Kramer says N.J. did better than most states with pension fund investments

New Jersey Investment Council Chairman Orin Kramer says the state’s pension fund – under attack by Republicans for losing $118 million in a Lehman Brothers investment – lost less over the last year than the funds of the 30 other states who make the information available on the Internet.

Kramer made the argument in a letter to state Sen. Joseph Pennacchio (R-Montville), who has been a vocal critic of the State Investment Council’s decision to invest in Lehman shortly before it collapsed. It was a response to a letter Pennacchio wrote to State Division of Investment Director William Clark to question why the state would not reveal which in-state companies the fund invested in as part of the two-year-old NB/NJ Custom Investment Fund program.

In an interview with, Kramer said that the ranking is vindication of his strategy to diversify the state’s holdings – a strategy that the Lehman investment ultimately came out of — and that politicizing the council will jeopardize its future performance.

“The portfolio diversification that made that possible has been under political attack,” said Kramer. “When people make the pension system a political football, seeing that kind of ranking again becomes harder and harder to achieve.”

Although the state’s pension fund lost 14.2%, or $10.9 billion, between June, 2008 and June, 2009, the average for the other states was 18.8%. North Carolina tied New Jersey, also losing 14.2%.

The state is currently suing Lehman Brothers’ former executives and directors, alleging that the company misrepresented its financial position when the state made its $182 million investment in Lehman shares.

“An irony about Lehman Brothers is that a major source of New Jersey’s outperformance arose from underweighting financial services companies. For every investor, some decisions produce atrocious outcomes,” wrote Kramer in his letter to Pennacchio. “While the State believes it was misled in making that decision, Lehman was obviously one of those atrocious outcomes.”

A company that was spun off by Lehman when it failed — Neuberger Berman Group – runs the NB/NJ Custom Investment Fund program, which has $100 million to invest in-state.

In his letter to Clark, Pennacchio questioned whether the state should trust former Lehman employees to run the fund, and wondered whether the it could be used provide payback for generous political donors.

“The chances are very high that the beneficiaries of these investments have strong relationships with some local government officials,” wrote Pennacchio. We have seen repeatedly that absent transparency and outside oversight in the handling of New Jersey taxpayer money, political considerations can and do lead to improper diversions of precious resources. Absent transparency and full disclosure, how can the public be assured that investments are being made honestly?”

Kramer, responding to Pennacchio, wrote that safeguards were put in place with just such a prospect in mind. For one, Neuberger Berman will only generate fees if the state gets at least an 8% return on its investments and must put up some of its own capital. Moreover, third party groups must put up at least 75% of the capital.

“If a political insider can convince Neuberger Berman to ignore its own economic interest in maximizing returns and produce dollar of capital from New Jersey, that insider will have to induce private capital to produce three dollars on terms equivalent to those paid on New Jersey’s dollar,” wrote Kramer.

Kramer also wrote that the state is contractually barred from giving information about specific investments, since most investment managers would refuse to work with the state without a confidentiality agreement,but that he would ask Clark to see if it’s possible to reveal them for this instance.

Pennacchio said that he only gave Kramer’s letter a cursory look and would examine it more later on. But he was skeptical of the numbers, given what he considered an unsatisfactory response to his previous inquiries about the Lehman investment. .

“I appreciate their hard numbers, but sometimes it’s more than the investment and the numbers themselves,” he said. “They set up this fund… and quite frankly they’re being very quiet about it. I don’t like them being so quiet about it when it comes to taxpayer money.”

Pennacchio said that the heavily redacted response to his OPRA request on the original Lehman investment amounted to “500 pages of nothing.’

“The basic, simple questions of how this decision was made, the thinking behind how the decision was made, were never answered,” he said. “So it you were me, would you take this decision at face value or would you question it?’

Kramer says N.J. did better than most states with pension fund investments