Category: zerohedge

Och-Ziff’s 34-Year-Old Superstar Trader To Get $7.5 Million Guarantee

Three weeks ago, news broke that Dan Och was stepping down as CEO of the once iconic Och-Ziff hedge fund (which as of January 1 managed $32BN in AUM), following internal turmoil in the form of a growing feud between founder Daniel Och and former superstar trader Jimmy Levin. As we noted at the time, it was unclear what future Levin, currently co-CIO at Och Ziff would have at the company as part of the executive fallout.

We now know the answer: according to Bloomberg, Levin, 34, who was passed over for the hedge fund’s top job in December and who netted the firm over $2 billion in 2012, will remain at the fund, and get restricted stock worth $35.6 million as of Friday’s close, as well as a guaranteed annual bonus of $7.5 million under his new job contract.

As disclosed in the company’s 10-K, Levin’s employment agreement entitles him to receive 1.1% to 1.5% of the gross profit of some of the firm’s funds, subject to a $7.5 million minimum guarantee, most of which will be paid in cash. In addition to receiving restricted stock, he’ll give up large chunks of previously awarded equity units, Bloomberg notes.

Och-Ziff Chief Financial Officer Alesia Haas said last week that Levin’s new contract would link his compensation more closely to fund performance to reflect his responsibilities as co-CIO. Returns at the hedge fund firm strengthened last year, with the flagship OZ Master Fund gaining 10.4 percent — the most since 2013 — and the OZ Credit Opportunities Fund jumping 11 percent.

As previously reported, Levin who  “in the late 1990s, was working at a summer camp in Wisconsin, teaching Mr. Och’s son how to water ski” was promoted to co-CIO in February last year, a move many saw as his promotion to heir apparent of Dan Och.

As part of the promotion, he got 39 million shares tied to stock return, outlining an effort by the firm to prop up its share price, which has plunged more than 92% since its 2007 initial public offering. The award would have been worth almost $200 million if all goals were met.

However, as the WSJ detailed last month, outgoing CEO Dan Och told investors in December that Levin wouldn’t succeed him.

Over Christmas weekend, Och-Ziff rushed out a letter to investors revealing that the 57-year-old Mr. Och had changed his mind, overruling others in the process. “After extensive discussion with the board of directors, including the company’s independent directors, who support transitioning to Jimmy in the near future, it was the conclusion of Dan Och …that now is not the right time to transition to Jimmy.”

Mr. Och himself has never publicly addressed why he soured on Mr. Levin and reasserted control at the big firm. Interviews with more than a dozen people close to the situation at Och-Ziff suggest that many inside the firm, including board members and Mr. Levin, were shocked by the shift. People familiar with Mr. Och’s thinking say he felt Mr. Levin pushed too far, too fast, asking for more money and control than he was due.

“A level of distrust” had developed between the two executives, says a person close to the matter.

In January, the firm said Robert Shafir, the former chairman of the Americas at Credit Suisse Group AG, would take the CEO job Feb. 5 and receive a $60 million pay package. Part of the award would be linked to the fund’s stock price performance.

While for many a $7.5 million guarantee is unheard of, for Levin – who was named global head of credit in 2013 – it represents a big step down from his prior arrangement. In 2013, Levin, then 30 years old, was rewarded with a $119 million payday for his big, and successful, bet on RMBS.

Last February, when relations between the two traders were better, Och shocked Wall Street by elevating Levin, the star of the firm’s credit business, to co-chief investment officer and handing him an incentive package of $280 million. 

“It’s the kind of crazy pay you don’t hear about in the industry much these days” Bloomberg reported at the time. As part of the deal, Och agreed to surrender around $100 million of his own stock to Levin, meaning Mr. Levin’s raise essentially came out of Och’s pocket.

Inside the firm, some seethed. Outside, they sneered; the move smelled a bit of desperation. Five months later, that remains the burning question: Is this a Hail-Mary stab by Och to win back his seat of dominance in the hedge-fund universe or a stroke of genius?

One year later, even as the internal “seething” has died down, the question remains – with Och relinquishing control of the hedge fund he built, and almost destroyed, is keeping Levin – a trader who made it to the top largely thanks to a concurrent bond bull market – still a desperation “Hail Mary” by the company?

Today, Och-Ziff, still one of the world’s largest hedge funds, manages just over $30 billion, down from almost $50 billion in 2005 as a result of the fund’s performance and legal woes, and its shares closed at $2.66 on Friday. To be sure, Levin’s challenge is great.

