, you know, his sort of life on a day-to-day basis. He has asked actually what have been very straightforward questions about the fees being paid and has exposed either completely dissident, generous responses or shocking lacks of knowledge on behalf of the former head of the private equity program he left earlier this year. And basically flat out lying by the chief operating investment officer. And the reason these fees matter, it may seem sort of pick you to be worrying about fees, but the fees in private equity are massive. Professor Ludovic Fallopu of Oxford, who's one of the few academics who writes objectively about private equity because everybody else, literally everybody, other academic expert in private equity, is getting paid huge consulting fees by private equity firms. So you've got to, you've got a problem in academia that there's a rather limited amount of research that's really trying to get

at the bottom of things. And that's, as an aside, that's a departure in financial economics. Basically, the rest of financial economics research, like into hedge funds and into equity strategies, it's extremely skeptical of investment managers. So that's already gives you a sign of there's something funny going on here. But Ludovic Fallopu has estimated that the total fees per year that private equity firms extract is seven percent, seven percent. It's just an enormous number and no one has disputed it, right? No, you know, you would think if there was, number was not in the ballpark, somebody would have come out and said, oh, no, that's really wrong and Fallopu is a hysteric. You know, so this number seems to be roughly right, you know, just based on the lack of pushback. In fact, CalPERS even used, you know, which presumably has access to the data, used that his number as a without crediting him as a proxy in a presentation, internal presentation they gave a couple of years ago. So the point is the reason that it's important

to question these private equity fees are sort of twofold. One is that they're just so egregious and aggregate with private equity returns now being much lower than they used to. If these public pension funds could negotiate more aggressively, you know, or start doing more in house, they could recover a lot of these fees and private equity would return better. It would make, you know, more sense as a strategy now on a risk-adjusted basis. One of the parts of the story I sort of, you know, didn't fill in this long historical narrative, it was sort of implied. But if you look back at the returns that the public pension funds have been getting from basically, basically 10 years ago onward, they typically are not making enough to pay them for the extra risk. You know, private equity is riskier than stocks. They should be paid extra for the fact that it's illiquid that they're stuck with these guys for 10 years, whether they're doing any roughly 10 years, whether they're doing a good job or not, and the extra leverage, which, you know, when leverage works, you make more and when it doesn't work,

you lose more. So they're, and their benchmarks, they call it, they have bench, all these places have basically standards for measuring performance. You can look back on there and they are largely, if not entirely, falling below the benchmarks for private equity over the last 10-year period. So the criticism is legitimate. You know, if you're not being paid enough for your risk and private equity, why are you still there? And so the question you kind of asked at the beginning, why are people still investing in it and your reference to, you know, what the central banks have been doing, they're desperate for any kind of return. And the Fed is basically pushed people into all kinds of investments where people are not getting enough of return. And that's what happens when you have a negative real interest rate environment where the short-term interest rates are below the rate of inflation. You're systematically not getting paid enough for risks. So it just is worse in private equity. It's worse and more visible because it's one of the riskiest

types of investments. So all these investors are in just a big conundrum created by the Fed. So it looks like it's their fault. And I'm critical of them because there are things they could do to alleviate the situation. There are no tidy solutions here. But, you know, this is, this is a big mess that everybody's trying to pretend isn't happening. And I assume that if they're not meeting their benchmark as investors, public pension funds are in danger of not having the money they need at any given point to pay the pensions they're obligated to pay out. That is true. And just again, I don't want to sound like I'm, you know, opposed to public pension funds. Private investors have the same problem. So people in their 401ks are in exactly the same boat and worse off because they pay more fees. So as bad as it is for the public pension funds, it's going to be worse for any individual. And the same picture is going to be similar for an individual investor. So let's just remember that when we're thinking about the mess that the public pension funds are in.

