Thursday, July 2, 2015

The Plight of Greek Pensioners?

Lefteris Karagiannopoulos of Reuters reports, Plight of Greek pensioners heaps pressure on Tsipras:
Long lines of pensioners jostling to get into a limited number of banks opened specially to pay out retirement benefits have become a powerful symbol of the misery facing Greece and the problems mounting for Prime Minister Alexis Tsipras.

With banks closed down and capital controls imposed to shield the financial system from collapse, the depth of the problems facing the country has become clearer each day.

Tsipras' leftwing government came to power in January vowing to protect pensioners and much of the breakdown in relations with international creditors centered on its refusal to accept the cuts in pensions that the lenders demanded.

Mindful of the fact that many older Greeks do not use credit or debit cards and so do not have access to cash machines, it has ordered 1,000 banks to open across the country to pay out a maximum of 120 euros and issue cards.

But in the process it has created a compelling reminder of the costs its confrontation with the lenders is inflicting on a society already deeply scarred by more than five years of harsh austerity imposed under successive bailout accords.

"In line for a handful of euros," the conservative Eleftheros Typos newspaper headlined on Thursday. "The dignity promised by Tsipras turns into humiliation for thousands of pensioners".

In a country where one in four of the workforce is without a job, the plight of the pensioners, whose monthly benefits can often be the only source of income for families, is an acutely sensitive issue.

Konstantinos Nikolopoulos, a 70-year-old former employee of U.S. entertainment group Warner Bros, emerged from his bank empty-handed after being told that benefits from his pension fund were not being paid out.

"They told me they don't know when they will have the money and asked me to come again tomorrow just in case," he said. "This situation is out of control."

With scenes of long bank queues being played continuously on Greek television, the issue creates a big risk for Tsipras ahead of Sunday's referendum on Greece's bailout terms, now widely seen as a decisive test on the country's future in the euro.

The only major opinion poll published on the referendum showed support for the "No" vote recommended by Tsipras slipping since the introduction of bank controls this week, although the depth of resentment against bailout-imposed austerity makes the outcome very hard to predict.

"On Sunday, I am slightly confused," said Nikolopoulos. "I believe the message should be that the Greek people has to take a decision to settle its debt with a fair compromise, I am leaning more to voting 'No'."

The government side is however keenly aware of the damage the headlines and continuous television broadcasts are creating for its image.

The left-leaning Efimerida ton Syntakton newspaper, which is sympathetic to the ruling Syriza party, reflected the concern on Thursday, blaming the TV stations for deliberately seeking to stoke the climate of fear in the country.

It showed the TV broadcasts alongside German Chancellor Angela Merkel and her Finance Minister Wolfgang Schaeuble, IMF head Christine Lagarde and others seen as villains by the left in a graphic headlined: "The mechanism of terror".
The left-leaning Efimerida ton Syntakton newspaper is worried because if the YES side wins the vote on Sunday, it spells the end for SYRIZA and its funding.

Greek newspapers and other media outlets are notoriously corrupt, routinely blackmailing businesspeople and politicians to get funding or their loans excused. I typically don't trust anything they say but in this case, you have to be blind and deaf not to see the horror going on in the streets of Greece.

I've been glued to Greek television all week, especially the last couple of days. Admittedly, it's hard not to get addicted to Greek television these days even though all they do is scream at each other at the top of their lungs. Unlike civilized and boring Canadian television debates, however, they have great shows where politicians and journalists rip into each other and even shows where normal citizens get to rip into elected ministers. Greeks argue with passion.

And these shows cover all the angles. Everyone has a voice except for the neo-Nazi Golden Dawn party which is rightly marginalized and ignored by the media. I grit my teeth whenever SYRIZA members spew their lies. I typically switch the channel whenever some guy or gal from the KKE communist party talks because their views are from planet Mars and useless as far as I'm concerned.

The two politicians I love listening to are Kyriakos Mitsotakis and Makis Voridis from New Democracy. Voridis makes Canada's NDP leader, Tom Mulcair, look like a puppy dog when he goes for the jugular of SYRIZA members. At his best, he's vicious, meticulous and ruthless exposing the lies SYRIZA's members are spreading.

But there are other excellent politicians in Greece. Greeks may not like him much but the former finance minister and former leader of PASOK, Evangelos Venizelos, is a constitutional lawyer with an incredible intellect and equally devastating when debating SYRIZA members (except he uses raw intellect and a much richer vocabulary than anyone else).

I also like the leader of To POTAMI (The River party), Stavros Theodorakis, and he may be the right person to lead a new coalition government out of this mess. His views are more balanced and has been urging the Greek PM to call off the referendum.

But a defiant Alexis Tsipras isn't calling off the referendum even though the country's economy just suffered a massive stroke. Without banks, the central nervous system of any economy, nothing is moving. The Greek private sector is at a virtual standstill. Employees are being sent on a "forced holiday" and if banks don't open, many businesses will go bankrupt and unemployment will surge to disastrous levels. 

SYRIZA's leaders are going on television stating the "ECB and creditors are to blame for bank closures as they want to meddle in Greek politics and scare people into voting yes." But the truth is the Greek government closed the banks, right after Varoufakis stated they will remain open. 

In fact, Yanis Varoufakis, Greece's "rock star" finance minister has been exposed as a hopelessly narcissistic blatant liar. Last Friday, just hours before Alexis Tsipras announced a referendum, Varoufakis stated "there will be no referendum" on Greek television. 

Varoufakis is now stating there will be "no bail-in", meaning there will be no haircuts on Greek deposits at the banks and "no return to the drachma". How can Greeks trust this guy or any of SYRIZA's leaders? They have all been exposed as incompetent, dangerous and delusional fools who are willing to commit economic suicide, foolishly thinking the other side will blink first

As I feared, Varoufakis and Tsipras have yet to blink but neither has the other side. In particular, Germany called Tsipras's bluff. Merkel and the rest of the eurozone leaders are telling the Greek government there will be no talks until the results of the referendum are known.

The latest official poll out of Greece puts the Yes side marginally ahead of the No side (47.1% vs 43.2%). You can click on the image below to view the results:



Quite worrisome, the vote is too close to call now but I take all these polls with a grain of salt and believe after a chaotic week, most Greeks fed up with SYRIZA's lies will resoundingly vote Yes.

At least I hope so. Because the truth is the plight of Greek pensioners and many other Greeks -- including public sector workers who think their jobs, wages and pensions are safe under this government -- will get a lot worse unless they vote Yes to the eurozone, forcing the current government resigns. 

At least Varoufakis has the courage to publicly state he will resign if the Yes vote wins. He should have resigned a long time ago and if he truly had his country's best interests at heart now, not his party's twisted and bankrupt ideology, he would urge Alexis Tsipras to call off the referendum and step down as soon as possible.

Other SYRIZA leaders will be hard pressed not to follow him and resign. Some are delusional, publicly stating they will endorse the will of the people and "negotiate with their European partners" who they've been publicly trashing on Greek television.

The devastation going on in the Greek economy right now is unprecedented. The Wall Street Journal published a great article on how the cash crunch is hitting every day life in Greece. It's even worse than the article states. There are many neighborhoods in Greece right now that look like ghost towns. People are glued to their television sets and only go out to shop for the bare necessities (the 60 euros a day withdrawal limit is more like 50 euros as many banks do not have 20 bills). 

There are Greek students studying abroad who cannot receive money from their parents to survive. There are Greek medical tourists in Italy right now who cannot pay their medical bills. There are big and small businesses who cannot pay their suppliers to import food and other much needed supplies. There are ambulances in northern Greece that ran out of gas.