… to reverse the merciless bleeding of assets — and defections of personnel — triggered by Och-Ziff’s misconduct in the Democratic Republic of Congo, Libya and other African countries. If Levin makes it happen, it’ll be because he’s successful in his push to remake Och-Ziff, a firm long dominated by equity trades, into something of a fixed-income shop. The firm now has half of its $32 billion in assets tied to credit, including dedicated funds that have cropped up in just the past few years.

“We certainly weren’t known as a credit shop when I first met with clients,” Levin said recently from an Och-Ziff conference room overlooking Central Park, recalling when he was a twenty-something on the road trying to convince investors to part with their money. “Those early meetings weren’t the easiest in the world.”

Well, if he fails at least he will at least have some guaranteed “pocket change” to fall back on, because for a man who has made hundreds of millions at the fund he joined in 2006, that’s precisely what $7.5 million represents. That, and of course, a forced vacation: Levin has a two-year noncompete clause in his contract precluding him from going to a new firm.

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South Africa To Cut All Diplomatic Ties With Israel

Via MiddleEastMonitor.com,

The South African government is intending to cut diplomatic ties with Israel in protest of its treatment of the Palestinian people, the country’s Science and Technology Minister Naledi Pandor announced yesterday.

Pandor informed parliamentarians of the government’s resolution during a ten-hour joint debate on South African President Cyril Ramaphosa’s State of the Nation Address (SONA) that he delivered last week.

“The majority party has agreed, that government must cut diplomatic ties with Israel, given the absence of genuine initiatives by Israel to secure lasting peace and a viable two-state solution that includes full freedom and democracy for the Palestinian people,” she said.

The comments were made in response to opposition leader Kenneth Meshoe, who had argued that it was disappointing that national and provincial authorities in South Africa had refused help from Israeli companies to address the country’s current water crisis.

However, the proposal was applauded by parliamentarians and Pandor, who is expected to be appointed vice president in Ramaphosa’s new Cabinet, was given a standing ovation as she left the podium.

The government’s decision was further confirmed on the South African Parliament’s official Twitter account.

South Africa has been a staunch ally of the Palestinian struggle and regularly spoken out against the atrocities committed by the Israeli government.

Last month, the South African representative to the UN told the Human Rights Council that Israel is the “only state in the world that can be described as an apartheid state”, just days after the ruling African National Congress (ANC) party called for government ministers to strengthen the country’s visa restrictions with Israel.

Last year, the government also resolved  to downgrade the South African Embassy in Israel to a liaison office, and cautioned Tel Aviv for blacklisting supporters of the Boycott, Divestment and Sanctions (BDS) movement, which included prominent figures of the ANC.

The BDS South Africa campaign has witnessed significant support from the nation’s public, with universities and churches backing a cultural and economic boycott of Israel affiliated organisations.

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House Intel Democrats Release GOP Counter-Memo

Following President Trump’s block (due to sources and methods needing to be redacted), and Rep Adam Schiff’s admission that the Democratic Party memo (rebuttal of the GOP memo) also needed to be redacted further, House Intelligence Committee Democrats have released their memo countering the GOP document that alleged surveillance abuses in the Justice Department and FBI. 

Key counterarguments are as follows:

1. The Steele Dossier was not the catalyst for launching the Trump-Russia probe

2. The rationale for surveilling Carter Page was carefully weighed.

3. The Nunes memo used classified information selectively and included distortions and misrepresentations  

4.  Papadopoulos’ role as the original catalyst for the Trump-Russia investigation outlined.

5. DOJ’s FISA application was carefully vetted and wasn’t used to spy on Trump or his campaign 

6.  Steele’s information about Page’s contacts with Kremlin insiders like Sechin was consistent with Papadopoulos information

As The Hill reports, the Democratic memo, which can be viewed in its entirety below, claims to “correct the record” on what the Democrats say is a “transparent effort to undermine” the FBI and Justice Department, as well as the Russia investigations, on the part of the committee’s GOP members.

The White House has releases a statement that President Trump supported the release of the memo.

Full Democratic Rebuttal Memo below:

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Riots Breakout Across Italy Ahead Of General Election (And Markets Are Getting Anxious)

Heading into the weekend, the Italian government massively stepped up security across the country in anticipation of demonstrations by anti-fascist and far-right groups, ahead of the general election on March 04. Italians will go to the polls next Sunday, in an election that could rebalance the political environment or send shockwaves through the European Union.

