STUMP » Articles » Divestment Follies: An Actual Cogent Case...Kind Of » 14 September 2018, 12:30

Where Stu & MP spout off about everything.

Divestment Follies: An Actual Cogent Case...Kind Of  


14 September 2018, 12:30

A month ago, I talked about the Chicago Teachers Pension Fund divesting from private prison-related investments. At the time, I mentioned a report, but it said it was part one of two… and I was waiting to see if a second part came out. I don’t see it, and I’m not waiting any longer, because something related popped up (and it has nothing to do with private prisons).

First, on August 10: Hedge Fund Billions Invested in Private Prisons Exposed:

WASHINGTON—The American Federation of Teachers is urging public pension trustees with more than $3 trillion under management to review their holdings in the wake of a new report exposing hedge funds and corporations that are profiting off the jailing of immigrant families in private prisons.

Luckily, there are no pension funds out there with more than $3 trillion under management.

Oh, that’s not what you meant? Perhaps you should have your PR people’s editorial skills looked at. That is extremely poorly worded.

The AFT periodically issues reports ranking asset managers, to both educate trustees of pension funds and shine a light on assets held by public pension systems. A new edition, released Friday, reveals that Renaissance Technologies, Wellington Management Group and 24 other funds hold over $4 billion in stock in General Dynamics, GEO Group and CoreCivic—three firms making money off the Trump administration’s policies at the southern border.

AFT President Randi Weingarten said, “Hedge funds that invest in private prisons are not only profiting off a broken justice system and abetting the administration’s policies of family separation and the permanent harm it has caused children. They are also making a risky bet on an industry rightfully under siege. Trustees have a fiduciary duty to ensure workers’ capital is invested in a fiscally prudent manner. The AFT will continue to work closely with the AFT Trustee Council to safeguard workers’ retirement security from those who would prefer to undermine it by exposing our members and retirees to unacceptable risk.”

Then on August 17: AFT’s Weingarten and CTU’s Sharkey on Chicago Teachers’ Pension Fund’s Divestment from Private Prisons:

AFT’s Weingarten said: “Private prison operators are officially on notice. Teachers and the trustees of their pension systems will now question whether their retirement savings are invested in morally abhorrent detention centers that are both a stain on our nation and a risky financial bet.

“When we released our asset manager watch list last week to pension trustees, we urged them to scrutinize whether their retirement systems were holding GEO Group, CoreCivic and General Dynamics stock—firms profiting from the separation of children and detention of families seeking asylum in the United States because of oppression in their home countries. Today we are heartened and encouraged by CTPF’s swift and sensible action to uphold its fiduciary duty to our members’ retirement security.

“In New York City, Chicago and elsewhere, the guardians of teachers’ deferred wages are rightly rejecting firms that profit off the Trump administration’s policies of family separation and mass incarceration targeting communities of color, while employing low-wage, unprotected employees. They can no longer abide by an industry that dehumanizes and endangers the immigrants and working people this country was built on.

“The AFT Trustee Council, which works with trustees who oversee more than $3 trillion in assets, is reviewing our report, and we urge other funds to consider divestment at the earliest opportunity.”

Okay, they got the language a little bit better here re: the trillions of dollars.

Let’s take a look at their paper and see the argument.


Here is the paper, with the subtitle PART ONE: Private Prisons, Immigrant Detention and Investment Risks

Ah, I see they’re trying to provide cover for fiduciaries.

Let’s just grab a little bit of the text:

[quick aside — I see they produced the PDF so that one can’t easily copy-and-paste the text. But easily copy the pull-quotes.

Now, I could provide screenshots… but guess what? OCR is in all sorts of software now. If you want your text to be truly uncopyable, you’ve got to make it unreadable by humans. And then you may as well not have published in the first place.

So stop these shenanigans, y’all.]

This special edition report is part 1 of two reports that the
AFT will be issuing to highlight the investment risks to
pension funds and other investors whose portfolios
contain exposure to the private prison industry or
contractors who provide services to immigration
detention centers. Since May 2018, when Attorney
General Jeff Sessions conveyed plans to prosecute
immigrants crossing the U.S.-Mexican border, making
it official U.S. policy to routinely separate children from
their parents, AFT pension trustees and members have
been inquiring about public pension funds that may be
invested in companies that profit from detention facilities
that house separated immigrant families and the *risks
those investments pose to members’ retirement security.*

In response, the AFT is issuing this two-part report to
inform trustees about the *top publicly traded companies
that are profiting from the detainment of separated
families or the incarceration of mass numbers of people*—
disproportionately people of color—in private prisons.
Public pension funds invested in companies identified in
this report *may hold direct shares, or may have
investments through index funds, private equity funds or
hedge funds*. Part I of this report identifies *investment
managers*, namely hedge fund managers, who invest
millions of dollars in companies that profit from private
prisons and detention facilities. Part 2 of this report will
identify an expanded list of investment managers who
invest in private prison companies that profit more
broadly from mass incarceration of communities of color.

