CalPERS eyeing Goldman case
Officials at the country’s largest government pension fund on Monday said they were “disturbed” about a federal lawsuit contending that investment bank Goldman, Sachs & Co. defrauded investors with mortgage-backed securities that allegedly were set up to fail.
The lawsuit also pointed out the need for increased federal regulatory oversight of the securities industry, the officials said.
The California Public Employees’ Retirement System, which owns 1.8 million shares in the company, also said it intended to question company executives at an upcoming meeting to discuss the way they operate.
For now, CalPERS said it had no plans to sell any of its Goldman stock. As a rule, the giant pension fund invests in equity issued by nearly every publicly traded company on U.S. markets and major exchanges around the world. Those stocks, once acquired, remain in CalPERS’ portfolio as long-term investments.
CalPERS said it had no other investments with Goldman or other assets owned by the firm.
Rather than selling its Goldman stock, the $213-billion pension fund plans to closely monitor the ongoing investigation by the U.S. Securities and Exchange Commission, said Chief Investment Officer Joseph Dear. Based on those developments, CalPERS’ board would consider taking appropriate actions to influence Goldman’s management if needed.
“We will see what develops,” Dear said. “Our corporate governance folks are examining Goldman Sachs in respect to their practices.”
Goldman said it has done nothing wrong and has vowed to contest the SEC action. Goldman said in a statement Friday that it had provided full disclosure to the sophisticated investors who bought the securities. Goldman claimed that it lost $90 million from its own investment in the securities.
CalPERS as of Dec. 31 owned about one-quarter of 1% of Goldman’s common stock, the fourth-largest holding of any public pension fund, according to Bloomberg News. With that kind of clout, CalPERS -- either alone or together with other pension systems -- could try to influence the makeup of Goldman’s board, its management structure and its investment behavior, Dear said.
CalPERS has a long-standing reputation for engaging in such “corporate governance” pressure tactics, aimed at making the companies whose stock it holds more transparent and overall better corporate citizens, according to CalPERS’ own criteria.
CalPERS plans to air those concerns at a meeting before Goldman Sachs’ annual general shareholder meeting May 7, Dear said, noting that the meeting was scheduled even before the SEC filed its complaint.
“We have an initiative with all the major financial firms because of the credit crisis,” he said, “and governance clearly is one of the contributing factors to the credit crisis.”
Those discussions now are more urgent, given the serious nature of the U.S. regulator’s charges against Goldman, Dear said. The filing of a complaint against the investment bank also “adds an exclamation point to the urgency to address financial market reform regulation now,” he said. Dear was referring to President Obama’s efforts to tighten controls on the creation and marketing of exotic new securities like the ones allegedly used by Goldman.
But there are limits to how much pressure CalPERS and other big institutional investors can bring to bear on Goldman and other wealthy investment firms, corporate governance experts cautioned.
“At this point there’s not much they can do,” said Charles M. Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware. Goldman, he said, probably won’t want to answer the most important question that CalPERS and other large investors should be asking: Why didn’t the firm tell them earlier that it was the target of an SEC inquiry?
Goldman, he said, is unlikely to discuss its legal problems in any detail as long as it is in litigation with the federal government.
And even though CalPERS owns a large block of Goldman stock, the pension fund still might not be in a position to force wholesale change, said Mercer Bullard, a law professor at the University of Mississippi and a former SEC attorney. That said, CalPERS should use all the influence it can muster to ensure that “Goldman’s allegedly bad business practices” do not have a major effect on the company’s bottom line and the value of the California fund’s stock.