But generally speaking, yes. And these funds were, you know, like CalPERS was adequately funded before the crisis. It took a big hit in the crisis. And remember, it still had to keep paying benefits out of its shrunken assets post crisis because it still had ongoing commitments. You know, people, you know, were retired. It's still to keep keep paying money out. So that's been that. And then the low return environment post the crisis has been what has created the funding problems that all these public pension funds. Now, there are some in the US that are that are just, you know, walking disasters because they're so corrupt. Like Kentucky is, you know, Kentucky is disastrously underfunded. You know, New Jersey is disastrously underfunded. Wait, wait, wait, wait a minute. There's corruption in New Jersey. Yes. That's right. Yes. Exactly. Aside from the corruption, you know, they made a decision. Christy Todd Whitman made a decision to underfund in the early nine, you know, in the early 90s when everything was fine. So they basically decided to kind of wreck

their pension system. But even pension funds that were responsibly, you know, managed to have been just, you know, whacked by the effects of the crisis. And there are a few that are doing okay. I don't want to imply that they're all having funding trouble. I mean, the San Francisco's pension fund is actually pretty well funded. But, you know, if you look at the public pension funds as a whole, most of them are having underfunding problems of varying degrees of severity. For example, CalPERS and CalPERS are both at around 63, 64 percent funding. I think CalPERS is 64 and CalPERS is 63. And that sounds really alarming. In fact, 80 percent, they were actually at a higher level pre-crisis. But over 80 percent is considered to be okay because they invest in risk your investments. And it's assumed that kind of over time, the bets on risk investments will enable them to make a less than 100 percent funding level worked out. You know, that's another big conversation to have between the investment people in the actuary. So, but it's still a bet.

But trust me, the low 60s is a bad number. It's not a good number. And they have a problem. Getting back to CalPERS. So, Mr. Jolinsic has been agitating for more transparency in the relationship between CalPERS and the private equity business. Is he still in danger being kicked off the board? Well, he's retiring. They were trying to kick him off the board, which yes, I'm glad you bring it that up because that was just scandalous. He was threatened in a board meeting this year, which would not have been recorded except one of our colleagues, Michael Flareman, who interestingly is a former CalPERS board member who is now running for the board. He's actually running for Jolinsic's seat, videoed it. But what happened was just scandalous. I mean, there was, in fact, a Bill Black who's a law professor and also white collar criminologist just really called out. I mean, we did too. But Bill Black is a former general counsel. And he just called out in sort

of brutal detail how outrageous what happened was. We know one board member in Bill Slayton got up and made these vitriolic accusations against Jolinsic with no substantiation, no specimen, not even specificity and said that he needed to resign or that he needed to be kicked off the board. And they don't even have the legal authority to do that. And the general counsel not only didn't stop this and procedurally he should have demanded that Slayton, you know, basically either produce the goods or really back down and he didn't. Nor did he even correct Slayton that basically the board's ability to sanction Jolinsic was quite limited. I mean, it was just stunningly poor and it's indicative of, frankly, a level of cultural corruption at CalPERS. I mean, there's no evidence of financial corruption, but the place, the place is just really degenerated to a shocking degree in terms of its governance procedures.

The board has basically act except Jolinsic has acted as if its job is to abdicate all responsibility to staff, save as acting for their cheerleaders and it's completely appalling. It's completely appalling. I cannot say in strong enough terms how deplorable the conduct of the board is except for Jolinsic and how frankly dreadful it is that the staff has gone about systematically working to eliminate any oversight by the board. It has been orchestrated by the staff. And that's why I deem that to be corrupt for government officials to operate in that manner is deplorable. I can put no stronger words on it. It is deplorable. Now, based on the reporting I've been reading in your dispatches, one can always only speculate about why a staff would be bending over backwards to avoid the transparency demanded or requested by a board member. But you have reported on more than one occasion that it is the practice of

private equity firms to almost threaten, if not outright threaten, that their customers, investors, would no longer be welcome at the table to use casino language. If they made these agreements public or they made this information public about fee structures and so forth, is that the best guess we can make about the motivation of the staff? Yes, it is a very complicated psychological question. Why are people behaving this way in the absence of payoffs? Because it looks like the behavior you would expect if there were payoffs. And in fact, again, if we go back to the corrupt places like Kentucky, they invest in really terrible private equity funds. You've got lots of reasons to believe payoffs are happening. CalPERS is working very hard to try to invest in the better of the private equity funds. You know, the only kind of payoffs they get are the kind of soft corruption that exists