Ah, the good ole blacklist of asset managers. Let me know when y’all run out of asset managers available for y’all.

Anyway, they go on how immoral prisons are, and not going for an open borders policy, and I’m not going to even address those issues. I want to go down the list of the companies they target. There are three firms specifically, which run private prisons. Then they list the companies that provide financing (i.e., regular old loans).

Earlier this year, the Center for Popular Democracy
released a report, “Bankrolling Oppression: How Wall
Street Companies Finance the Private Prison and
Immigrant Detention Industry, “11 identifying the following
Wall Street firms that provide financing to CoreCivic and
GEO Group:

  • Wells Fargo
  • JPMorgan Chase
  • Blackrock

VVhile these firms do not directly provide services to
facilitate the “zero tolerance” policy, their financial
support enables private prison companies to operate.
Public pension funds wishing to assess their exposure to
the private prison industry or raise concerns with
companies involved may choose to include these financial
firms in their assessments, in addition to the private
prison and immigrant detention companies listed above.

Now, maybe they’ll be able to shame Wells Fargo, JPMorgan Chase, and Blackrock into not financing these deals. I bet some other companies would be very happy to… as where is the money for these private pensions coming from?

Why, the fount of all that is good and pure — government!


They do address that issue, and it’s really the only thing related to fiduciary duty that really makes sense.

Perhaps because the private prison industry has a record
of abuses, a few states—Illinois, Iowa and New York—
have passed legislation banning private prisons, and
under the Obama administration the Department of
Justice announced that it would stop housing federal
inmates in private prisons—a decision that was reversed
in 2017 by the Trump administration. *It is precisely this
vulnerability to political changes that makes
investments in the industry risky.* As Stringer and
Valdes put it in their recent New York Times op-ed:
“These companies have a financial interest in
perpetuating the inhumane ‘zero tolerance’
policies whose consequences we now see on
the front page of the news each day.
Consequently, as an investment, they’re at the
whims of a seesawing political climate. “

I happen to agree in this sense: public pensions are already heavily exposed to governmental/political risk. What if the contributions from government go away? Maybe they’d go away from the private prisons, too! (No matter if they were politically popular).

The thing is — they’d need to extend this reasoning to a whole bunch of other “investments” with huge political risk exposure as well, like all those pie-in-the-sky “green” investments, where almost all the money initially comes from government. Or maybe infrastructure investments. There are loads of companies out there where their largest sources of funds are governmental units — should those be divested as well?

I actually would be very on board for them to do a holistic risk review, looking at the risks embedded in their assets and liabilities. I think that would be an excellent idea.

But if you do it piecemeal like this, it looks like blatant politicking over issues particular parties go for, and not considering all the assets with similar risk exposures.

Because it is obviously blatant politicking, given stuff like this:

The AFT, among many others, believes that this
immigration policy is unjust and inhumane. In June 2018,
the AFT filed a complaint with the United Nations Human
Rights Council, asking the council to condemn the Trump
administration’s policy of separating families and call for
its immediate revocation. The complaint described the
Trump administration’s immigration policies as violating
basic human rights and causing deep and traumatic harm
to children and parents, and asked the UNHRC to help
ensure that migrant families who have been separated
have equal and effective access to justice.3

So let’s see. They’re saying “We hate this thing and we’re lobbying against it!” and “Hey this thing may lose money because our political action is whacking these businesses!”

At least, it’s consistent.


But here’s the problem:

I would be absolutely fine with them doing all this, if it really were only their money they were playing with.

If the investments underperform, they fully expect taxpayers to get soaked (and, ultimately, bondholders when the taxpayers can’t meet all the obligations).


Here is the list of all the hot divestment topics of late:

  • energy companies
  • anything to do with guns
  • private prisons
  • soda/fast food companies
  • pharmaceutical companies making painkillers

The divestment run started a long time ago, with South African divestment, which probably had minimal effect on fund returns (because it was such a small part of the market), and then tobacco divestment (and there was a big problem there, too — the states wanted tobacco to hang on, so they could get those sweet sweet cigarette taxes). There actually had been an earlier gun divestment wave, which left some of the California funds out of the loop for a way to virtue-signal after whatever mass shooting event that did not occur in Chicago.

This never stops. That’s why I loved Portland, Oregon’s decision in 2017 that all corporations are de facto evil, so we’re keeping our money in cash and government bonds.

