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WALTERS: Pension fund's inside deals raise a stench in California

Remember the old saying, ?Once burned, twice shy?? It?s supposed to mean that when one has a bad experience, one should be more cautious in similarly dangerous circumstances.

California got burned in the early 1990s when Leon Black, fresh off a career with the scandal-tainted Drexel Burnham Lambert junk bond shop, set up his own investment firm and persuaded the state?s new insurance commissioner, John Garamendi, to seize a supposedly insolvent Executive Life. Executive Life had a fat portfolio of junk bonds that Black had helped assemble, and Garamendi allowed him to broker a deal with some French buyers who, it turned out, had illegal backing from a French government bank.

Many of the company?s annuitants got burned and many years of litigation and investigations followed, but Black walked away with a reported billion-dollar profit for moving some paper. It was a nice grubstake as Black built his firm, Apollo Management, into a financial powerhouse whose holdings, valued at around $40 billion, include AMC Entertainment, Harrah?s Entertainment, Norwegian Cruise Line, Coldwell Banker and Century 21 Real Estate.

Black, it would seem, concluded that California?s clueless officials were sources of easy money and by and by, set his sights on the California Public Employees Retirement System (CalPERS), the nation?s largest pension trust fund.

CalPERS is run by a claque of politicians and directors who mostly come from public employee unions. And it hasn?t exactly posted a sterling investment record lately, having lost about $100 billion in often-speculative investments, such as a $1 billion haircut on Southern California land.

It appears that many of CalPERS? investments were arranged by middlemen, including ex-politicians and ex-members of the CalPERS board, who had developed relationships with those who made investment decisions.

Apollo had an especially well-connected middleman, Alfred Villalobos, a former CalPERS board member who set up his shop, called Arvco, after leaving the board. Apollo hired him, as did others seeking pieces of the huge trust fund. CalPERS invested hundreds of millions dollars with Apollo ? and so far has lost money on those investments. It even bought a significant share in the firm.

Several newspapers reported recently that Villalobos was paid a whopping $50 million by Apollo to pitch deals to the pension fund and later hired Fred Buenrostro, CalPERS? top executive. It stinks like Fort Bragg?s dead whale. And who will pick up the tab for CalPERS? bad investments? Taxpayers, of course. The pension fund, whose chief actuary has described its long-term income-outgo situation as ?unsustainable,? will hit deficit-ridden state and local budgets for billions of dollars next year to offset its losses.

Dan Walters is a columnist for the Sacramento Bee.

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