State pension funds are a mess — and it’s all the fault of those greedy teachers and firefighters, right? While they may have played a part, the real drivers of this twisted tale have managed so far to hide in the shadows. Luckily, Ohio Governor John Kasich is here to school you, courtesy of the edifying spectacle of his life.
Once upon a time, there was a man named John Kasich. For many years he’d fought valiantly in the House of Representatives to protect defenseless big corporations. After he stepped down, he was rewarded for his efforts with positions on corporate boards, motivational speaker gigs at corporate events, Fox news punditzing, and a little job on Wall Street working for the Brothers Lehman as a Managing Director.
What did Kasich know about Wall Street? Aside from the fact that it was a great place to shake down for cash if you’re a politician, not very much. But that was OK. The Brothers Lehman didn’t want him for his financial prowess. They wanted him because he possessed a magic key called Access. And one of the shiny doors this key could open was to Ohio state pension funds.
In 2002, John Kasich arranged meetings between members of Lehman Brother’s private equity department and investment officials at two Ohio Pensions: the Ohio Police & Fire Pension (OP&F) and the Ohio Public Employees Retirement System (OPERS)….
John Kasich claimed he “never approached any other Ohio governmental entity about doing business with Lehman,” but new public records information indicates he pitched the State Teacher Retirement System (STRS) on using Lehman as a broker for a real estate investment sale….
One of the men Kasich introduced to Ohio pensions in 2002 was John Dwyer, a member of Lehman’s private equity team headed by Kevin Newman and James Swindell (who also met with the pensions). Public records requests indicate Dwyer continued to try to pitch the pensions for years after the initial meeting. On August 25, 2008 – 21 days before the Lehman bankruptcy – Dwyer tried to sell OPERS on investing in several funds managed by Lehman. Many of the products Dwyer tried to sell involved real estate assets, but standing out from the others was a product Dwyer was personally working on – Lehman’s Distressed Structured Credit Fund, which intended to invest heavily in collateralized loan obligations and collateralized debt obligations.
These toxic instruments are widely credited with bringing down Lehman in 2008, as they consistently downplayed the losses associated with their products.
How did Ohio’s pension funds fare at Lehman’s hands? Not well, says the Columbus Dispatch .
For a number of reasons, the funds could not or did not move quickly enough to sell off questionable assets. As a result, the treasurer’s office, which acts as custodian but does not invest pension monies, calculated that the funds had a combined $480 million loss in market value solely from Lehman investments.
Officials at the pension funds, in response to questions from The Dispatch, calculated direct losses at about $220 million. The difference between the two figures essentially represents the higher value the investments reached before plummeting when the markets fell in September 2008.
The rest of Ohio’s state government could’ve suffered even worse if not for speedy action by Ohio’s new state treasurer.
Shortly after arriving at the Ohio treasurer’s office in early 2008, Amer Ahmad discovered a ticking time bomb: $800 million in risky short-term investments, including some with Lehman Brothers. Fresh off 12 years working for two large Wall Street firms, the deputy state treasurer and chief financial officer immediately saw red flags.
In less than a week, the treasurer’s office, then headed by Richard Cordray, disposed of all assets that Ahmad considered toxic. “I made a choice that we should not be investing in these companies,” Ahmad said, “because in the world I just came from, everybody knew these companies were toxic assets.”
Even so, the Brothers Lehman kept knocking at his door.
In late July and early August 2008, Ahmad said he received calls from two senior management officials: Erin Callan, chief financial officer, and Paolo Tonucci, corporate treasurer. “They said, ‘Things are fine at Lehman Brothers. We would encourage you to buy our commercial paper and help us with the liquidity issues we have on Wall Street.'”
But Corday and Ahmad decided to “distance ourselves” from the commercial-paper holdings, Ahmad said. Ahmad said he found it “shocking” that such high-level officials would call to pitch investments to the state.
About six weeks later, Lehman Brothers announced it was filing for bankruptcy. It was the largest corporate bankruptcy in U.S. history. An examiner’s report said the firm masked $50 billion in debt.
The stories of Kasich’s newfound pals in Corporate America had happier endings, says the Dispatch, because Kasich did what he could to look out for them.
[According to Glenn H. Schiffman, who at the time ran Lehman’s media-industry banking investment business,] Kasich had “board level and CEO relationships where he helped not only open the door for Lehman Brothers, but he also was a key member of the deal team providing advice.”… Schiffman said in a phone interview that one of Kasich’s strengths at Lehman was his credibility with CEOs: “Investment bankers sometimes can push clients to do deals. John was very different. He steered clients away from transactions that he felt didn’t make sense.”
But when it came to the good citizens of Ohio, Kasich steered them towards a very different fate.
John Kasich wasn’t just helpful in directly relieving Ohio pension funds of their money. As a Managing Director at Lehman Brothers, he was a bit player in the drama of the Wall Street fiasco that tanked pension fund stock market investments — and, as an added bonus, crushed the budgets of states like Ohio with a devastating recession and with plummeting property taxes due to the collapse of the Wall Street toxic fuel-injected housing bubble.
After Lehman Brothers was allowed to fail, the Powers That Be decided we had to bail out the rest of Wall Street and make taxpayers pick up the tab, devouring vast subsidies that could’ve been used instead to help devastated states like Ohio.
And then Kasich ran for governor, decrying the thousands of government regulations that were strangling poor defenseless businesses and wreaking havoc on the state of Ohio. He won — and hoped to live happily ever after.
The moral of this tale: it’s all the fault of greedy schoolteachers and firefighters. If they’d only chosen a more noble pursuit of a politician who cashes out or of a humble investment banker, we wouldn’t have to worry about shoring up their pension funds.
Up next week: how to use my framework to prevent state pension funds from suffering the same fate in the future.
PS According to Dean Baker’s calculations, state pension funds may be in better shape than we’ve been led to believe. Here’s the gory details.