Hotel owners cannot buy food and beverages for their customers and are now demanding cash as a from of payment fearing they won't be paid from bank if they accept credit cards. Many Greek islands are now suffering from gas shortages and tourism both from Greeks and foreigners has plunged as many are cancelling their vacation plans fearing the worst.

Greek professionals are scrambling to leave the country as the economic situation deteriorates, flooding the inboxes of diaspora Greeks across the world with resumés and requests for jobs.

In short, every day that banks are closed, the Greek economy sinks further into the abyss and closer to total collapse. Varoufakis and company didn't factor this is into their equation as they arrogantly played their "Great Game" because they simply do not understand how a market economy works or couldn't care less of the plight of their fellow citizens. Closing the banks effectively means blowing up your economy. 

And the irony is that while Varoufakis continues to lament against harsh austerity measures, urging Greeks to vote No, his government has succeeded in implementing the harshest austerity ever, a total and utter economic collapse

As far as the creditors are concerned, they need to wake up and take responsibility for this chaos too. They turned a crisis into a calamity. Ambrose-Evans Pritchard is right, Europe has suffered a reputational catastrophe in Greece, but he's wrong to blame the ECB for this latest turn of events.

Lastly, I urge all of you to read Stratfor founder George Friedman's analysis, Beyond the Greek Impasse as well as Harvard economist Ken Rogoff's latest comment in Project Syndicate, Why the Greek bailout failed. Both are must read comments but Rogoff's conclusion really struck me:
The vast majority of Greeks want to stay in the EU. In an ideal world, offering financial aid in exchange for reforms might help those in the country who want to shape it into a modern European state. But given the difficulty Greece has had so far in making the necessary changes to reach that goal, it might be time to reconsider this approach to the crisis completely. In place of a program providing the country with further loans, it might make more sense to provide outright humanitarian aid – regardless of whether Greece remains fully within the eurozone.
The way things are going, Greece will soon need a lot of humanitarian aid. Even if the Yes vote wins, which is likely but far from certain, banks won't open anytime soon until another deal is struck. If the No side wins, the Greek economy will collapse and I fear Armageddon, riots and social unrest. 

I'm taking Friday off as it's 4th of July weekend and being a proud Greek-Canadian, I don't typically blog when U.S. markets are closed (I only invest and trade in U.S. stocks). Please remember to contribute to my blog using the donation or subscription options on the top right-hand side. Thank you and I wish all Americans a great long weekend.

Below, anxious crowds of Greeks on Wednesday thronged banks that were opened especially for pensioners who don't have bank cards, to allow them some access to their money. Some had been waiting since the early hours of the morning, but as the opening hour approached, tensions rippled through the crowd.

I hope Greek pensioners realize this is their future if they vote No on Sunday. I hope Greeks realize a No vote won't lead to a better deal, just Grexit and catastrophe I also hope European politicians are ashamed of these images and realize the devastating consequences of imposing harsh and asinine austerity measures which have disproportionately hurt the Greek private sector, killing growth.

But most of all, I hope Greek Prime Minister Alexis Tsipras does the right thing and resigns on Monday, especially if the Yes vote wins. Greek pensioners and all Greeks have suffered enough.

Wednesday, July 1, 2015

A Somber Canada Day?

Daniel Tencer of the Huffington Post reports, Recession Threat Looms As Canada's Economy Shrinks For 4th Month In A Row:
The odds that Canada will see a recession this year just rose considerably.

Canada's economy shrank 0.1 per cent in April, StatsCan said Tuesday morning, the fourth consecutive month of negative growth. Economists had been expecting the economy to expand by 0.1 per cent.

That suggests Canada's economic growth entered the second quarter considerably weaker than most economists had been expecting. Canada's economy shrank at annual pace of 0.6 per cent in the first quarter, and the number for April suggests that a negative reading for the second quarter is now much more likely.

Two consecutive quarters of economic decline would constitute a recession.

The mining, oil and gas sector shrank 2.6 per cent, the sixth month in a row it contracted. Retail trade shrank 0.2 per cent, the third month in a row it has seen negative growth. Manufacturing declined 0.2 per cent (the fourth consecutive month of declines) while construction fell 0.1 per cent. Finance and insurance fell a large 0.6 per cent.

Bright spots included wholesale trade (up 1.6 per cent) and accommodation and food services (up 1.2 per cent).

"The hit from oil to the Canadian economy doesn’t appear to be as 'front-loaded' as the Bank of Canada and Governor Poloz had expected," CIBC economist Andrew Grantham wrote.

"Thus far, we are yet to see the positives that should be offsetting weakness in the energy sector... Lower gasoline prices are doing little thus far to spur retail spending, while the weaker loonie is doing little to boost manufacturing."

The weaker-than-expected economy raises the odds that the Bank of Canada will lower interest rates again this year — something not all economists agree would help Canada's economy, particularly heavily indebted consumers.

April's weak GDP reading "probably provides the Bank of Canada with enough ammunition to cut again in July," CIBC economist Benjamin Tal wrote.

Tal wondered whether such a move would be necessary. "Highly indebted households don’t need even lower borrowing costs," he wrote.

Still, there are two months left in the quarter and most observers are not yet ready to declare a recession.

"While the decline in Canadian real GDP in April raises the risk of a technical recession, we still believe the economy will manage to eke out marginally positive growth in the second quarter," TD Bank's Diana Petramala wrote.
You can read more about Canada's economic woes in the National Post, the CBC and the Globe and Mail. None of this surprises me in the least as Canadians have been living in a bubble for a long time.

In December 2013, I warned all of you it's time to Short Canada, stating that oil prices will decline and along with them, the loonie will plunge from parity. A year later, in December 2014, I told you Canada's economic crisis is just beginning and that things will get much worse.

Amazingly, some economic commentators think the miserable truth to Canada’s economic recovery is that it's much stronger than we think, inflation is just around the corner and the Bank of Canada should hike rates aggressively (thank god we have Steve Poloz at the helm of our central bank).

Even Garth Turner with his popular blog on Canada's housing bubble, Greater Fool, has foolishly been proclaiming that the Fed will hike rates aggressively and the Bank of Canada will follow and that this will lead to a Canadian housing crash.

Poor Garth, he just doesn't get it. There will be a Canadian housing crash (the slowdown has already begun) but it's going to come when the next financial crisis hits, unemployment soars, and a protracted period of debt deflation sets in. And with Canadians indebted up to their eyeballs, the housing crash will be a lot more severe and protracted than anyone can possibly imagine.

The lower loonie will help boost tourism and manufacturing, but lower energy prices in the U.S. typically mean that manufacturing in Canada isn't as competitive as it once was. The shale energy revolution in the U.S. is very bad for Canadian manufacturing activity, which has slowly but surely been declining over the years.

Employment in the financial services industry and construction in particular will get hit hard. Already banks are in cost-cutting mode, shedding many employees, fearing the worst lies ahead. It will get worse for both these sectors.

"Leo, what's wrong with you? It's Canada Day today. Can't you be more patriotic?". I'm very patriotic and want the best for Canada and Greece, my ancestral home. But being patriotic means telling it like it is and not sugarcoating things.

Last week was St-Jean Baptiste Day in Quebec. I was too busy writing on Greece and completely forgot to write a comment on why I think Quebec is heading the way of Greece. Quebec's debt clock keeps rising but Quebecers seem to think we are immune to global crises and the craziness in Greece can never happen here. They will be shocked in the future.

Many Canadians will be shocked too by the severity and the duration of our economic crisis. I wish it wasn't so but I have been warning all of you to prepare for a crisis that will last many years, especially if global deflation sets in.

