The People vs. Northern Trust

  • 05/02/2014
  • Reporters Desk

 How the LACERS Pension fund was looted and Why LA Runs a Deficit

James Preston Allen, Publisher

Underneath the media circus that exploded in the wake of TMZ’s reporting of Donald Sterling’s racist rant, Sterling’s biracial mistress denials of sexual-romantic relationship and Sterling’s ban from the NBA, was the news that the Securities Exchange Commission subpoenaed Northern Trust for documents related to the company’s securities-lending activities.

Admittedly, it doesn’t have the sexual allure or glitz of a billionaire’s scandal, but it caught my eye just the same. Why, you may ask? Because Northern Trust is the custodial bank for all of the pension funds for the city of Los Angeles and has control of more money than Don Sterling could ever imagine.

Let me explain.

Back towards the end of 2011, former City Attorney Carmen A. Trutanich tried to get the Los Angeles City Employee’s Retirement System, LACERS, to become a party with Los Angeles in a $95 million lawsuit against Northern Trust for losses they incurred in the sub-prime mortgage crisis. The bank that invests the $9.6 billion in assets for city employee’s retirements. LACERS refused to sign on to the lawsuit and Northern Trust subsequently settled with the city for a few million.

Never one to allow the timid to deny him victory, Trutanich sued Northern Trust again on behalf of “the people of California” in 2012 using the private law firm Stanzler Law Group of Palo Alto, Calif. Trutanich reasoned that this route to pursuing justice against Northern Trust would allow him to avoid using compromised attorneys. They are still taking depositions today, more than two years later.

So what’s the point?

This is just another one of those lawsuits that gets buried in the courts for years and will probably get settled with no one admitting fault for their misdeeds. The big point for the Los Angeles is that Northern Trust handles more than one of its pension funds and handles hundreds more nationwide.

In fact, it is listed as the third largest “custodial” bank in the nation handling hundreds of billions in pension fund assets. And every year since the Wall Street crisis of 2008, Los Angeles, like many other cities across this country have been running budget deficits, while cities like Detroit have imploded in bankruptcy.

Repeatedly, the finger of blame has been pointed at the city workers’ under-funded pension funds as the culprit behind the city’s budget deficit. This is true, but the fault lies more with banks like Northern Trust, which as this suit alleges, “made false claims” and promised “low-risk” investments, rather than city workers and managers that simply negotiated well for their benefit packages. Banks betting against their clients’ investments — the practice of banks investing pension funds in high risk sub-prime mortgage bonds, while simultaneously using their own money to sell these same investments short — are to blame.  Northern Trust, like many Wall Street banks, gamed the system and made billions in profits at the expense of our nearly collapsed financial system.

For the past five years, Los Angeles, like many other cities, has had to tighten its belt to back fill its pension fund obligations. This amounts up to some $200 million a year being siphoned directly out of the general fund. Miguel A. Santana, the city’s chief accounting officer, cautions that the pain is going to just get worse until 2018.

For perspective, this deficit amounts to about 3 percent of the overall budget. Two hundred million dollars is a lot of money to folks like you and I, who pay taxes and want our sidewalks fixed. The cure for this, however, is not to raise taxes, but to audit all of the city’s pension fund investments. The city controller and city attorney need to analyze these investments and the performance of all the custodial banks. These banks must be investigated for any malfeasance or conflict of interest in their investments on behalf of Los Angeles. In other words, do a forensic “performance review” of the financial investments of the city and when “mismanagement of securities” is discovered, sue to recover our lost assets.

What’s at stake here is not just this one $95 million lawsuit against Northern Trust but the several hundreds of millions of dollars of the city’s four or five pension funds that banks like Northern Trust (or others) manage. I doubt there are many inside of the city “family” with the courage or the talent to expose this kind of financial corruption. But if we are to accept Mayor Eric Garcetti’s pledge of getting “back to basics” in city governance, I can think of no more basic a principle than managing the fiscal side of the city’s pension fund investments in a responsible and profitable manner.

But again, this is not a very sexy story. It doesn’t grab huge headlines in the Los Angeles Times and it won’t be exposed by TMZ. But let me ask Mayor Garcetti and CAO Santana one question: What difference would we see in your budget projections for the next four years if you added back the $400 million reclaimed city pension funds from Northern Trust? What savings would we see if we held city pension fund managers to a much higher performance standard. Holding Northern Trust’s feet to the fire would be an excellent place to start.

It will be very interesting to see what shakes out of the SEC Northern Trust subpoenas. Will they discover the evidence that the Trutanich lawsuit alleges? And will this lawsuit redeem Carmen’s political reputation from the dead political file of Los Angeles city politics?

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