According to CNBC, here are the three leading candidates dominating the race:

  • Silvio Berlusconi, former prime minister and head of Forza Italia.

  • Matteo Renzi, the embattled leader of the center-left Democratic Party (PD) and former prime minister who quit the post in 2016 after a referendum on constitutional reform failed.

  • Luigi Di Maio, the anti-establishment 5 Star Movement’s (M5S) leader.

Last night in Pisa, Italy, anti-fascist protestors formed a counter-demonstration against Lega leader Matteo Salvini, who was speaking at the center of town. Anti-fascist groups threw glass bottles and rocks and attacked police officers as they tried to silence Salvini, a leading anti-EU political figure, before next week’s elections.

Insane video of Anti-fascist activists fighting with police last night in Pisa

In the early hours of Saturday morning, riots have erupted on the streets as police and protesters have clashed in Pisa and Milan with massive marches expected in Rome later in the day, said the Daily Express.

Former Italian prime minister Matteo Renzi is expected to visit an anti-fascist protest hosted by the Democratic Party in Rome. Preliminary reports indicate more than 20,000 people are expected to protest in just one march by the National Association of Italian Partisans (ANPI) and ’Mai piu fascismo’ (Fascism Never Again). There will also be three other protests planned in the Italian capital later in the day.

Police commissioner Guido Marino told the Daily Express: “We have two objectives – guarantee a high standard of counter-terrorism prevention and prevent violent groups from infiltrating the marches with negative consequences for order and security.”

Protestors from the National Association of Italian Partisans (ANPI) are currently underway in Rome…

Demonstrators from ’Mai piu fascismo’ (Fascism Never Again) are lining up for a rally in the heart of Rome.

“At the call of the left, thousands of people parade against fascism in Rome, in the rain but in good humour #AFP,” said one Twitter blogger.

“MFJ in #Rome on #siCobas March for immigrant & workers rights-against #razzismo& #Fascismo #24febbraio Open the borders of Italy and Europe! Organize community proletarian defense against the fascists led by workers/gold immigrants, young and young! Solidarity!,” one activist said.

“Anti-fascist protests have kicked off outside Termini station in Rome!,” alerted one twitter user.

The Daily Express provides the economic and social backdrop in why Italy’s political environment is in chaos:

The bleak economic forecast and growing immigration concerns have resulted in toxic election campaigns for the upcoming vote amid fears of a revival of neo-fascist sentiment.

 

Tensions have risen across Italy ahead of the elections as right-wing Lega Nord Matteo Salvini has pledged large scale deportation of refugees.

 

He vowed to deport 500,000 migrants within five years if his party wins the election – including 100,000 in the first year.

 

Polls suggest the conservative coalition made up of former prime minister Silvio Berlusconi’s Forza Italia (Go Italy!) and its far-right allies will win the most parliamentary seats, but probably will fall short of an outright majority.

 

In that case, President Sergio Mattarella could ask a centre-right figure to try to form a government, or he could turn to Luigi Di Maio, leader of the anti-establishment 5-Star Movement, which looks set to become Italy’s largest party.

 

Before a poll blackout came into force on Saturday, 5-Star was polling at around 28 percent, ahead of the ruling PD on 23 percent and Forza Italia on 16 percent.

Maxime Sbaihi, a Euro-Area economist for Bloomberg said (Feb 19), “Italy’s general election, aka the euro-area’s top political event of 2018. Our composite poll tracker shows @Mov5Stelle and @pdnetwork, the 2 poll leaders, drifting further apart.”

Italy’s Nationalism verse Popularism explained in one chart:

And perhaps it is this chart more than others that has the market getting nervous.

As Tom Luongo details, we are in the quiet period before the Italian elections.  No public opinion polls are published in the last two weeks of an election cycle per Italian law. Consequently, there is a bit of a news lockout on the subject.

These are the most important elections in Europe this year – laying aside the possibility of a German re-vote – and the amount of coverage it is getting is disturbingly scant.  Articles like this bit of pablum from Bloomberg is what passes for analysis, purporting to tell you “What You Need to Know about Italy’s March 4th Elections”

Even as the specter of populist revolt recedes elsewhere in Europe, Italy’s anti-establishment, Euroskeptic Five Star Movement is seeking a breakthrough.