everywhere in the private equity industry, where the staff do get flown to annual meetings where they get fed, you know, terrific food and wine and the big funsy top entertainment. You know, someone leaked the fact and he put up even the video of Elton John performing at one of these private equity conferences. And that's coming out of the pension funds and dime that the private equity firm is not taking it out of its profits. They're charging that back as an expense to the fund. Well, when you say, just to clarify, when you say the pension funds dime, you mean... Ultimately, the retirees dime. Ultimately, it's being charged back to the fund investors of which the fund manager is only a very small portion. They do put some money in, but it's like one to three percent. So it's overwhelmingly the price of seeing Elton John is coming out of everybody's hide. So they don't talk about stuff and they fly on private jets, which in terms of absolute dollars is not that large, but again, the optics are just dreadful.

Right. Why are public schoolteachers and bus drivers and cops? Why are their pension funds going to pay for travel in private jet when the overwhelming majority of the time? There are times when, if you're having to go from, you know, boondocks A to boondocks B or secondary city A to boondocks B, private jet actually is cheaper. But the overwhelming majority of the time, it's not. Plus, there's lots of evidence that, you know, there are abuses. I mean, that people have tracked the tail numbers of these planes and seen that they go to Hampton's on the weekends in the summer and that they go to, you know, that they all somehow converge on the location of the Super Bowl on Super Bowl Sunday. So there's, you know, there's a lot of sort of petty, you know, cheating, cheating, going on the ads of two, you know, fair number of dollars. But the point is that to your point, there's a tremendous amount of psychological capturing. Even more so now that the funds are so desperate for returns, they believe that they have to be in private equity in order to make their return targets,

that they must be in this strategy. And then to the point about secrecy, now, in fairness, that's actually the part of the contracts, that they, that they sign these contracts with, which have, you know, very tough non-disclosure terms. And on top of that, when they started to be a bit of transparency, and ironically came about with CalPERS. In the early 2000s, there was a successful suit by the Mercury News to force CalPERS to disclose some of its private equity return numbers. So that's one of the reasons we do have some insight into what happens in private equity, CalPERS invest in so many funds. Every quarter, it discloses what it's making on those funds, you know, plus a few other statistics about the funds. And that has served, CalPERS has, CalPERS invested in so many funds, that served as like a good proxy for what was happening in the private equity industry, particularly for the big funds. People can say, oh, I know how Black Stone 7 is doing, you know, I can see it on CalPERS website. The industry ran around and in

virtual, in every state, they either got legislation or state attorney general's opinions that protected the secrecy of private equity contracts. In California, it's actually in the, in the California Constitution, believe it or not. And so they are not permitted to disclose the contracts even if they wanted to. So the information that Jelentik is asking about the fee information is not, you know, he's been asking at a fairly high level of abstraction. He's not been asking about, you know, tell me what this particular KKR fund is doing. He's actually been asking sort of more general portfolio level questions. And he's either been getting flummoxed responses or, you know, deflections. And then the staff has gotten really angry as if he's persecuting them. And then CalPERS makes these spurious claims that their leaders and disclosures on fees, that's absolutely, in fact, that the chief investment officer got up and said something to that

effect early this week. And that's false. That's false. CalPERS own consultant, CEM benchmarking, which is, which is basically effectively an industry standard setter, has held out two funds as the leaders in getting the information about private equity fees. And that's South Carolina. And one of the Texas fund, I think Texas municipal, I should know which particular Texas fund, but they're two, they're two public pension funds. They've held out of this as the standard setters. And they're far ahead of CalPERS in terms of the level of information they get. And for CalPERS to win that their leaders in transparency and they somehow persecuted just isn't true. I mean, it's just not true. And yet they appear to believe this quite sincerely. I got to ask a naive question because it's asked in other contexts all the time. If you got nothing to hide, why the secrecy? Well, again, another problem, which we haven't really discussed, is that private equity has been found out to be cheating on a very significant basis. Now, it's not the SEC. Now,

under the Trump regime, this isn't going to go forward. Not that the old SEC under Obama was that enthusiastic, but at least they did something. The SEC, as a result of Dodd-Frank, was given supervision over part of the activities of private equity, not all of them, but they were given supervision over their roles as investment advisors. And so now, the private equity firms are subject to SEC audits, and they have to file a form once a year called form ADVs, which explain, you know, they're supposed to explain a whole bunch of things they're doing. Well, it turns out you could look at their form ADVs, and there were some people who had better acts. I mean, I've been able to get a few contracts and publish them on my side. I've got, I think, 26 now private equity contracts. There were some people who had individuals who had better access to the private equity contracts, who went through them systematically and found that even just looking at the form ADVs, what they said in the form ADVs were basically admitting they were

cheating on the contracts. And here, the private equity investors themselves weren't doing that. What are these guys doing all day? They should be sitting in their offices, reading about this stuff, and at least making a stink. Even if they can't claw it back historically, they should be calling the general partners up and saying, cut this out. And yet, they're apparently afraid, too, because they're afraid not to get asked to the next deal. Again, it's a really appalling degree of complacency here among the limited partners. I mean, they really believe that they don't have the power when in any other area of investing, it's the money that calls the shots. The idea that they as the investors don't have any power is just an astonishing notion. And oh, to back to original point, the threat that they won't be led into funds, even though that's the widespread belief, the only time this has actually happened is kind of a nothing burger. When that mercury news came, case came through, and CalPERS was forced to disclose its return

information on a regular basis. Two funds got up Sequoia, and I think it was Kleiner Perkins. Got up and made a stink of it. Well, we're not going to let anybody into our club who's going to make those kind of disclosures. And the implication was that other public, you know, pension funds like CalPERS might start doing it too. Public pension funds and CalPERS in particular don't invest in venture capital very much because it's basically endowments and foundations in places like that. What you put in VC funds are so much smaller that they just can't put enough money in them. And then on top of that, there's this urban legend that, oh, people were really hurt by not investing in Sequoia. Sequoia's flagship fund, they've got like a bigger fund that, you know, that's the one that they advertise their results in. That fund apparently does perform extremely well. However, you don't get to invest in Sequoia's flagship fund only. The price investing in their flagship fund is you also have to invest in their China fund,

in whatever sort of other cat and dog funds they have. And the blended return is not, is rumored to be not very good. So even this notion that, oh, people have been hurt by the one known instance of people being deprived of the opportunity to invest in a good fund is not true when you examine, when you turn over enough rocks. So J, J, J, Linsick has retired. Has, has he been replaced? Oh, he's retiring. He's retiring. His term ends in, he's, he's on the boat to the end of the year, but he's retired. And has he been replaced by somebody, as you suggested, who's equally interested in trying to, well, we have, we have people, we have Michael Flerman, who's running, who's equally interested, but the, the, the, the board elections aren't being held until, um, I believe, I believe the, the ballots are open for a month. And I think it's, I think it's like the first week in September to the first week in October. So we don't know who will take Jolent's seat. And among the members of the board are California state treasurer and other public officials in the state of California. Right, right. So the, the composition of the board

is it as 13 members, six of them are elected by beneficiaries. Six of them are basically a state officials are appointees. So you've got the, the state treasurer, John Chang, state controller, Betty Yee. There's, there's a three member state personnel board and one member of the personnel board is always, um, on the CalPERS board. Then there are two people, I'm, I'm going to miss one in this count. But there are two people who are appointed by the governor. I think one is a community banking representative. Is that the name of Bill Slate and slot? And there's one that's an insurance that's, you know, an insurance representative because there's all this actuarial stuff and insurance person presumably understands the actuarial stuff. And then there's one that's appointed a public representative that's appointed effectively by the legislature. Basically, there are seven that are non-elected and there are six that are elected. So this, the future of what happens at CalPERS and its effect on other public employee pension funds is, is up in the air

until at least the fall of this year. Yeah, no, that's right. And if I'm not mistaken, the federal reserve has sent signals now that it's not going to be raising interest rates anymore in the immediate future, right? Right. Well, actually, it's a little more complicated. The close fed watchers seem to believe that the Fed actually sort of recognizes that this kind of experiment with super low interest rates has not worked out as they intended and that it also separately leads them with no room to drop rates in a crisis. So they really want to get out of the corner that they've backed themselves into. And they're looking for sort of any good run of economic news they can find, any signs of, you know, vibrancy or, you know, incipient vibrancy or what they could point to is vibrancy in the economy. Possible incipient vibrancy. Possible incipient vibrancy to move rates up. And we had a run of reasonable looking employment reports. So they did stick with their plan to raise rates in June, but things have started looking a little bit less. And it wasn't like

