Saturday, July 25, 2009

california and the nick leeson school of finance


California's CalPERS is the largest public pension fund in the USA with just under $200 billion in assets. They are down about 30% from their peak and want to get back up in a hurry. This is from the financial blog Calculated Risk:

Double Up to Catch Up!

From the NY Times: California Pension Fund Hopes Riskier Bets Will Restore Its Health (ht several)
[Joseph A. Dear, the fund’s new head of investments] wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.

That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge.

The post title is an old gambling saying. Actually now is probably a better time to buy some of these assets than a few years ago.

This is a classic application of the Nick Leeson theory of finance. Who is Nick Leeson? A seemingly inconsequential trader in the Singapore office of Barings Bank. Barings was the Queen's Bank, it began in 1765 and was Britain's largest investment bank until 1995. In 1995 Mr. Leeson suffered some trading losses so he made even riskier trades to try to make it up. He lost another $1.4 billion and Barings went belly up.

The managers of CalPERS have a lost of lost pension money that needs to be made up. Maybe it will turn out better for California's state employees and retirees than it did for the stockholders of Barings.

No comments: