At its February meeting Oregon PERS tentatively decided to invest $100 million in a partnership designed to purchase failed banks. While the Oregonian reporter Ted Sickinger wrote an excellent detailed article, the Bloomberg article, written by Dakin Campbell, looks as if it were written by the partnership and includes major inaccuracies, presenting a business media related risk to all investors considering investing in troubled banks. This risk, business media risk, is rarely discussed yet it is important to recognize.
Turning around the banking industry is imperative to restarting the economy and initiating the next business cycle. For this reason my research has focused heavily on this proposed investment. Pictured above, center, giving his presentation to the Oregon Investment Council is former JP Morgan CEO William Harrision. While Sickinger’s article highlighted Harrision’s role, the Bloomberg “exclusive” made no mention.
In preparation for this meeting, I provided the same information to the Oregonian and Bloomberg reporters, although in Bloomberg’s case it was provided to the local Oregon based Bloomberg reporter Anthony Effinger. Also provided to Effinger prior to this “Bloomberg Exclusive” article containing major inaccuracies was a letter to State Attorney General John Kroger (letter included at end of post) noting that the partnership’s structure was not legal given that it was done on “tax efficiency” grounds. Simply put, this would be like me being in a partnership with the City of Portland and trading the City’s depreciation deductions on City Hall for a slightly higher equity position. Although creative, this is not legal since the City, even though a partner, is tax exempt and has no depreciation deductions.
Additional Bloomberg errors include its claim that the firm will earn management fees along with a percentage of the profits and that the presentation was made by Sageview. The truth is that Sageview is proposing taking 25 percent of the ultimate holding companies value in “stock options,” not profits. This represents a dramatic increase in overall fees when compared to the standard “carry fee.”
In addition, the presentation was made by former JP Morgan CEO William Harrison (see photo from meeting). Harrison is a controversial figure, as is his fellow partner, the former CEO of Waccovia, since it was under Harrison’s watch at JP Morgan that the explosion in toxic derivatives occurred that ultimately took down the banking industry. Harrison and his Community Bancorp partnership were presented by Sageview as being independent of Sageview, yet they are not.
This proposed investment is a significant event for the banking industry in that Oregon PERS is ligitimizing funding a partnership created by two of the current debacles key architects. This makes no sense when Oregon PERS could go out and find much better partners with better terms. Especially given that the proposed structure provided a triple public subsidy in the form of 90 percent FDIC backing on the loans, 90 percent funding from public pensions and ultimately large stock option gains they will be able to take a full deduction on, even though only a small portion will be recognized as an expense given the expense is calculated on the date of grant while the deduction is based upon the date of exercise. Excessive stock options are indeed the most abused executive perk and should be closely monitored by all investors in that in this case they are a license to fleece other investors, in this case Oregon PERS.
Letter to Oregon Attorney General John Kroger
To: John Kroger, Oregon Attorney General
From: Bill Parish, Parish & Company
10260 SW Greenburg Rd., Suite 400
Portland, Oregon 97223
cc:: Mary Shapiro, SEC Chairman
Sheila Bair, FDIC Chariaman
Ron Wyden, US Senator, Financial Services Committee
Paul Krugman, NY Times
Ted Sickinger, Oregonian
Nigel Jaquiss, Willamette Week
Glenn Simpson, Wall Street Journal
Gretchen Morgenson, NY Times
Matt Krantz, USA Today
Anthony Effinger, Bloomberg
February 26, 2010
On Wednesday the Oregon Investment Council voted, subject to final
approval of terms, to invest $100 million in a partnership, Sageview,
designed to purchase failed banks. Clearly, this will be a profitable
investment yet I would appreciate your opinion regarding whether this
is legal on two specific grounds.
In his proposal former JP Morgan CEO William Harrison noted that the
OIC would, at a minimum, make twice its investment given that the FDIC
has offered to back 90 percent of the loans in the failed banks
acquired. Harrison also noted that most of the funds they accumulate
for these buyouts will be obtained from public pensions and their key
focus will be to takeover community banks, not large banks.
Rather than earn the typical private equity fund “carry fee” of 20
percent they would instead take stock options equivalent to roughly 25
percent of the holding company they eventually plan to take public.
“Tax efficiency” reasons were cited by firms principals for this
structure. One might also note that this represents a dramatic
increase over the carry fee since it is on the entire value of the
While some may be incensed that a key architect of this current
debacle, former JP Morgan CEO Harrison, would return and lead a
partnership in this area to prey on smaller banks given the literal
creation of toxic derivatives at JP Morgan under his watch, I would
simply like your opinion regarding whether or not this is legal in two
1) Structure: Harrison’s buyout holding company, CBC, is being
organized by the private equity firm Sageview Capital. Sageview notes
that Sheila Blair of the FDIC “loves this structure “since public
pensions can be passively involved and private equity firms can put
forth the perception they are not controlling the entity since a
holding company is being used. When asked about the reality that
Sageview, a private equity firm, is really controlling the holding
company entity, they replied “it’s not like these people we have put
on the board are my brother in law.” Harrison also noted he would
include Mark Shapiro and various others he has collaborated with in the past.
My basic point is that it seems that the OIC is neglecting basic
corporate governance fundamentals here. Whether they agree with Paul
Volcker, former Fed Chairman, and former SEC Chairman Bill Donaldson
that banks should not be invested in private equity and hedge funds is
perhaps not relevant. What is relevant is the mockery they are making
of effective corporate governance and its potential to discredit an
important institution before the taxpayers, PERS.
2) Tax Efficiency: As a public non-taxed entity it is my
understanding that it is patently illegal to trade tax benefits in
terms of organizational structure. If all of Sageview’s partners were
non-public entities, this would be irrelevant yet how can a public
entity openly engage in “tax efficiency’ strategies with a private
partnership. Sageview has twice noted that their rationale for only
investing 10 percent as a general partner and instead taking 25
percent of the holding company in stock options is for “tax
efficiency” purposes related to the partnership structure.
Due to other tax related debacles in Oregon, including the spiraling
cost of energy credits that will indeed cost more than 10 times what
the legislature budgeted, my hope is that you will work with the OIC
to generate better terms rather than allow PERS participants to be
fleeced with such an options package for Harrison and other
You do have legal counsel at these meetings that has simply not
recognized the importance of corporate governance including but not
limited to his allowing incomplete minutes to be published with
respect to the nature of public comments provided An example might
be John Doe made a comment before the counsel without noting the
subject of the comment. This is simply ridiculous.
As an SEC registered investment advisor I would also like to invest my
clients funds in struggling quality community banks yet am concerned
that not even the best run bank could defend itself against the triple
public subsidy structure Sageview is advocating. Extracting subsidies
from the IRS, FDIC and public pensions at once might be called a
triple play in baseball terms yet if you believe in corporate
governance and something that remotely represents a level playing
field, perhaps your office should take a look. Thank you for
considering these observations.
All the best,