14 February 2010

Something is rotten

Not, as Marcellus would have it, in the state of Denmark, but with the Board of Regents. A recent article by Peter Byrne over at blog.spot.us details the conflict of interest of several Regents, including the Governor himself, in the way the University invests its endowment and pension fund portfolios.

The conflict of interest is perhaps most obvious in the case of Paul Wachter, CEO of Main Street Advisors as welll as longtime personal friend and financial adviser to Gov. Schwarzenegger. It is in the latter capacity that Wachter is in charge of Schwarzenegger's blind trust. Among the Governor's assets that are not in a blind trust is "over $1,000,000" in stock of Dimensional Fund Advisors — and Regent Wachter similarly owns, according to his financial disclosure, "over $1,000,000" in DFA stock. (No upper limit is specified in either case on the disclosure forms.)

Interestingly, since 2004, the University of California Retirement Plan has invested over a third of a billion dollars in a DFA "emerging market fund." The original investment of $226M in 2006 was raised to $329M in 2007, although the value of UC's investment  plummeted to $151M (a drop of over 50%) by the end of 2008. But we should rest assured that the value of Schwarzenegger's and Wachter's investment in DFA was shielded by the large management fees DFA charges its investors.

As Byrne puts it,
it is remarkable that Schwarzenegger and Wachter allowed the UC Treasurer to invest hundreds of millions of public dollars with an investment management firm which they partly own. The regent’s investments with DFA were not a secret: they was publicly reported to the board. And Schwarzenegger’s and Wachter’s large stake in DFA has long been a matter of public record, so the Treasurer could easily have refrained from investing in DFA.
We had already commented on the shady ways in which UC manages its investment portfolio, and this seems just further confirmation.  All the glorious details, including some possible conflict of interest of former Regents Chair Blum. aka Mr. DiFi, in the management of CALPERS's investment fund, can be found over at blog.spot.us.

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