That’s a lie.  And a bald-faced one at that.  There hasn’t been one election in Europe in the past two years where populism hasn’t been a major and rising factor.  The fact that Italy’s President dissolved parliament early and moved elections up from May to March 4th is proof they are scared of the trend.

Because the trend is against them.  Five Star Movement or M5S continues to rise in the polls and another two months would put them in a position to put a government together.

The writers of this article push a lie that M5S is uninterested in forming a coalition government.  The rules for this election were changed to allow the parties to fight as coalitions to freeze out M5S from ruling, even if they win the most votes.

The last polls taken had the Northern League tied at 15% with Silvio Berlusconi’s Forza Italia.  These two are campaigning together.  And the intention, clearly expressed by the Bloomberg writers, is to create a ‘grand coalition’ a la Germany, which no one in Italy wants except the political elites who back further integration with the European Union.

Bond Posturing

These are the real stakes in the Italian elections next week. And despite the gaslighting of the Bloombergs and worse, the Los Angeles Times, trying to tell everyone that M5S has no chance at winning, traders in the sovereign bond pits aren’t buying it.

Since the beginning of December European bond yields across the board have been rising.  The chart below is the magnitude of the rise in yields for Germany, France, Portugal and Italy.

Note how for most of February yields have been rangebound, treading water.  This is most likely the European Central Bank in there buying up supply to keep yields from rising despite the steady march higher of yields in the U.S.

Italy’s debt, however, is in free fall.  In the past five trading days Italian 10-year debt has risen a whopping 20 basis points. Rising yields equals lower bond prices and the bond vigilantes are calling the bluff of the media and the ECB by selling Italian debt with impunity.  They are rightly scared that the polling numbers are far worse than what we’ve seen at this point.

eurobond rates

Traders are Selling Italian Debt Faster Than the ECB Can Buy It

Italy’s 10-year debt is now trading well above recent high at 2.10% (see chart below).  More importantly this week’s price action broke a long-running trend of lower highs and lower lows in yields, indicative of a bullish market.

italian debt

The Break Above 2.10% is Very Significant, Technically.

Now, it’s hard for that market to not be bullish when the ECB is the only marginal buyer of Italian debt and heretofore, traders bet on that behavior continuing in perpetuity, front-running the ECB’s buying.

But, rising yields means that the net volume of selling across the spectrum of European sovereign debt is more than the ECB is willing or allowed to buy.  So, what’s happening is the ECB is managing the rate of the rise in sovereign bond yields and that is clear in the chart above.

What is also clear is that it is losing control of the Italian bond markets.

Coalition Party Bingo

So, what’s next?  While new polls will not be published between now and the election, polls are being taken.  Someone has seen them.  And, by inference, the Italian bond market is telling us that those numbers are either far worse than we’ve been led to believe at this point or some traders are simply nervous.

I believe it’s the former, otherwise yields wouldn’t have pushed through 2.1% to the upside.  If the Northern League and M5S can pull off something close to a clear majority together that would be a big blow to Brussels’ plans to control coalition talks.

Moreover, if this last bit of news about M5S candidates standing for specific seats gaining ground is accurate then the renegade party will have a much stronger hand to play as it will pick up more seats than poll watchers were anticipating.

The natural alliance here is the Northern League and M5S.  Berlusconi, I feel, has been acting as a stalking horse for the established political powers to freeze M5S out of coalition talks and hand a weak “cartel” government to Brussels for upcoming debt relief and banking reform talks.

NL leader Matteo Salvini has wrapped himself fully in the populist flag, echoing Donald Trump.  One of the few things the Bloomberg article linked above gets right is all of the parties backing off from a referendum on the euro.

For now that is off the table to get votes but Salvini and his M5S counterpart Luigi Di Maio both know that Italy’s path to prosperity lies through either a massive write-down of its sovereign debt, something German voters are clearly not in favor of (and are becoming moreso every day) or leaving the euro and depreciating it away.

Given the rate at which rates are rising that is moving that timetable up considerably.  And with no government in Germany yet that creates a lot of uncertainty for investors, who rightly, are beginning to panic that those in charge really aren’t.

A firming dollar and U.S. equity markets would also imply that we’re seeing capital begin a panic move out of Europe in case the populists win.

In any case, the markets will tell us what’s really happening even if the politicians and the media won’t.

