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Who's To Blame?
“Only when the tide goes out do you discover who’s been swimming naked.” — Warren Buffett.
The tide continues to go out. And it’s causing a lot of people to lose a lot of money.
A couple of weeks ago, crypto exchange FTX blew up and filed for bankruptcy. About $32 billion in value evaporated overnight. FTX turned out to be one of the biggest frauds in history.
Watching the fallout of this blowup can only make you shake your head and ask, “how did no one see this?” And “who is to blame?”
Turns out, everyone is. There was almost no due diligence done on the investing side. Looks like no one even bothered to try.
It’s a shame that retail investors who had money in FTX lost all of their money. But that’s not the worst part.
It’s those who were invested and didn’t know it — i.e. the pensioners of Ontario Teachers’ Pension Plan.
The Ontario Teachers Pension Plan (OTPP) invested $95 million in FTX. That money is now gone. That’s $95 million that can’t get paid out anymore.
From MarketWatch:
“Ontario Teachers’ Pension Plan invested $75 million in FTX in 2021, plus a $20 million follow-on investment in January, through its three-year-old Teachers’ Venture Growth (TVG) platform in order to “gain small-scale exposure to an emerging area in the financial technology sector.”
The $95 million is less than 0.05% of the pension plan’s total net assets. But that’s not the point.
Do you think pensioners would have willingly signed up to invest in one of the riskiest asset classes with their hard-earned money?
Does OTPP get a pass for investing into — what turns out to be — a blatant fraud despite its “robust due diligence?”
Would the size of its Teachers’ Venture Growth (TVG) platform even have $8 billion in assets under management (AUM) had it not been for the zero-interest rate world we lived in from 2009-2021?
Which leads us to the following questions…
Who is to blame here? Is it the OTPP? Is it the Fed? Either way, that $95 million is gone.
This isn’t the only story of a pension investing in hundreds of millions into a crypto Ponzi scheme. Here’s what we said June 28th in Ripple Effects... Fallout:
“Canada’s second-largest pension fund, Caisse de Dépôt et Placement du Québec (CDPQ), invested in Celsius Network — a crypto lending platform that turned out to be Ponzi-ish
CDPQ manages over $300 billion…
CDPQ announced they were leading a $400 million investment in Celsius Network back in October 2021.
This round gave Celsius a valuation of more than $3 billion.
CDPQ believed Celsius would “shake up the financial industry.” They claimed they did months of due diligence.
Year to date, Celsius’s token has dropped from over $4 to around $0.80 — an 80%+ drop. And 90%+ since CDPQ’s investment.
CDPQ is now down hundreds of millions of dollars on its investment in just the last 8 months alone.
That’s hundreds of millions in hard-earned money which pensioners expected to be paid out. Now it’s gone.
Hundreds of millions is a drop in the bucket for a pension managing $300+ billion.
But that’s not the point.
The point is CDPQ probably would never have invested in a company like Celsius had interest rates been anywhere higher than 0% over the past 13 years.
How many other private investments did CDPQ make at unwarranted valuations? How much “unnecessary” risk did they take elsewhere?”
Pension funds continue to get swept up in the fallout of asset prices. Showing they’re being anything but good stewards of pensioners capital.
Here’s what we said in our October 18th note So-Called Good Stewards Of Capital:
“Pension systems are supposed to be “safe,” right?
Work for decades. Put money into the respective pension plan. And get promised an expected annual return — usually 7% — after X number of years.
The managers running the pensions are supposed to be good stewards of capital.
There’s an embedded trust between pensioners and the people managing their $35-$40 trillion in assets.
The trust is not to risk too much because its people’s retirement money. So most pensions have mandates to invest a large percentage in safe assets (like bonds), and some in stocks. Pension mandates usually follow some sort of traditional 60/40 bond-equity ratio.
But it turns out pensions systems levered up and took on as much risk as retail traders due to the global central bank policy of 0% and, of course, negative interest rates.
Here’s what we said back in July 2019 in our piece Pensions Are In For A Rude Awakening (emphasis added):
Pension funds took on an insane amount of risk because interest rates were zero. They had to. That was the only way to meet their pension obligations.
However, the Federal Reserve pivoted because of inflation. The tide has been going out — aka raising interest rates. The Fed won’t stop raising rates until they’ve contained inflation back down to 2%.
And now we’re seeing who’s been swimming naked.
The ripple effects of this tightening policy are cascading. (You can read our series on The Ripple Effects here.) Almost every asset class has imploded.
Pension funds over-indexed into stocks and private equity because of the zero-interest rate world. They’ll be rotating hundreds of billions of capital back into bonds now that they have some yield.
Pensioners should feel better knowing a lot of their money is moving into U.S. bonds — the risk-free asset.
Unfortunately, they’ll have taken billions of losses in write-downs on their stocks and private equity portfolios.
No one will take blame amidst the millions of dollars lost. Pension fund managers will claim they were doing what was needed to meet their obligations. The Fed will claim they needed to maintain a stimulative policy to help the economy.
Nothing will change. Just pensioners having to roll with the punches.
That’s just the way it goes… I guess?
Good investing,
Lance