As I look outside my window, it's raining and grey in Montreal. I hate this weather. Wish I was in Greece but things aren't much better there. In fact, heartbreaking scenes of pensioners clamoring to get some cash out of the banks makes my stomach turn and blood boil (see below).

A defiant Alexis Tsipras is urging Greeks to vote no on Sunday. He's a delusional fool and he and SYRIZA will go down soon but it will be too late for Greece. The banks will not reopen next week and without banks, the economy will slide further into depression.

Those are my thoughts on this somber, rainy and grey Canada Day.

Tuesday, June 30, 2015

Averting a Greek Collapse?

Joseph. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, wrote an op-ed for the Guardian, How I would vote in the Greek referendum:
The rising crescendo of bickering and acrimony within Europe might seem to outsiders to be the inevitable result of the bitter endgame playing out between Greece and its creditors. In fact, European leaders are finally beginning to reveal the true nature of the ongoing debt dispute, and the answer is not pleasant: it is about power and democracy much more than money and economics.

Of course, the economics behind the programme that the “troika” (the European Commission, the European Central Bank, and the International Monetary Fund) foisted on Greece five years ago has been abysmal, resulting in a 25% decline in the country’s GDP. I can think of no depression, ever, that has been so deliberate and had such catastrophic consequences: Greece’s rate of youth unemployment, for example, now exceeds 60%.

It is startling that the troika has refused to accept responsibility for any of this or admit how bad its forecasts and models have been. But what is even more surprising is that Europe’s leaders have not even learned. The troika is still demanding that Greece achieve a primary budget surplus (excluding interest payments) of 3.5% of GDP by 2018.

Economists around the world have condemned that target as punitive, because aiming for it will inevitably result in a deeper downturn. Indeed, even if Greece’s debt is restructured beyond anything imaginable, the country will remain in depression if voters there commit to the troika’s target in the snap referendum to be held this weekend.

In terms of transforming a large primary deficit into a surplus, few countries have accomplished anything like what the Greeks have achieved in the last five years. And, though the cost in terms of human suffering has been extremely high, the Greek government’s recent proposals went a long way toward meeting its creditors’ demands.

We should be clear: almost none of the huge amount of money loaned to Greece has actually gone there. It has gone to pay out private-sector creditors – including German and French banks. Greece has gotten but a pittance, but it has paid a high price to preserve these countries’ banking systems. The IMF and the other “official” creditors do not need the money that is being demanded. Under a business-as-usual scenario, the money received would most likely just be lent out again to Greece.

But, again, it’s not about the money. It’s about using “deadlines” to force Greece to knuckle under, and to accept the unacceptable – not only austerity measures, but other regressive and punitive policies.

But why would Europe do this? Why are European Union leaders resisting the referendum and refusing even to extend by a few days the June 30 deadline for Greece’s next payment to the IMF? Isn’t Europe all about democracy?

In January, Greece’s citizens voted for a government committed to ending austerity. If the government were simply fulfilling its campaign promises, it would already have rejected the proposal. But it wanted to give Greeks a chance to weigh in on this issue, so critical for their country’s future wellbeing.

That concern for popular legitimacy is incompatible with the politics of the eurozone, which was never a very democratic project. Most of its members’ governments did not seek their people’s approval to turn over their monetary sovereignty to the ECB. When Sweden’s did, Swedes said no. They understood that unemployment would rise if the country’s monetary policy were set by a central bank that focused single-mindedly on inflation (and also that there would be insufficient attention to financial stability). The economy would suffer, because the economic model underlying the eurozone was predicated on power relationships that disadvantaged workers.

And, sure enough, what we are seeing now, 16 years after the eurozone institutionalised those relationships, is the antithesis of democracy: many European leaders want to see the end of prime minister Alexis Tsipras’ leftist government. After all, it is extremely inconvenient to have in Greece a government that is so opposed to the types of policies that have done so much to increase inequality in so many advanced countries, and that is so committed to curbing the unbridled power of wealth. They seem to believe that they can eventually bring down the Greek government by bullying it into accepting an agreement that contravenes its mandate.

It is hard to advise Greeks how to vote on 5 July. Neither alternative – approval or rejection of the troika’s terms – will be easy, and both carry huge risks. A yes vote would mean depression almost without end. Perhaps a depleted country – one that has sold off all of its assets, and whose bright young people have emigrated – might finally get debt forgiveness; perhaps, having shrivelled into a middle-income economy, Greece might finally be able to get assistance from the World Bank. All of this might happen in the next decade, or perhaps in the decade after that.

By contrast, a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands. Greeks might gain the opportunity to shape a future that, though perhaps not as prosperous as the past, is far more hopeful than the unconscionable torture of the present.

I know how I would vote.
Another Nobel Prize-winning economist, Paul Krugman, also came out recently to urge Greeks to vote no in the referendum:
OK, this is real: Greek banks closed, capital controls imposed. Grexit isn’t a hard stretch from here — the much feared mother of all bank runs has already happened, which means that the cost-benefit analysis starting from here is much more favorable to euro exit than it ever was before.

Clearly, though, some decisions now have to wait on the referendum.

I would vote no, for two reasons. First, much as the prospect of euro exit frightens everyone — me included — the troika is now effectively demanding that the policy regime of the past five years be continued indefinitely. Where is the hope in that? Maybe, just maybe, the willingness to leave will inspire a rethink, although probably not. But even so, devaluation couldn’t create that much more chaos than already exists, and would pave the way for eventual recovery, just as it has in many other times and places. Greece is not that different.

Second, the political implications of a yes vote would be deeply troubling. The troika clearly did a reverse Corleone — they made Tsipras an offer he can’t accept, and presumably did this knowingly. So the ultimatum was, in effect, a move to replace the Greek government. And even if you don’t like Syriza, that has to be disturbing for anyone who believes in European ideals.
I have tremendous respect for Stiglitz and Krugman but when it comes to the Greek economy, they either do not understand what is going on or they like Varoufakis choose to state half-truths and conveniently ignore what exactly has happened in Greece over the last five years.

They both need to read an op-ed thirteen prominent Greek economists from around the world wrote to explain why Greece must sign a deal now and say yes to the euro.

First, I agree, the Troika has proven itself to be entirely incompetent. Several former IMF economists have come out to discredit the austerity measures imposed on Greece.

But here is where Stiglitz and Krugman got it wrong. The asinine austerity measures Troika imposed on Greece disproportionately hurt the Greek private sector, leaving the bloated and inefficient public sector largely intact.

I keep referring to this unsustainable figure: 1.5 million Greek public sector workers vs 2.5 million Greek private sector workers. Some people argue that my figures are off as it's 700,000 public sector workers but when you look at the broad  measure of everyone getting a paycheck from the state, it's more than double the official figure.

Keep in mind that ratio of public-to-private sector workers in Greece was unsustainable prior to the crisis and has reached disastrous levels as the private sector keeps hemorrhaging jobs. 

In any case, one thing is for sure, there have been no job cuts in the Greek public sector, even after five years of crisis. Do you know there are people who worked in public sector in Greece who are being paid right now even though they're not working? They were "shifted" and are in a "state of flux" waiting for SYRIZA to place them back into a job.

This is amazing when you think about it. In Canada, the Conservative government has (needlessly and foolishly in my opinion) shed quite a few public sector jobs over the last five years but in Greece no politician has dared to touch the public sector because they fear the repercussions of powerful public-sector unions (this is what happens when your economy succumbs to the tyranny of public-sector unions).

And it's not just Alexis Tsipras. When he was slipping in the polls, the former Greek Prime Minister and New Democracy leader Antonis Samaras hired a bunch of people in the Greek public sector in a last ditch attempt to hold on to power. This is why I keep telling you, don't trust Greek politicians, they're all liars and they put their party above their country each and every time.

So, when Stiglitz writes "a no vote would at least open the possibility that Greece, with its strong democratic tradition, might grasp its destiny in its own hands," I can't help but laugh. Over the last 40 years, Greeks have proven themselves incapable of governing their country properly. If they were capable of this, they would have introduced draconian job cuts to the over-bloated and inefficient Greek public sector a long, long time ago (read former finance minister Stefanos Manos's opinion piece, Leaving our statist habits behind).

And the real tragedy now is that the Greek private sector -- the little left -- will continue to experience "shock therapy" from Troika's asinine measures or worse, from a return to the drachma which will ensure more statist policies and keep this ratio of public-to-private sector workers unsustainable and ludicrously high.

Also, as I explained in my last comment on Greece's Metaxas moment, there are many dire economic and political consequences to leaving the eurozone, much worse than living under Troika's idiotic measures. Greeks aren't stupid. They know what Grexit means which is why they overwhelmingly want to stay in the eurozone. They're living a nightmare now which will only get worse once they default and their banks collapse.

Amazingly, Greek Prime Minister Alexis Tsipras remains defiant, rejecting the idea that a No vote means Grexit. Quite laughably, Greece has threatened to seek a court injunction against the EU institutions, both to block the country's expulsion from the euro and to halt asphyxiation of the banking system.

These are acts of desperate people. Tsipras and Varoufakis know their time is up. A yes vote will usher them out quickly whereas a no vote will just buy them some time until Greeks force them out with pitchforks.

Quite worrisome, Andreas Koutras sent me this from Athens today:
If you thought that Greek FM was an expert in game theory he also proves to be an ideal chaos practitioner.

From the one hand he is saying that the referendum is not about exiting euro zone and then he goes off and pronounces injunction against the ECB. It is quite obvious that he does not know how Europe works and also that he plays for his home crowd.

Syriza is already moving the boundaries of democratic behaviour as they please. They passed a law that effectively gives more TV and radio time to the NO campaign and they changed the president of the highest court who is also presiding the referendum process two days ago. They further refused to place an independent minister in charge of the election, something that happens normally in every election. In addition they printed a ballot box that clearly aims to confuse the people and promote the NO vote. The short period of time also means that many if not most poll station would not have a representative form the judicial system and many fear that this would make electoral fraud very easy.

In terms of the economy there were rumours of lowering the 60euro limit but later this was denied. For the first time in history thousands of pensioners were not paid and some were left literally crying outside the banks. According to reports Greece has barely more than 1-3bln of cash to survive and after this chaos.

PM Tsipras in a televised interview with the state TV. An interview reminiscent of the best practices of Sadam regime. In it he hinted that he may go if there is a YES vote. Yet many now say that it is hard to believe anything that comes out from this government.

Today Greece is going to fail the IMF payment and the markets should wait for the response. If they declare Greece in arrears and in default then the ECB would be free from tomorrow to cut off any banking support.

Officially the program expires tonight and Greece would be unprotected. From Wednesday onwards Europe can pull all the plugs. There are signs that this may happen but this means a humanitarian aid program should be voted.

Reaction so far in the markets has been muted. As we have argued before the financial and economic risks are limited. Political risks are not easily quantifiable but the markets reaction so far point to faith in Europe's politicians to deal with it in a a effective way.

Just to add some news. Most ATMs have run out of 20s so they dispense only 50s. In addition pensioners with no cash cards are only allowed to withdraw up to 120 euros a week.
Andreas also told me he fears SYRIZA will move to haircut bank deposits very soon. If that happens, you will see civil war in Greece (I'm serious).

Sensing the rage of pensioners, the Greek government just announced it will open 700 banks Wednesday, Thursday and Friday to allow pensioners to withdraw a maximum of 120 euros (40 euros a day). I'm waiting to see how this will go down as many irate pensioners are going to be demanding a lot more.

There was a large crowd of anti-bailout protesters which gathered at Syntagma Square last night to support the government. I suspect most of these people work in the public sector or are unemployed and desperate. Interestingly, on camera, many were stating that they want to remain in the eurozone but will vote No on Sunday.

Unfortunately, these people are delusional and believe the garbage SYRIZA is feeding them. It's sad because they don't realize or don't understand what a no vote means and how much worse off the country will be outside the eurozone.

But when you have Nobel Prize-winning economists publicly telling them to vote no on Sunday, what do you expect these people to think? Stiglitz and Krugman aren't the ones waiting in line to withdraw 60 euros a day or waiting at banks for their pension to buy some bread as not to starve.

I suggest Krugman, Stiglitz and many other economists who don't really understand the Greek economy and what's at stake if Greeks vote no in the referendum to please butt out. Your anti-austerity agenda is fine but in Greece, austerity measures have killed the private sector, not the over-bloated and inefficient public sector. And Tsipras's big gamble will pretty much kill off the little that remains in the private sector and jeopardize the future of the country.

Greeks are worried. If they don't sign an agreement, banks will not reopen next week. There will be no money to pay pensions and public-sector wages. The country will experience riots and social unrest.

Markets are calm on Tuesday and even rallying a bit. Perhaps the smart money is sensing Greeks will come to their senses and vote yes on Sunday, which will also force SYRIZA out. I actually believe the mayhem in Greece will work in favor of a yes vote but I'm worried that far too many Greeks will vote no thinking they can reject the proposals and remain in the eurozone.

Below, RT interviewed Jim Rogers, co-founder of the Quantum Fund, who stated "Greece will collapse this week and people will be terrified." I hope he's wrong.

As I end this comment, the BBC is reporting that the Greek government is reportedly planning to request a new two-year bailout deal from the eurozone in a last ditch effort to avoid defaulting on its IMF loan. The Eurogroup is holding an emergency meeting to discuss the latest Greek proposal.

Greek deputy foreign minister Euclid Tsakalotos told the BBC's Katya Adler he believed a solution could be found. I certainly hope so but I simply don't trust SYRIZA and think the country is better off with new leaders.

Update: Eurozone finance ministers have declined to extend Greece's bailout, just hours before its expiry and a possible IMF default, but talks will continue on Wednesday after Athens asked for a new aid plan, officials said.

More interestingly, my sources in Athens tell me that polls now suggest the yes vote (47%) is ahead of no votes (43%) with the rest undecided. They tell me that rather than face a humiliating defeat, Tsipras will call off the referendum, step down and a new party formed from New Democracy, PASOK and To Potami will take over. Still, it could take weeks before Greek banks reopen. In the meantime, the Greek economy and the private sector in particular sink further into the abyss.

Late Tuesday Greece officially missed a roughly $1.7 billion loan repayment due to the International Monetary Fund -- a first for an advanced economy.

On Wednesday, the Greek government indicated to its creditors that it is willing to accept many of the terms of a bailout package that it had earlier rejected, if they are part of a broader deal to address the country’s funding needs for the next two years. For her part, Angela Merkel refuses to negotiate on new Tsipras bailout proposals before Sunday referendum

I believe Mr. Tsipras should call off the referendum and resign. If he truly cares about his country, he will step down as soon as possible and allow a coalition government to work on a new deal now.

Monday, June 29, 2015

Greece's Metaxas Moment?

“There’s a dark night going on in Europe, a dark and foggy night where bad things come out of trees and bite you. It’s a pretty scary place.”

 -- Michael Sabia (2013), CEO of the Caisse de dépôt et placement du Québec
Kathimerini reports, Closed banks and capital controls until referendum:
Greece heads to a referendum on Sunday that could decide whether its future lies in or out of the eurozone, with its banks closed and capital controls in place after the European Central Bank decided not to further increase the emergency liquidity it supplies to local lenders.

The decision to impose the extended bank holiday was taken during a meeting of Greece’s financial stability council, which included Finance Minister Yanis Varoufakis and Bank of Greece Governor Yannis Stournaras.

The official announcement had not been made at the time of going to press but sources said that ATM withdrawals would be limited to 60 euros per day per account and that banks would remain closed for at least the next six working days, including the day after the referendum on the institutions’ proposals to Greece. Visitors to Greece will be able to withdraw cash up to the limit set by their bank.

The decision to shut down banks and bring in capital controls came less than 24 hours after Parliament voted in favor, by 178 votes to 120, of holding a referendum on Sunday. This, combined with the expiration of Greece’s bailout extension Tuesday, prompted the ECB governing council, which met Sunday, to decide not to raise the Emergency Liquidity Assistance ceiling beyond the level it reached on Friday.

This meant that banks would not have enough liquidity to support the spike in withdrawals prompted by Prime Minister Alexis Tsipras calling a referendum on Friday night. Around 1 billion euros was taken out of accounts on Saturday as Greeks queued at ATMs around the country. There were longer queues Sunday.

Tsipras blamed the country’s creditors for forcing Greece’s hand but said that this would not halt the plan to hold a referendum next Sunday.

“(Rejection) of the Greek government’s request for a short extension of the program was an unprecedented act by European standards, questioning the right of a sovereign people to decide,” Tsipras said in televised address to the nation Sunday.

“This decision led the ECB today to limit the liquidity available to Greek banks and forced the Greek central bank to suggest a bank holiday and restrictions on bank withdrawals.”

Tsipras also said he sent a new request for an extension of Greece’s bailout – which expires on June 30 – to leaders of eurozone countries and the heads of the European Central Bank, the European Commission, the EU parliament and the European Council.

“I am awaiting their immediate response to a fundamentally democratic request,” he said, adding that such a move could prompt the ECB to turn on the liquidity tap again.

“One thing is clear: the refusal of a short extension, and the attempt to nullify a democratic procedure is an act deeply offensive and shameful for the democratic traditions of Europe.”

Tsipras suggested that the lenders’ behavior would make Greeks more determined to vote against the bailout proposal put forward by lenders to the Greek government on Thursday. In his speech in Parliament on Saturday, the Greek prime minister suggested that a “no” vote would allow him to return to negotiations in a stronger position and able to ask for a better deal from the institutions.

Tsipras said bank deposits and wage and pension payments in Greece remained safe and appealed to Greeks to stay calm.

“Any difficulties that may arise must be dealt with with calmness,” said the premier. “The calmer we are, the sooner we will get out of this situation.”

New Democracy leader Antonis Samaras, who clashed with Tsipras in Parliament on Saturday, called on the prime minister to continue negotiations with the country’s lenders this week in the hope of finding a last-minute compromise. Samaras suggested that if Tsipras does not have enough support from his own party, he should create a national unity administration with the participation of opposition parties.

“Our country needs to remain in the heart of Europe and in the euro. Mr Tsipras must continue the negotiations,” Samaras said. “If he can’t do that by himself, he should attempt a big national consensus.”

Developments in Greece also drew the attention of the American government Sunday. US Treasury Secretary Jack Lew urged top European finance ministers and the International Monetary Fund to continue working together toward a “sustainable solution” to reforms in Greece and its recovery within the eurozone.

Lew spoke by phone with several top officials on Saturday, including the finance ministers of Germany and France, and IMF Managing Director Christine Lagarde, according to a readout of the call provided by the Treasury Department on Sunday.

In those calls, he said it was “important for all parties to continue to work to reach a solution, including a discussion of potential debt relief for Greece, in the run up to the July 5th referendum,” according to the readout, referring to a planned vote in Greece.

Lew also underscored the need for Greece to adopt “difficult measures to reach a pragmatic compromise with its creditors,” the Treasury statement said.

The Treasury spokesperson said senior department officials have also been in regulator communication with Greece and that Lew had spoken to Prime Minister Alexis Tsipras “multiple times” over the past two weeks.

The department has urged Greece to work closely with its international partners on planning for a bank holiday and capital controls, the spokesperson said.

President Barack Obama spoke with German Chancellor Angela Merkel on Sunday about the Greek situation.

“The two leaders agreed that it was critically important to make every effort to return to a path that will allow Greece to resume reforms and growth within the eurozone,” a White House statement said.

“The leaders affirmed that their respective economic teams are carefully monitoring the situation and will remain in close touch.”
Not surprisingly, global markets slid lower on Monday. Reuters reports that European bank stocks and bonds are shaken by Greek turmoil:
Europe's financial markets were jolted on Monday by the collapse of talks and imposition of capital controls in Greece, although initial heavy selling eased as investors judged there was still some way to run for the saga.

Banks and bond market borrowing costs for Italy, Spain and Portugal bore the brunt of markets' fright that Prime Minister Alexis Tsipras' calling of a referendum on further austerity demanded by euro zone creditors would see Greece leave the euro.

After an initial wave of selling, however, most markets recovered some ground. The one-day moves were large but looked pale in comparison to the events of 2008 or the last major round of Greek-spurred turmoil in 2011-12.

Wall Street was set to open around 1 percent lower while the FTSE Eurofirst blue chip index was down by just over 2 percent overall.

"The European financial system now has much less exposure to Greece than in 2011 and 2012," said Stephanie Flanders, Chief Market Strategist for Europe at JP Morgan Asset Management.

"It is also better equipped to deal with contagion to other countries -- and so are the countries themselves."

Greece's banks and stock market were closed on Monday and were expected to remain so until after the July 5 snap referendum called by Greek Prime Minister Alexis Tsipras on austerity demanded by euro zone partners.
Beware of market strategists telling you that "Grexit can be contained." This is pure rubbish and wishful thinking. There's a reason why Francois Hollande and Angela Merkel are urging Greeks to vote "yes" on Sunday, they're petrified of the ramifications of a Grexit.

What are my thoughts on all this? I've written extensively on a Greek suicide, the endgame for Greece and Europe and managing a Greek default. I warned you to prepare for Graccident, knowing full well that SYRIZA's leaders weren't going to blink first and that all hell would break loose if there was no deal for Greece.

Faced with political suicide, Greek Prime Minister Alexis Tsipras decided to abdicate his responsibilities to the country and called a referendum on the proposals. He's playing this referendum as Greece's Metaxas moment (borrowed this term from a friend of mine; h/t Dimitri) in a pathetic attempt to appeal to nationalism and stand up to the "blackmail" of creditors.

But the timing of this referendum is highly specious and I agree with those who think it's more of a con than about democracy. Moreover, Hugo Dixon of Reuters is right, as Tsipras gambles Greece, it could backfire on him and his party:
This, indeed, is one of the problems with Tsipras’ move. Even if the people say they want the creditors’ proposals, it is not clear these will still be on the table in a week because the euro zone’s bailout programme will have expired.

In theory, a totally new programme could be created. But, in practice, it will be impossible to persuade creditor countries such as Germany to approve such a deal if Tsipras is still in power. It is hard to see how Athens could avoid defaulting on some bonds owned by the ECB itself on July 20.

Although Tsipras has vowed to respect the decision of the people, he will struggle to hang onto power if they vote against him. But that won’t make things a lot easier because no other combination of parties can form an alternative government.

It is likely therefore that there would be new elections. It is possible that this could lead to a national unity government that then reached terms with the creditors. But the ensuing havoc would have damaged the economy further. What’s more, with the opposition in disarray, there’s no guarantee that even new elections would end the political paralysis.

On the other hand, if the people backed Tsipras, it is hard to see any outcome other than Greece quitting the euro. Some might hope that the creditors would then back down. But it seems more likely they would harden their line.

With the banks in meltdown, Tsipras might try to avoid the inevitable by issuing IOUs to pay his bills. But this is unlikely to do more than postpone the time before Greece returned to the drachma or whatever it would call its new currency.

In theory, default and the launch of a new currency could give Greece a new lease of life after a sharp shock, provided Tsipras then pursued a responsible fiscal and monetary policy. But this doesn’t seem likely. Tsipras and his colleagues in the radical left Syriza party would be more likely to use their renewed control of monetary policy to print money. The new currency would then devalue massively, leading to rising inflation. There would also be such dislocation that unemployment and poverty would increase.

Foreigners might also initially be deterred from visiting the country. That would be a blow to Greece’s most important industry, tourism.

Meanwhile, the euro zone is facing the most testing time in its troubled history. The ECB’s so-called quantitative easing programme, which involves buying masses of bonds issued by euro zone governments, will probably keep things under control.

But if Greece leaves the euro, there would be a nagging question over whether other countries in trouble might in the future quit too. In some circumstances, such doubts could become self-fulfilling.

Beyond the economic repercussions, a so-called Grexit would unleash vitriolic recriminations. These could poison intra-European relations for years to come.
Nobody really wants Grexit except the way SYRIZA's leftist lunatics are acting, I'm beginning to wonder if this was their goal all along. One might also wonder if Merkel, Schaeuble and other leaders of creditor nations are also looking for Grexit.

This is what happens when two sides practice the politics of brinkmanship. This Greek "crisis" could have been settled a few years ago by providing Greece meaningful debt relief in exchange for huge job cuts to the Greek public sector. The Troika should have written off 30%-50% of Greece's debt and provide concurrent investment projects but imposed draconian cuts to the public sector and a 1% primary surplus every year.

Instead, the Troika in its infinite wisdom imposed asinine measures which slowly but surely ensured a Greek depression as the Greek private sector bore the brunt of these harsh austerity measures.  Greeks revolted by voting in SYRIZA and now we're at the brink of a Greek disaster and possibly something much, much worse.

Even now, as the Greek economy plunges into the abyss, job losses in the private sector will soar. Some analysts in Greece think the 1.3 million unemployed will reach 2 million unemployed but don't worry, nobody in the Greek public sector will lose their job. At least not yet, once the crisis reaches epic proportions and there is no money to pay them, there will draconian cuts in the public sector too.

This is what Greeks don't understand. Unlike what Paul Krugman thinks, leaving the eurozone will plunge the Greek economy back to 1975. Dimitrios Giokas outlined 12 devastating consequences if Greece returns to the drachma:
  1. Rapid devaluation of the drachma against other currencies (the rate might surpass 1,000 ΔΡΧ/1€). An attempt to tie the drachma to the euro and lock the conversion rate is doomed to fail (as it failed in the case of Argentina), because of the huge capital flight and depletion of foreign exchange reserves.
  2. The devaluation will lead to skyrocketing inflation at levels equal and greater than 40 percent, further limiting thereby the purchasing power of citizens.
  3. Capital flight and a sharp increase in non-performing loans will be the coup de grace for the weak country's financial system, which would collapse, "drying" the real economy.
  4. In such an eventuality the wage and pension freeze payment will be inevitable for a while until the partial restoration of liquidity. The consequences from social unrest that will likely follow are unpredictable.
  5. Gross domestic product will likely shrink to about 2/3 of the current level.
  6. The public debt of Greece, totaling 322 billion euros, will increase automatically depending on the amount of the depreciation of the drachma, multiplying our borrowings.
  7. Even if, after bankruptcy, a partial debt restructuring follows, it will not be painless. It will be accompanied by a new rescue package (only from the IMF now) and very burdensome fiscal adjustment measures.
  8. There will be an equal increase of private debt through the skyrocketing of lending and depositing rates in an effort to control inflation. Higher interest rates will also make it difficult for businesses to raise capital.
  9. Suffocation of import business due to a weakened market, the devaluation of the drachma and the obvious lack of credit.
  10. Failure of imports will bring shortage of essential items on the market since, as we know, Greece is not self-sufficient in raw materials and meets its needs (eg. wheat, milk, meat) by imports from foreign countries.
  11. Invasion of predatory foreign investors, who will acquire companies, property, and public property at derisory prices. It will lead to a sellout of the country, now claimed by the proponents of the drachma.
  12. Diplomatic and economic isolation of Greece, who, being in a very difficult situation, will not be able to follow geopolitical developments in the region, as well as any challenges by its neighbors.
There are other consequences to leaving the eurozone. Greeks won't be allowed to work in eurozone countries and their kids will find it harder to study abroad. Even visiting these European countries will be a lot harder.

But the way SYRIZA is phrasing the question of the referendum is very misleading because most Greeks don't want the harsh austerity measures creditors are imposing on their country and some think by voting "no", it will force creditors to ease up.

This could prove to be a disastrous miscalculation. True, the creditors are absolutely dumb in their demands but a "no" vote will be a total disaster for Greece and the eurozone. Keep in mind, there are many extreme left-wing and right-wing imbeciles in Greece who don't care and think they're better off without the eurozone. But even some in the center think they can force better terms by rejecting these proposals and that scares me.

So what happens now? I'm hoping that as Greeks get a taste of what communism is all about -- namely, long lineups at ATMs and gas stations and food shortages at supermarkets -- they will come to their senses and vote a resounding "yes" in the referendum on Sunday.

If they vote "yes", Tsipras and company will be forced to resign and call an election. This is what the creditors want. They want to kill SYRIZA once and for all and they might achieve this goal. A lot of Greeks are fed up with SYRIZA too and they want them out.

And what if it's a "no" vote? This might buy SYRIZA some time but when the country plunges into the abyss and has no money to pay pensioners and public sector workers on July 15th, Greeks will hang Tsipras, Varoufakis and other members of SYRIZA, quite literally.

Either way, yes or no, I truly believe Tsipras and SYRIZA are cooked. Of course, I worry more about the second scenario as a "no" vote will set Greece back to the 1940s and possibly trigger a liquidity time bomb in Europe and the rest of the world. 

That is something Tsipras and company are hoping for. They want a global financial crisis to spread so they can make their case for a new deal for Greece. But this is a dumb strategy too because if the world is thrown into a crisis, Greeks will be even more isolated.

As far as the creditors are concerned, they need to take responsibility for this latest tragic turn of events too. As they wage ideological warfare on SYRIZA and other leftist parties in the eurozone, they risk fanning the flames of radicalism in Europe, and that will come back to haunt the continent.

As far as the Greek stock market, it's closed for a week. Some investors are speculating on the National Bank of Greece (NBG) and the FTSE Greece ETF (GREK) on the NYSE but I would steer clear of both as the risk of nationalization has just increased considerably. There are plenty of nervous investors watching events in Greece, including Canada's Warren Buffett and frantic hedge fund managers that made big bets on Greece.

Who else is nervous? PSP Investments which bought a big stake in Athens' airport and other large investors with big stakes in Greece. The events of the last few days has made everyone very nervous as SYRIZA's leaders are showing they're willing to nationalize everything in their twisted and perverted version of democracy.

On a personal note, it pains me to see what is going on right now in Greece. Old men and women waiting at the doorsteps of banks to see if they can get their pensions. One old lady passed out waiting in a huge lineup at an ATM as she tried to get money to pay for her doctor's visit. 60 euros a day is nothing, it's a joke in Greece, especially in Athens.

