Why is transparency and openness important? Think about Bernard Madoff.
People invested millions in Madoff on the promise of 14 or 15 percent returns, even though they had no idea what he was investing in or how he was pulling it off. Likewise, poorly-regulated and opaque investment vehicles like securitized mortgages and auction-rate securities share a large part of the blame for the financial crisis gripping this country, and the world, over the past year.
One of the more outrageous spectacles of the past year has been banks and other financial institutions resisting disclosure of how they invested or spent federal bailout money. It’s bad enough when some bureaucrat won’t tell you how much was spent on fixing a pothole. It’s worse when a megabank begs for billions and then won’t tell you where the money is going.
The nation’s largest public pension funds, like CalPERS, may be learning the hard way about the risks associated with secretive investments by self-proclaimed financial geniuses. The value of CalPERS’ investments in hedge funds has fallen from $7.6 billion to $5.9 billion. This comes after CalPERS and other public pension funds fought unsuccessfully against public records disclosure of the performance of their investments in venture capital funds and other alternative investments, claiming that if the public found out about investment performance the public pension funds would be chased away from lucrative venture capital funds. Now the New York Times reports that big public pension funds “have grown uneasy over the costs and secrecy” associated with hedge funds. And one hedge fund executive pled guilty and is cooperating with an investigation of corruption at the New York state pension fund.
Transparency and openness aren’t just good public policy. They are good investment policy for public pension funds which don’t want to get caught doing business with shady people with conflicts of interest who peddle opaque and risky investments..