the, you know, isn't like the employment market. Is that strong anyhow? I mean, even though the unemployment rate is really low, the quality of the jobs created has been terrible. And a lot of them have been part-time jobs. I mean, a part-time job still gets counted as a job. So we also have the syndrome that many full-time jobs have been replaced by part-time jobs. So the employment rate really doesn't tell that whole story. So we've got a, you know, we've got a large degree of under employment in this economy. And yet the Fed feels compelled to raise interest rates because it, you know, it recognizes that where we are isn't very good either. You know, they're kind of in a box. Wow. Well, we will stay tuned. Eve Smith, thank you for making it all, at least if not easily comprehensible, comprehensible beyond the expectations of a normal person. And, well, that's very kind. Thank you. And thanks for your pointing out this week that the media missed the whole thrust of the story on the mortgage problem by focusing on robo-signing instead of document forgery, which I thought was a point you've made way back when and it was great to see

you make it again. Well, thank you. Appreciate that. And we'll talk to you again soon. Eve Smith of nakedcapitalism.com. Thanks for being with us. Thanks again. And now the apologies of the week. The Wall Street Journal this week fired its highly regarded chief foreign affairs correspondent after evidence emerged of his involvement in prospective commercial deals, including one involving arms sales to foreign governments with an international business man who happened to be one of his key sources. The reporter, Jay Solomon, was offered a 10 percent stake in a fledgling company. We're dismayed by the actions and poor judgment of Solomon, said the journal's spokesman in a written statement. I clearly made mistakes in my reporting and entered into a world I didn't understand Solomon told the AP. I never entered into any business with far-had Azima nor did I ever intend to by understand why the emails and conversations I

had with Mr. Azima may look like I was involved in some seriously troubling activities. I apologize to my bosses and colleagues at the journal who were nothing but great to me, journal owned by news, I mean, Nice Corp. Johnny Depp is the latest celebrity to apologize for making fun of the idea of killing the president of the United States. Quote, I apologize for the bad joke. I attempted the last night in poor taste about President Trump. He said in a statement made exclusively to people magazine, God, what a scoop. I did not come out as intended and I it did not come out as intended. I guess Johnny hasn't come out and I attempted no malice. I was only trying to amuse not to harm anyone, but he had said at the Glastonbury Festival, hey, I've been there. He said this is going to be in the press and it will be horrible. When was the last time an actor assassinated under president? Yeah, after posing the question, Depp had it. I want to clarify, I'm not an actor. I live for a living.

However, it's been a while and maybe it's time, unquote. Well, he said one true thing there. NASA just schooled Gwyneth Paltrow about wellness stickers promoted on our lifestyle blog Goop. Goop said in a post that the stickers which are sold by body vibes are made with the same conductive carbon material. NASA uses to line spacesuits so they can monitor astronauts' vitals during wear and can target energetic frequency and balances in the body. Stickers are sold 10 for $60. A representative from NASA told Gizmodo they do not have any conductive carbon material lining the spacesuits. They're actually made of synthetic polymers, spandex and other materials. NASA spokeswoman Tabitha Thompson told the Washington Post that actually NASA does not use carbon fiber anywhere in the spacesuits, like anywhere. By Friday morning, Goop had removed the reference to NASA materials from the product description on its website. Body vibes, which sells the stickers, has apologized to NASA, Goop and its customers. We never intended to mislead anyone the company said.