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FBI Never Contacted Google After “Professional Shooter” YouTube Threat Reported

As we dig further into the monumental breakdown in protocol between the FBI and Florida officials which could have prevented 17 deaths in the Valentines Day massacre at Stoneman Douglas High School in Parkland, Florida – Senator Chuck Grassley (R-IA) revealed on Friday that the FBI never contacted Google – which owns YouTube, after it was reported that suspect Nikolas Cruz, under his own name, said “I’m going to be a professional school shooter” in a YouTube video comment last September.

When the uploader of the video, Ben Bennight, contacted the FBI shortly after Cruz left the comment, officials spoke with him for 20 minutes, after which there was no follow up until the same agent or agents came to his home on Wednesday. 

In a press conference late last week, Special Agent Robert Lansky who is in charge of the Miami FBI division said that the FBI received the tip, however they were “unable to further identify” the person who made the comment, despite conducting “database reviews” and “checks.”

“No other information was included with that comment, which would indicate a time, location or the true identity of the person who made the comment,” Lasky said. “The FBI conducted database reviews, checks, but was unable to further identify the person who actually made the comment.”

What they didn’t do is contact Google – which would have been able to help confirm Cruz’s identity. Cruz’s IP address, for example, would have allowed the FBI to at minimum know what town the comment came from – narrowing the list of suspects to everyone named “Nikolas Cruz” in the region.

Had they simply followed up, the FBI would have also discovered from Florida’s state social services agency that Cruz intended to buy a gun, or that he had been cutting his arms on snapchat. 

FBI investigators could have then called the Broward County Sheriff’s department and found out about the 23 times deputies responded to Cruz’s home over a seven year period for emergencies including a “mentally ill person, ” “child/elderly abuse”, “domestic disturbance,” and “missing person.” 

The last call received by Broward County Sheriff’s office on November 30, was a warning a caller who warned that  Cruz is collecting guns and knives. Concerned he will kill himself one day and believes he could be a school shooter in the making.”

To top things off, a young woman close to Cruz warned the FBI she was concerned he would “get into a school and just shoot the place up,” according to a leaked transcript of her call to the bureau’s tip line one month before the massacre.

You know, its just so much, said the caller. I know heshes going to explode. The woman said she was making the call because she wanted a clear conscience if he takes off and, and just starts shooting places up, according to the transcripts which were reviewed by the Wall Street Journal. 

Two different people specifically told authorities from two different agencies that Cruz might shoot up a school. 

And despite all of that, the survivors of the Valentine’s Day massacre are being paraded around on national television as puppets for gun control – demonizing gun owners and the NRA. 

Instead of blaming guns, perhaps the cumulative angst of Parkland survivors should be directed towards the monumental failures by the FBI, the Broward County Sheriff’s office – whose officers refused to enter the active shooting at the school, and the Florida state social services agency that concluded Cruz did not pose a threat. 

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Naval Academy Rocked By Drug Scandal; Drug Ring Bought Cocaine With Bitcoin

New revelations have surfaced in a drug scandal case festering at the United States Naval Academy in Annapolis, Maryland, involving a criminal ring of about ten midshipmen, according to Fox News.

The United States Naval Criminal Investigative Service (NCIS) was briefed on the illegal activity three months ago when a fellow midshipman contacted authorities about a rogue group of midshipmen selling drugs on campus.

Current reports estimate ten midshipmen were part of the elaborate scheme to supply midshipmen throughout the Naval Academy with powerful drugs including cocaine, lysergic acid diethylamide (LSD), and Ketamine. Fox News specifies the criminal ring used Bitcoins to purchase the drugs on the dark web then distributed the product throughout campus.

Sources from within the academy tell Fox News that roughly two-dozen midshipmen are under investigation. No formal or pending charges have been brought against any midshipmen as the investigation expands.

Second in command of the school, Capt. Robert B. Chadwick II conducted a surprise drug test for all 4,500 midshipmen at 5:30 a.m. Wednesday morning. Sources tell Fox News that drug tests are only given at the company level with about 150 midshipmen at a time. Chadwick’s response demonstrates that America’s most prestigious military academy has a massive drug problem.

Several midshipmen informed Fox News that the investigation is situated around 23rd company of about 150 midshipmen. The midshipmen who provided Fox News spoke on the condition of anonymity because they are not permitted to talk with the media.