I hope Greeks see all this and vent their rage against Tsipras, Varoufakis and the rest of the clowns governing the country right now. I hope they vote "yes" to the eurozone and vote these bums out. Greece needs a new deal, one based on market principles and the primacy of the private sector over the public sector. Mindless austerity is insanity but so is expanding the bloated an inefficient public sector at all cost even when the country is faced with ruin.

And if you're thinking of visiting Greece this summer, bring lots of cash, get ready for aggravation and read the views from a friend of mine in Mykonos now:
"I’m in Mykonos at the moment. Last night, after they announced the measures for the next week, I went to withdraw money from ATMs; 5 in the main city (Chora) were out of service. I found one that still had cash. I withdraw up to my daily limit. It was getting busy by the time I left.
Ironic comments flew about situation and references to Argentina rose; a lady was told not to go to ATM alone from now on...
This morning, pensioners we’re lining up at banks to get money. Unlucky.

Today, at lunch, our foreign credit card was declined by restaurant. They offered us to pay cash or to drive us to an ATM since foreign cards are not limited on withdrawals.

Seems though that we’re disconnected from the rest of the country here. Greeks from abroad can’t believe where the situation has gotten to. Local Greeks are generally calm given the circumstances.

Back in Athens tomorrow. Will update you."
Below, Greece's government is under pressure after a shock decision to hold a referendum hit markets and closed banks. Reuters Ciara Lee looks at how likely a Greek exit from the euro zone is now.

And CNN talks to New York University Professor Nicholas Economides about the Greek debt crisis. Listen carefully to his comments, he understands what is at stake now that no deal is signed and the country's banks are on the verge of collapse.

The next few days have the potential to transform Greece and Europe. What remains to be seen is if this transformation will be for the better or worse. Will the Greek debt crisis be the Iraq War of finance or will there be a real awakening among Europe's leaders and an attempt to deal with huge inequities between eurozone's northern and southern members?

I remain very skeptical and fear eurozone's deflation crisis will get worse until these structural issues are finally dealt with, one way or another. Let's hope it's a peaceful resolution which takes everyone's best interests into consideration.


Friday, June 26, 2015

CalPERS' Fiduciaries Breach Their Duties?

Alexandra Stevenson of the New York Times reports, Calpers’s Disclosure on Fees Brings Surprise, and Scrutiny:
Earlier this year, a senior executive of the California Public Employees’ Retirement System, the country’s biggest state pension fund, made a surprising statement: The fund did not know what it was paying some of its Wall Street managers.

Wylie A. Tollette, the chief operating investment officer, told an investment committee in April that the fees Calpers paid to private equity firms were “not explicitly disclosed or accounted for. We can’t track it today.” 
It was an unusual disclosure. In the world of public pension funds, Calpers is a big fish. It manages $300 billion in retirement funds for 1.6 million teachers, firefighters, police officers and other state employees and is generally credited with being the most sophisticated investor in the pension world.

For J. J. Jelincic, a member of the Calpers board, the disclosure raised a red flag. “I am disturbed that we don’t disclose the carry,” Mr. Jelincic said, referring to carried interest, the industry term for private equity performance fees. “I am appalled and, actually, I’m not sure I believe the staff when they say they don’t know what the carry is,” he added.

It also caught the attention of Edward A. H. Siedle, a pension fraud investigator and a former lawyer at the Securities and Exchange Commission. Mr. Siedle, who has investigated public funds like those in North Carolina, Alabama and Rhode Island, and corporate retirement plans for Walmart, Caterpillar and Boeing, is seeking to investigate Calpers with the help of crowdfunding. He wants to determine, among other things, how much Calpers pays in private equity fees. He plans to pay for his project by raising $750,000 from the public through the online platform Kickstarter.

“The money manager knows to a penny what the fees are,” Mr. Siedle said. “The only explanation is that the pension fund has chosen not to ask the question because, from an accounting and legal perspective, those numbers have to be readily available. They are intentionally not asking because if the fees were publicly disclosed, the public would scream.”

Calpers paid $1.6 billion in fees to Wall Street in 2014, according to its annual report. The figure, however, does not include how much it paid in carried interest. Both Mr. Siedle and Mr. Jelincic say that figure could be as much as an additional $1 billion a year.

Private equity firms typically charge investors a management fee of 1 to 2 percent of assets and about 20 percent of any gains each year. But fees for transactions, costs for monitoring investments and legal fees are not readily disclosed. Those undisclosed fees result in a substantial weight on returns, according to a recent study by CEM Benchmarking.

Faced with ballooning deficits and lackluster performance, state pension funds nationwide are beginning to examine more closely how much they are paying Wall Street to manage their investments. Calpers for the first time this year will begin to make more payments to retirees than it receives from contributions and its investments. Pennsylvania is facing a $50 billion shortfall in its pension fund.

In New York City, the comptroller, Scott M. Stringer, commissioned a study of the city’s five pension funds that showed external managers fell more $2.5 billion short of benchmark returns over 10 years.

Mr. Siedle’s firm, Benchmark Financial Services, recently published a crowdfunded investigation into Rhode Island’s public employee pension fund. In an 81-page report, Mr. Siedle outlined how the pension fund had incurred $2 billion in preventable losses from investments in outside real estate, private equity and hedge funds. Seth Magaziner, Rhode Island’s treasurer, has disputed the report.

“Treasurer Magaziner strongly agrees with the need for greater transparency and lower fees by alternative investment managers doing business with public pension funds,” Shana Autiello, a spokeswoman for Mr. Magaziner, said.

In addition to wanting to examine the fees that Calpers pays, Mr. Siedle also wants to scrutinize the relationship its executives and placement agents — middlemen it hires to help it find money managers — have with Wall Street to determine whether any conflicts of interest exist. He plans to spend nine months sifting through Calpers’s public disclosures and will also comb through the private offering documents that external money managers give to consultants who advise Calpers.

Calpers said it was trying to address the lack of transparency around fees. In April, Mr. Tollette, the chief operating investment officer, told the investment committee that Calpers planned to require greater disclosure from the private equity firms it invests in, adding that this was an industrywide problem. Calpers is also working on a reporting program that would track data from each external firm with which it has investments.

“Calpers has long been a leader in advocating for fee economies and transparency, including in private equity,” Joe DeAnda, a spokesman for Calpers, said. “A necessary element in that effort is additional disclosure and reporting from the general partners managing the funds,” he added.

The public scrutiny comes as Calpers seeks to simplify what it has called a complex and expensive portfolio. This month, Ted Eliopoulos, the chief investment officer, said that over the next five years, Calpers would cut by more than half the 212 external money managers it invests with for private equity, real estate and global equity funds. It will reduce the number of private equity firms to 30 from 98, giving those firms $30 billion to manage. Calpers has put its money with some of the biggest private equity firms in the world, including TPG, Blackstone, Carlyle and Kohlberg Kravis Roberts.

Last year, as part of its move to slim down its external investments, Calpers decided to liquidate $4 billion of hedge fund investments.

The S.E.C. has started to look more closely at private equity firms to understand how they value their assets and charge fees. The agency, which has conducted examinations of private equity firms, found that more than 50 percent of the time there were violations of law or weaknesses in a firm’s controls.

Mr. DeAnda, the Calpers spokesman, said fund officials had been “actively engaging with some of our private equity partners to help improve the disclosure and data available and have been closely monitoring the regulatory announcements and attention around this subject.”

