Was CalPERS Libored?

CalPERS is in the news these days after it missed its projected rate of return by six percent in the last fiscal year.

At a recent El Dorado County Board of Supervisors meeting, Chief Administrative Officer Terri Daly said the CalPERS rate would be going up substantially because of the lower than expected returns.

However the possibility exists that CalPERS’ low return on investment may, in part, be related to the Libor rate fixing scandal that has spread to big banks around the world including some of the largest in the United States.

According to CalPERS Chief Investment Officer Joseph Dear, “Once again, the financial services industry demonstrated that it cannot be trusted to make decisions in the long-term interests of investors.”

The Libor scandal 

The Libor scandal broke earlier this year but the allegations are that rate fixing has been going on since at least 2005.

Libor is a measure of how much banks must pay to borrow money from one another over the short-term and affects $500 trillion worth of worldwide contracts, financial instruments, mortgages and loans.

Ultimately the Libor rate influences what consumers, businesses and investors pay on a variety of financial contracts from home mortgages, business loans, car loans or interest rate swaps.

According to data from the Federal Reserve Bank of Cleveland, in 2012, around 45 percent of prime adjustable rate mortgages and more than 80 percent of subprime mortgages were indexed to the Libor in the United States.

American municipalities also borrowed around 75 percent of their money through financial products that were linked to the Libor. Some of those municipalities are now thinking about or are already in the process of suing those banks involved in the scandal using a RICO lawsuit to recover damages.

Initially traders at Barclays bank in London were fingered as being at the center of the rate fixing scandal but executives at the bank implicated both the Bank of England and the Federal Reserve as being complicit.

Since then, the number of banks involved has expanded as traders working for at least 16 different financial institutions have been implicated including those at Citigroup, UBS, J.P. Morgan Chase, Deutsche Bank, HSBC and the Royal Bank of Scotland.

So far it’s not clear if CalPERS was actually affected since they may have profited from some rate fixing and suffered from others.

Amy Norris, who is a spokesperson for the retirement fund, said that, “CalPERS is evaluating the impact on the fund, and whether any legal action is required.”

Norris said that the lower than expected projected return from the last fiscal year was “immaterial” because the agency smooths the ups and downs of returns over a 30-year period.

“Any additional contributions that result for member public agencies will take place in two years, not next fiscal year,” she said. “State and the schools will be impacted next fiscal year. It is related to the timing of the valuations.”

Contact Dawn Hodson at 530-344-5071 or dhodson@mtdemocrat.net. Follow @DHodsonMtDemo on Twitter.