Fox News has obtained the names of the midshipmen who have tested positive for drugs but says the names will be withheld as the investigation is ongoing.

Since charges have not been brought against any of the suspected midshipmen, Fox News is withholding the names of those implicated. Two are prior enlisted midshipmen who had spent time in the fleet before gaining appointment to the Naval Academy, which educates and trains young men and women to become officers in the Navy or Marine Corps. One of the midshipmen tested positive on a drug test in early January after returning from Christmas break, adding more urgency to the investigation, according to one midshipman.

Chadwick recently addressed the brigade at lunch, telling them that while the investigation is ongoing, there would be no more discussion about it, according to several midshipmen present that day.

“The Naval Academy and the Naval Criminal Investigative Service recently initiated a command-assisted investigation in Annapolis after receiving a midshipman report of alleged recreational drug use within the Brigade,” Cmdr. David Mckinney, a Naval Academy spokesman, told Fox News.

“[T]he results of the investigation are still pending. We are continuing to work with NCIS on these reported allegations. The Navy has a zero tolerance for drug abuse and takes all allegations of misconduct very seriously,” he added.

Between 2010 and 2011, the Annapolis Capital reported, “NCIS conducted an 11-month investigation into the use of synthetic marijuana, or spice, by midshipmen. That investigation ended the careers of at least 27 midshipmen.” Naval officials have confirmed from 2010 through 2017, seven midshipmen were expelled for drugs.

Drugs in the United States Naval Academy should make you furious. It threatens our national security because it lowers the readiness of our midshipmen to become efficient officers. Drugs undermine the authority and strict order that fuels military efficiency. And of course, drugs damage the health of the men and women who are protecting this country. As drugs flourish throughout the military, are we witnessing another crack in the American empire?

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Subway Dramatically Expands Loyalty Program To Try And Revive Sagging Sales

Last spring, we pointed out that, for the first time in its 52-year history, Subway had contracted in 2016, shuttering 359 US locations which, as Bloomberg explained, was the “biggest retrenchment in the history of the restaurant chain.”

Since then, the outlook for Subway has only deteriorated. The chain, which holds the title of “most ubiquitous fast food chain in the US,” is facing the largest sales slump in its history, driven no doubt by the advent of healthy eating trends that have pushed consumers toward low-carb and less-salty foods.

Subway

Sales fell 4 percent last year after a 1.7 percent drop in 2016, according to industry researcher Technomic.

To try and revive growth, the chain is now offering steep discounts on meals.

The chain, Bloomberg explains, will now allow customers to use their rewards of up to $2 on any menu item, lifting restrictions that existed under its previous program. The new system, which will expand to 28,500 US and Canadian locations next month, will offer good customers free cookies and chips, as well as allow them to pay for their food with a mobile app.

Subway

Subway’s loyalty program has existed, in some form, for years. But Subway executives felt they needed to do more to win back customers. The chain is notorious for being one of the cheapest fast-food restaurants to open, with potential franchisees only need to show liquid assets of $30,000 and a net worth of $80,000.

Subway

“It made sense for us to revisit our loyalty program,” Chief Digital Officer Carissa Ganelli said in an interview. “We’re putting the customer first. We have to be everywhere they are and engage with them how they want to engage.”

The chain, of course, has also endured its fair share of public-relations blunders in recent years. The company was widely criticized last year after DNA tests revealed that the chicken in its chicken sandwiches was mostly soy filler. Also, the company’s former pitchman, Jared Fogle, is presently serving a 16-year prison sentence for possessing child pornography and for crossing state lines to pay for sex with a minor.

As Bloomberg points out, closely held Subway is relying on technology to reverse the decline, making it a latecomer to the technology world. Last year, the company introduced a new mobile-phone application and started adding touch-screen kiosks in its restaurants. The new rewards program will also represent a significant expansion, since rewards are currently only available at about one-third of North American locations. The company’s millions of existing rewards members will be automatically enrolled in the new program, which was intended to “reward our most valuable customers.”

Of course, given the combination of shifting eating trends and the broader malaise in Subway’s segment of the food service industry, even these changes might not be enough to reverse sales for the closely held private company.

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Former CalPERS Board Member’s Shocking Admission: “CalPERS Is Near Insolvency; It Needs A Bailout Soon”

Two weeks ago, in the aftermath of the February 5 volocaust, we quoted David Hunt, CEO of $1.2 trillion asset manager PGIM, who said ignore the volatility spike, the real financial timebomb was and remains public pensions: “if you were going to look for what’s the possible real crack in the financial architecture for the next crisis, rather than looking in the rearview mirror, pension funds would be on our list.” 