My main problem with these divestment drives is that you get one area after another being targeted, without a holistic view of the portfolio — that is, if you’re trying to argue from fiduciary grounds. For those arguing purely on morality, there’s no problem with targeting just one thing.

But if you want the pension funds to come along….you have to pitch it as a fiduciary duty of some sort.

The paper is simply a “Part One”. Perhaps Part Two will be looking at political risk everywhere. I doubt it. I am even doubtful of a part two, but maybe they intend to drop it right before election day.


This divestment I have no problem with at all. It’s a private institution deciding how to invest its endowment. If they want to screw up their returns with a bunch of restrictions, that’s their problem.

Yale adopts investment ban on assault weapon retailers – Pensions & Investments

Yale University’s board of trustees has adopted a policy prohibiting its $27.2 billion endowment from investing in retail outlets that market and sell assault weapons.

The university announced in a statement on Tuesday that the policy was adopted by the board following a recommendation by the board’s Committee on Investor Responsibility.

The policy applies to retail distributors of assault, as well as dealers and promoters that organize the sale of such weapons at gun shows, the statement said.

By “assault weapons”, I assume they mean handguns, rifles, and shotguns… no indication whether crossbows and hunting knives are included. Or all knives.

Another piece on this announcement: Yale Blocks Future Gun Investments | Chief Investment Officer

Yale University’s endowment has barred investments in retailers that sell firearms to the public.
This comes at a time where institutional investors, such as the Connecticut Treasury ($42.3 billion), the New Jersey State Investment Council ($78.6 billion), and the California State Teachers Retirement System ($228 billion) are or are considering cutting gun and gun-related holdings from their portfolios amid a number of shootings that have occurred throughout the year, starting with the Stoneman Douglas High School shooting in Parkland, Florida, in February.

Such retailers the institutions have been boycotting include Kroeger, Walmart, and Vista, who have since dropped guns from their inventory.

The Yale Endowment has been known for its top returns, and you can dig into that report if you wish… it turns out they have very sophisticated portfolio managers as well as an odd allocation across asset classes.

One thing to keep in mind is that the Endowment has a spending target based on fund amount and recent performance. Check out their actual spending pattern:

In general, the spending has increased, as the Endowment receives further alumni donations and as investments do well. But what about when investments don’t do well?

Their reports go from June 30 to June 30, so the market crash in fall 2008 won’t show up until the June 30, 2009 report, Which happened.

Yale’s Endowment produced a negative
24.6 percent return in the fiscal year ending
June 30, 2009, a period marked by a financial
crisis during which global equity markets
declined by nearly 30 percent.

Due to timing on spending decisions, a reduction in spending didn’t show up until the June 30, 2010 report. That report is here. Here is what they had to say:

Despite the conservative nature of Yale’s spending policy, distributions
to the operating budget rose from $281 million in fiscal 2000 to
$1,108 million in fiscal 2010. The University projects spending of $986
million from the Endowment in fiscal 2011, representing 38 percent of

They spent $1,175 million in fiscal year 2009, so we saw a 5.7% drop from FY2009 to FY2010, and then they spent $987 million in FY2011, and almost 11% drop.

From FY2009 to FY2011, the endowment disbursements (to scholarships, endowed chairs, etc.) decreased a cumulative 16%.

Think public pensions can do that?

Are they willing to absorb those risks?


The reason I decided to post this today was not because I was impatient for part two of the report, but because what I read in the Wall Street Journal this morning (I’m linking to the MarketWatch republication of the story).

U.S. sanctions Russian and Chinese tech firms it says are North Korean front companies

WASHINGTON—The U.S. Treasury Department on Thursday sanctioned two Russian and Chinese technology firms Washington said are front companies for North Korea generating illicit revenues for Pyongyang’s weapons programs.

The Treasury said China-based Yanbian Silverstar Network Technology Co. Ltd. and a sister company set up in Vladivostok, Russia, called Volasys Silver Star are managed and controlled by North Koreans and are earning millions of dollars for Kim Jong Un’s regime in violation of international sanctions.

The sanctions come as the Trump administration has expressed increasing frustration at what it says is an easing in sanctions enforcement by Russia and China amid stalled nuclear talks between North Korea and Washington.

Interesting. The WSJ article is here — unsurprisingly, the WSJ did not have any comment from the Russian and Chinese embassies in DC nor from North Korea’s UN mission (presumably in NYC).

You may not see the connection, but here are two more pieces of news I saw this morning.

First: market reactions to the sanctions.

Washington’s Sanctions Push Sinks Russian Bonds

Prices could fall further as Congress moves forward legislation that would ban investors from buying newly issued Russian government debt

A growing drumbeat on Capitol Hill for further sanctions against Russia because of its interference in U.S. elections has hit Russian bond markets and the foreigners who trade in them.