Mr. Siedle’s investigation will not be the first for Calpers. In 2009, it hired the law firm Steptoe & Johnson to look at its use of placement agents as part of a wider pay-to-play scandal across the industry. The investigation, which cost Calpers $11 million, uncovered evidence of bribery and corruption. The S.E.C. accused Federico R. Buenrostro Jr., the Calpers chief executive from 2002 and 2008, and Alfred J. R. Villalobos, a former board member turned placement agent, with fraud. The United States attorney in San Francisco charged the two men with criminal fraud. Mr. Buenrostro pleaded guilty last year to conspiracy to commit bribery and fraud. Mr. Villalobos, who pleaded not guilty, committed suicide this year. 
Seeking to put the controversy behind it, Calpers adopted new policies and disclosure requirements. It continues to use placement firms.
This article covers a lot of hot topics. First, let me disclose that I sent an email yesterday to Ted Eliopoulos, CalPERS' CIO, and Réal Desrochers, the head of CalPERS' private equity, to see their response to the article. My email went unanswered, which is odd since Réal knows me well.

Anyways, let me share with you my thoughts. It's utterly unacceptable for any limited partner (pension fund, sovereign wealth fund, insurance company, endowment, etc) not to know the fees it's doling out to private equity funds. In the case of CalPERS, the largest most followed public pension fund in the U.S., it's worse as it should publicly disclose all fees being doled out to each of their GPs (private equity and other external funds).

I simply don't buy the excuses being doled out by CalPERS' senior staff and agree with J. J. Jelincic, one of their members cited in the article, there's no way that CalPERS' private equity staff don't know what the carry is on each of their fund investments. I know Réal Desrochers well enough to know that he holds that information on his fingertips and can easily disclose it to any board member.

So why isn't he doing so? I don't know but if I was a CalPERS' board member, I would demand the information or simply fire him for failing to disclose these fees and violating his fiduciary duties. It's simply unacceptable for any public pension fund, especially CalPERS which prides itself on good governance, not to disclose all these fees as well as hidden fees and all relationships with third party placement agents.

On the topic of placement agents, the scandal that rocked CalPERS over two years ago should have been a wake-up call to ban them altogether. Instead, this arcane practice fraught with conflicts of interests continues at CalPERS and elsewhere where millions are squandered on middlemen.

The fact that Mr. Villabos committed suicide is tragic and shows you how ugly things get when big money meets big pensions. The potential for fraud and bribes is huge and I simply don't trust placement agents or underpaid pension fund managers enough to take their word that everything is kosher. I've seen enough shady things from "CFAs" and even well-paid pension fund managers on the take to know that bribing pension fund managers although rare, can and does happen.

Ted Siedle, the pension proctologist, should shine a light on all these fees and third party relationships. When it comes to public pensions, my philosophy is simple, I want to know every detail in terms of performance and money and fees being doled out to all external managers and third party providers like placement agents, lawyers, accountants, software vendors, consultants, and brokers.

People think fraud and bribes at pension funds can only happen with external managers but that is nonsense. I've seen pension fund managers schmoozing with brokers, consultants and third party vendors, pushing commissions to their favorite brokers while ignoring others who don't wine and dine them, sending a contract to their consultant buddies or buying expensive and useless risk, back and front software systems without a proper request for proposal (RFP) and proper bid process, scrutinized by internal and external auditors.

The same goes for law firms, accounting firms, actuarial firms and investment consultants. There needs to be a proper bidding process and the public should know which firms are selected every year and how much money is being doled out and on what basis.

What else? As I stated in my recent comment on private equity stealing from clients, limited partners should be made aware of any rebates private equity funds enjoy with third party providers and these rebates should be discounted from the fees they pay these funds.

Folks, we live in an era of deflation, pension poverty, underfunded pensions and increased regulatory scrutiny. The good old days of fast times in Pensionland are over. Board members and beneficiaries are increasingly asking for more transparency on fees and performance, and they're holding pension fund managers accountable if they're not meeting their fiduciary standards. And regulatory bodies are increasingly paying attention to public pensions too.

But let me not be overly critical of CalPERS staff in this post, after all Ted Eliopoulos and Réal Desrochers are not to blame for past investment mistakes that cost the giant fund billions and they're moving to streamline investments and lower fees by chopping in half the number of external managers in illiquid alternatives and by nuking their hedge fund investments.

Finally, I highly recommend you read a RIABIZ article, CalPERS's hatchet man, Ted Eliopoulos, goes on a manager firing spree, shaving hundreds of millions in management fees -- but is it enough?.

This article provides a very decent overview of what Mr. Eliopoulos and his investment staff have managed to do in terms of cutting external manager relationships. It states that for its most recent fiscal year, the pension giant paid $1.6 billion in fees, with close to 90% of that money going to the real estate, private equity, and egregiously pricey hedge fund managers. But again that $1.6 billion in fees doesn't include carried interest estimated at over $1 billion. A billion here, a billion there, pretty soon you're talking about real money!

As far as their new investment approach to private equity, the article ends by stating this:
In its statement earlier this week, CalPERS said it expects to change its fundamental approach to private-equity investment. Going forward, CalPERS plans to invest via separately managed accounts with its external managers instead of investing in general funds. These external SMAs are often less expensive than traditional private-equity arrangements and offer more control and transparency for investors. Typically, however, they require larger sums of committed capital.

“I think this is all part of a much broader push for transparency, structure and as well pricing, in the investments space. The 'black box’ hasn’t sold well since Madoff,” says Will Trout, a senior analyst with Houston-based Celent. See: Nine threats to the RIA business and how they can be avoided.

Such consolidation is good news for private-equity giants like The Blackstone Group LP, Carlyle Investment Management LLC, Apollo Global Management LLC and TPG, each of which already manages multiple billions for CalPERS and has capacity to take even more commitments.

In a sign of things to come, the Wall Street Journal recently reported CalPERS was handing another $500 million to Blackstone Group for a fund over which CalPERS will have some influence.

Yet CalPERS also made it clear that these Wall Street Goliaths won’t be the only winners of the consolidation push. Pensions & Investments reported last week that the fund is setting aside $7 billion to significantly increase allocations to managers in its development program who currently manage assets only in the tens of millions — an act that has the look of deconsolidation.
That $7 billion is a pittance compared to what Blackstone (BX), Carlyle (CG), Apollo (APO), KKR (KKR) and TPG are going to get but at least they thought of setting some money aside for emerging managers and smaller funds. Every pension fund should be doing this through specialized funds of funds that can identify and track top emerging managers and smaller funds that fall under the radar.

As far as separately managed accounts with its external managers, unlike Canadian funds, CalPERS and many U.S. pension funds don't have the investment staff to co-invest alongside their private equity managers, so this approach allows them to provide a big chunk of money to fewer relationships, squeezing them hard on fees.

Still, don't kid yourselves, private equity is only trying to emulate Warren Buffett because it sees the writing on the wall and wants to increase the size of assets under management so it can keep collecting management fees and carried interest on a larger asset base.

Lastly, Dan Primack of Fortune provides more evidence that CalPERS's private equity problem is about CalPERS, not private equity:
His example was the Texas County & District Retirement System, which invests around 12% of its $25 billion into private equity. In the pension’s comprehensive annual financial report, it explicitly breaks out the amount paid in carried interest to its private equity managers. See below (click on image):



So much for the CalPERS argument that this is a “private equity industry issue” rather than a CalPERS issue…
Below,  have a look at CalPERS' investment committee meeting from April 27, 2015. Take the time to listen to all of it. The presentation on cost management starts at 1 hour 55 minutes, and the section on carried interest begins at 2 hours 6 minutes, and the CalPERS staff member making the presentation is Wylie Tollette, Chief Operating Investment Officer.

Again, it's simply unacceptable and a breach of fiduciary duties not to disclose all fees, including hidden fees, that external managers and third-party providers are charging a public pension fund, especially when that fund is the largest best known fund in the United States. Good governance starts by taking your fiduciary responsibilities seriously, disclosing all pertinent information to your board of directors, beneficiaries and other stakeholders.