In a brief discussion wondering what municipalities and states will do when local tax revenues decline and unemployment worsens, Hunt said “we’re worried about those pension obligations.”

He is hardly alone: having reported over and over and over (and over, and over) again that public pensions are in deep trouble, two days ago none other than Steve Westly, former California controller and Calpers board member – manager of the largest public pension fund in the US, made an shocking warning:

“The pension crisis is inching closer by the day. CalPERS just voted to increase the amount cities must pay to the agency. Cities point to possible insolvency if payments keep rising but CalPERS is near insolvency itself. It may be reform or bailout soon.”

Westly was referring to an editorial  laying out “the essence” of California’s pension crisis, exposed last week when the $350 billion California Public Employees Retirement System (CalPERS) made a “relatively small change” in its amortization policy.

Specifically, the CalPERS board voted to change the period for recouping future investment losses from 30 years to 20 years. While this may not sound like much, the bottom line is that it would require the California state government and thousands of local government agencies and school districts “to ramp up their mandatory contributions to the huge trust fund.”

As author Dan Walters observes, with client agencies – cities, particularly – already complaining that double-digit annual increases in CalPERS payments are driving some of them towards insolvency, the new policy – which kicks in next year – will raise those payments even more.

“What we are trying to avoid is a situation where we have a city that is already on the brink, and applying a 20-year amortization schedule would put them over the edge,” a representative of the League of California Cities, Dane Hutchings, told the CalPERS board before its vote.

CalPERS, however, has no choice because as both Walters and Westly claim, America’s largest public pension fund itself is on the brink, “and the policy change is one of several steps it has taken to avoid a complete meltdown.”

As we have reported previously, the Calpers system, once more than 100 percent funded, now has scarcely two-thirds of what it would need to fully cover all of the pension promises to current and future retirees. And that assumes it will hit an investment earnings target of 7%per year, that many authorities criticize as being too optimistic. 

Last In December we also reported that the increasingly panicked fund, decided to boost its stock allocation to 50% in order to raise its future liability discount rate to 7%, as any reduction in stock allocations would also lead to a lower discount rate which in turn which would require more contributions from cities, towns, school districts, etc. and could bring the whole ponzi crashing down. Amusingly, one Calpers board member argued to raise the equity allocation even higher, to 60%, so that the discount rate was greater than the current 7% in order to make the books appears “better.”

Ironically, it was just a decade ago that Calpers’ lofty equity allocation resulted in a staggering losses, and the current dead end. The trust fund lost about $100 billion in the Great Recession and never has fully recovered. In December 2016, Calpers voted to lower its earnings projection to 7.0% – it had been 7.5% – hoping to avoid another disaster were the economy to turn sour; since then it has been taking quiet steps to lever up its equity exposure once again.

Meanwhile, officials fear that were it to experience another big investment loss, it would pass a point of no return and never be able to pay for pension promises.

On the other hand, “protecting” CalPERS means getting more money from its client agencies, which could drive some of them into insolvency, as Hutchings said. This is not a hollow threat: three California cities have already gone bankrupt in recent years, in part because of their ever-increasing pension burdens, and payments have escalated sharply since then.

So on one hand, CalPERS is doing what it has to do to remain financially solvent, but on the other hand its self-protective steps threaten local government solvency.

That’s the crisis in a nutshell.

As Walters suggests, one way out would be to modify benefits in some way.

City officials, for instance, have suggested reducing automatic cost-of-living escalators in pensions over a certain mark, such as $100,000 a year.

However, the CalPERS board, dominated by public employee organizations and sympathetic politicians, has spurned such pleas: it is almost as if, once promised generous retirement benefits, public workers would rather take the entire system down, than see their own pensions reduced, even modestly.

“Our members have expressed frustration that you keep coming to them asking for more while at the same time not providing a lot of other options and assistance for them,” Dillon Gibbons of the California Special Districts Association told the board.

Alas, the options boild down to either taxpayers get the shaft, or public employees see their pensions reduced.

In the end, it will likely be the worst of both worlds, as taxpayers are dragged in to bailout CalPERS and other retirement funds, while retirees see huge cuts to their benefits. 

And the next market crash will likely catalyze it.