Since U.S. legislators ramped up efforts at the start of August to pass laws that would penalize Russian financial and energy industries, prices of bonds denominated in Russian rubles have dropped about 7%, according to IHS Markit.

Prices are likely to fall further as Congress moves forward legislation that would prohibit U.S. investors from buying newly issued Russian government bonds, emerging-market bond fund managers said. Such selloffs also hit Russian banks and institutional investors, which are heavy buyers of their government’s debt.

Oh, institutional investors…. REALLLY?

Which institutional investors may these be?

“Investors have had years to reduce exposures in Russia,” Daleep Singh, a former U.S. Treasury Department official, said at a hearing before the Senate Banking Committee Wednesday about one of the new sanctions bills. “I can think of no credible argument why U.S. public pension funds and saving vehicles should indirectly fund the Russian government while the latter continues to sponsor violations of U.S. sovereignty.”


Investing in all sorts of stuff carries political risk.

The article details not banning ownership altogether – but if you can’t sell what you’re holding… talk about political risk.

You may wonder why pension funds hold Russian sovereign debt. Here is an answer within the article:

Russia had stood out as one of the more stable economies in the developing world this year, bolstered by its low debt — 17.4% of gross domestic product, according to S&P Global Ratings — and prudent fiscal policies. Political risk has increasingly overshadowed that economic strength as the U.S. government moves to pinch Russia’s finances.

Russia is not the only country whose debt is getting hammered via these sorts of pronouncements.

The reason pension funds are invested in this stuff – “emerging market debt” – is they’re deperate for investment returns. U.S. Treasuries get you squat there, currently.

Finally, a piece in Rolling Stone (yes, that Rolling Stone): Teacher, Firefighter, Police and Other Retirement Funds Flow Into Sanctioned Russian Companies

President Trump’s executive order over election meddling won’t stop the river of cash running from the United States to Kremlin-connected coffers

For years, a river of American wealth has flowed into Russia — money from virtually every corner of the U.S. financial world. Public pensions, hedge funds, banks, insurers, university endowments, mutual funds and wealthy investors have collectively showered billions of dollars on Vladimir Putin’s regime and supported companies closely connected to it.

Teachers, firefighters, police officers and state employees from New York to California might be surprised to learn that their retirement dollars are invested in shares of sanctioned Russian companies.

The nation’s two biggest public pension funds — the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) — together hold stock in sanctioned Russian companies worth nearly $715 million, according to their most recent annual filings. These include Gazprom, the Russian gas giant that has functioned as a bottomless expense account for Moscow and Rosneft, which acts as a foreign policy arm of the Russian state.

So. If private prisons should be divested from due to political risk… seems to me that Russian stuff needs to be divested from due to political risk.

Daniel Fried, a former U.S. ambassador to Poland, was stunned to learn of the scale of pension fund investments in companies he helped sanction as State Department coordinator for sanctions policy in the Obama administration. “Are you kidding me?” Fried tells Rolling Stone. “Those are companies I would not want to have any American’s pension money tied up with.” (CalSTRS says it carefully monitors these stocks for risks and has restricted its money managers from buying new shares of Gazprom. CalPERS did not respond to repeated requests for comment.)

Not quite sure why this is being run in Rolling Stone.

It’s not even a Trump thing, by the way:

The Russian Central Bank, through an opaque process that resembles a three-card Monte game with bonds, lends money that winds up in the accounts of financially-strapped, sanctioned Russian banks and companies. In 2016, the Obama administration tried to warn U.S. banks not to take part in a potentially lucrative Russian bond deal because it would undermine sanctions, according to The Wall Street Journal. “The Russians really know what they’re doing with bonds, far more so than any other sort of kleptocratic government,” Maximilian Hess, head of political risk advisory at AKE International who has been researching the Kremlin’s policies concerning bonds, tells Rolling Stone. The Kremlin, he says, has become adept at using bonds as a “geopolitical tool.”

That sounds like huge political risk.

In any case, I think if the AFT wants to promote divestment drives due to political risk, I think it needs to be a global look at political risk. It’s probably a bit too late to re-jigger the Russian bonds currently in public pension funds – you don’t want to sell at the bottom of the market – but they may want to look at their investment landscape as a whole.

If you want to make the case that it is a fiduciary duty to divest from the currently hottest thing to divest from, due to political risk in that asset class, then you really should not do it piecemeal – you may end up with a concentration risk in a new asset class (like, oh, Russian bonds) that has even more political risk… but you discounted that, because you were looking at only the one thing.

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