We've learned that our engineer was misinformed by a distributor about the material in question, which was purchased for its unique specifications. We regret not doing our due diligence before holding the distributor's information, or before including the distributor's information, in the story of our product. But what a story. Australian Broadcasting Corporation Radiohost Red Simons asked a Taiwanese Canadian journalist Beverly Wang. Are you yellow? Wang, who also works for that ABC, was being interviewed about her podcast, called It's Not a Race. The ABC, down under apologizes and unpublished a full recording of the radio interview. Similarly, Simons has apologized on June 19th's program for coming across as a racist and inappropriate. I came across as a racist and I was wrong in the way I conducted the interview. This is not who I am. I'm from my sincerest apologies. We need to talk about these issues and be careful how we consider them. ABC also apologized and said it was reviewing the matter. This is

their ABC, down under. Charleston River Dogs, General Manager Dave Eccles has apologized to those offended by the team poking fun at Columbia Outfielder Tim Tebow last weekend. This is minor league baseball in case you didn't know. On the first game for Tebow and the Fireflies in Charleston, the River Dogs, which lists comedian Bill Murray as a co-owner, took several jabs at the Heisman Trophy winner, playing his first full season of pro baseball. Hey, it worked for Michael Jordan. Oh, the River Dogs mascot wore iBlack with the Bible verse John 316, like Tebow did with, he was in his football years. Teemo also played the Halloween chorus every time Tebow came up to bat. While we believe that our promotions were poking fun at Mr. Tebow's celebrity status rather than his religion or baseball career, our intent was not to intend anyone. And for the fact that we did offend, we're sorry. He said, in General Manager Dave Eccles, General Manager Dave Eccles, the chairman of the Florida's Democratic Party

apologized to members of the legislative black caucus this week after reportedly calling them childish during the dispute related to a South Florida fund raising. It's all going good for the Democratic Party this week. Biddleits and members of the caucus were acting childish and accused them of playing the race card when he was confronted over the incident. Biddle apologized multiple times during Tuesday's meeting after he spent several days apologizing to party leaders, both, both elected politicians and fundraisers. Biddle issued a statement after the meeting. Same as time to move forward. You rarely see a statement issued saying the opposite, do you? An Indian American landlord in Queens, New York has apologized for having said letters to the tenants and is building demanding they prove they're in this, the United States legally or risk eviction according to the New York Daily News. State Senator Jose Paralta furious upon learning about the letters filed to complaint with the state attorney general's office. When the Daily News confronted landlord, landlord Jay deep, Jay deep ready with the letter. He apologized. That's wrong. He told the

news. I'll retract that. I'm sorry. We look fortunate as apologized for using a backdrop for its southern charm week that appeared to show African Americans dressed as slaves on a plantation. Harry Friedman, the show's executive producer, apologized for the image and said it would not be used in reruns when the episode was rebroadcast. How do they do that? We regret the use of this background image and we will be replacing it moving forward on any rebroadcast. Wow. They could also change the winners. The photo was shot on location at Oak Alley plantation in Vachery, Louisiana. The spokesperson for the plantation said the plantation does not have actors portraying slaves but people do dress up on the clothing of that era to give tours. People of all races are employed by the plantation. Friend of mine suggests plantations be renamed slave labor camps just to make things clear. Uber Uber has apologized to some of its users but not everyone is willing to forgive it forget. It sent an apology to some of its former customers in an effort to win them back according to business insider in an email. Uber reportedly said in expanding so

quickly we failed to prioritize the people it helped get us here. We realized we've fallen short. Email was reportedly sent to users in several communities who hadn't used the app to hail a car in some time but Susan Fowler, the ex-Uber engineer who published a blog post saying there was sexual harassment and discrimination at the company he said she was critical of the apology. It was all done she said for show and optics. She sets it apart from all of the long time director of an arts festival in New Zealand as apologizes for removing the word Israel from a song in the musical Joseph and the amazing technical dream coat scheduled to be performed there. May Richard said in a letter to a regional Jewish council and other critics of the change the original words would be reinstated. They phrased children of Israel are never alone in the song close every door had been altered to children of kindness. And the Dinwitty high school seniors and Dinwitty Virginia got diplomas with the word Virginia spelled incorrectly. We apologize

said the school system for any inconvenience this error has caused. Virginia, hey Virginia, the apologies of the week ladies and gentlemen a copyrighted feature of this broadcast. Ladies and gentlemen that's going to conclude this week's edition of La Shulla Preformature and next week at the same time over the same stations over NPR World Wide Threat

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