Meanwhile, everyone involved is waiting for the California state Supreme Court to rule on pending pension rights cases, and were it to overturn the so-called “California rule” that bars changes in benefits, it would open the door to pension modification.

CalPERS officials are also concerned that should it become insolvent, or pension payments force some cities into bankruptcy court, it would revive long-dormant plans for a statewide pension reform ballot measure.

* * *

As Walters concludes, “This crisis will haunt California for many years to come and will be a big headache for the next governor.”

Unfortunately, that is an optimistic outlook, because when the crisis really hits, it will be all American taxpayers who are on the hook to bail out the country’s insolvent pension funds. It is also then that some of the deepest fissures in US society: between public and private workers, between taxpayers and benefits recipients, between the young and old, all bubble to the surface at the same time, with very violent consequences.

via Zero Hedge http://ift.tt/2EQhCMa Tyler Durden

Companies Bow To Media Pressure, Sever Ties With NRA

Metlife, Hertz, Delta, United and a host of other companies are severing their ties with the NRA its refusal to support another assault weapons ban following the shooting at Marjory Stoneman Douglas High School in Parkland, Fla. But in an unprecedented step first reported by Axios, Bank of America said in a statement that it’s reexamining relationships with clients who make AR-15s – the weapon that was used by shooter Nikolas Cruz to murder 16 of his teenage classmates and one adult.

NRA

Companies have been bowing to social-media pressure and pulling out of their business partnerships – a trend that started when the First National Bank of Omaha tweeted that it would not be renewing its contract to produce NRA-branded Visa cards. Social media users like Joe Scarborough have been researching which companies have partnerships with the NRA, then tweeting their disapproval, forcing the companies to remove details of their relationship from their websites.

 

 

As the Wall Street Journal reports, insurance giants Chubb Ltd. and Metlife, cybersecurity company Symantec Corp. and Enterprise Holdings – owner of the Alamo and National car-rental chains – have said publicly that they will end their partnerships with the NRA.

Companies are reacting partly in response to a social-media movement to pressure or boycott entities with NRA ties, energized by the emotional calls for gun-control action from survivors of the shooting rampage at Marjory Stoneman Douglas High School in Parkland, Fla., and students around the country. On Friday, the hashtag “#BoycottNRA” was among the top trends on Twitter nationally.

 

Many of the companies named above tweeted that they would be ending their business relationships with the NRA…

 

 

 

 

In the aftermath of the shooting, some gun-control advocates have pushed for financial institutions and credit card companies to take action independent of the Republican-controlled Congress, which has repeatedly balked on passing gun control in the wake of mass shootings. Advocates have called on credit card companies to stop processing purchases from gun shops, and for banks to put pressure on clients who manufacture powerful semiautomatic rifles with military features.

Now, Bank of America appears to be slowly moving in that direction, releasing a statement saying it’s in the process of engaging its gun manufacturer clients to “understand what they can contribute” to stop these mass shootings…

“We are joining other companies in our industry to examine what we can do to help end the tragedy of mass shootings, and an immediate step we’re taking is to engage the limited number of clients we have that manufacture assault weapons for non-military use to understand what they can contribute to this shared responsibility.”

The statement implies that BofA isn’t the only major US bank considering whether it should cut off its relationship with gun manufacturers.

According to Axios’ interpretation of the statement, BofA is evaluating whether these gun manufacturers fit with its responsible growth strategy.

Reading between the lines: This sounds like Bank of America thinks that servicing these manufacturers may not be consistent with its Responsible Growth strategy, which calls for “addressing the challenges of our time.”

Back in 2015, Bank of America and other banks backed away from coal miners because of the damage coal does to the environment.

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Of course, not everybody believes banks should flex their muscles in such a restrictive way. As Mike Krieger pointed out earlier this week, preventing customers from buying guns with their credit cards would be a “deeply misguided” decision…

If we’re looking for some kind of national consensus, it appears to be centered around the view that mental health issues lie at the core of mass shooting events. Any bank CEO foolish enough to start a fight and ban customers from buying what they want to legally purchase could very quickly regret it. Moreover, irrespective of your stance on the issue, it’s dangerous and irresponsible to call for shadow public policy by crooked mega banks.

What do you think? Are these companies overreacting? Or are they doing the responsible thing by listening to their customers and shareholders?

via Zero Hedge http://ift.tt/2FsRxQ7 Tyler Durden