Morgan Stanley had a great idea for how New Haven could save money—by doing business with Morgan Stanley.
Morgan Stanley gave that advice in its new role as adviser to New Haven’s police and fire pension.
Its first advice: Switch the pension funds’ custodial bank to ... Morgan Stanley.
The Harp administration took the advice. At a City Hall press conference this week, Daryl Jones, the city’s new controller, announced that the move will save $700,000 per year—which, compounded by interest, could add up to $11.2 million over 10 years—by reducing the fees charged to manage its pension funds.
An expert in pension forensics, meanwhile, cautioned against a potentially dangerous conflict of interest.
“Brokers purporting to provide objective advice to pension funds has been very problematic because there are these conflicts of interest,” said Edward Siedle, a former Securities and Exchange Commission lawyer who has investigated over $1 trillion in public assets.
Siedle noted that New Haven just let go of its previous pension adviser because of that firm’s conflict of interest.
“New Haven has time and again made missteps in managing pension funds,” he said.
The city has two municipal pension funds: the $200 million City Employees’ Retirement Fund (CERF) and the $330 million police and fire pension fund. They both use Northern Trust as the “custodial bank,” where the money is kept. The boards for the two funds have agreed to switch most of that money, some $400 million to $500 million, from Northern Trust to Morgan Stanley, said Jimmy Kottage, chairman of the police and fire fund.
The savings comes because Morgan Stanley will charger lower management fees, Kottage said.
The police and fire pension fund board hired Morgan Stanley as its new adviser after its former adviser, Larry Gray, stepped down in November amid a federal investigation into allegations that Gray steered $64 million in Atlanta pension money to his own hedge fund. New Haven officials have been subpoenaed about potential conflicts of interest in Gray’s dealings in New Haven as well. Morgan Stanley is also the adviser on CERF.
Jones explained the new savings this way: Northern Trust currently serves as a middleman, taking on the responsibility of paying fees to the investment managers who handle the pension fund money. Northern Trust charges the pension fund for that middleman role. Morgan Stanley will charge a lower middleman fee, Jones said.
The city would keep some money with Northern Trust, which would stay on its role of cutting checks to pensioners, Kottage said. Workers’ pension benefits would not change.
In an interview Thursday, Siedle (pictured) cast doubt over the wisdom of allowing Morgan Stanley to take on the dual role of adviser and custodial bank.
“The potential dangers are: The firm is involved in myriad business operations, and there may not be full disclosure of all of the fees they’re making from those various lines of interest,” Siedle said of Morgan Stanley. “They’re in a position to basically recommend themselves in various capacities.”
Siedle said best practice would be to hire an investment consultant who isn’t in the money management business.
“Savvy public pensions don’t use conflicted investment consultants, because of the pivotal role that they plan in recommending management,” Siedle said.
James Spiotto (pictured), a Chicago-based lawyer who has worked in the municipal pension field for 30 years, took more of a middle-ground stance on New Haven’s deal.
“On its face, if it appears that they’re pointing out that there is a way in which they can save money or make money, and that’s just a factual determination,” Spiotto said. Cities shouldn’t lose out on that savings just because of who their pension adviser is, he said.
At the same time, he said, there are lingering questions: Morgan Stanley may offer low management fees now, but given that Morgan Stanley is the adviser, who will monitor those in upcoming years to ensure they are still the best deal around?
Jones said he sees no conflict of interest—just a good deal that will save the city money. He said Morgan Stanley guarantees to undercut other firms’ management fees.
“They are the lowest fees that are out there,” Jones said.
“It just makes good prudent sense to not pay Northern Trust any more money than we have to,” and to switch to Morgan Stanley, he said. “I wish we had done this years ago. We could have saved us a lot more money.”
posted by: Threefifths on May 2, 2014 5:35pm
They have sold out the city to the croos on wall street.
Morgan Stanley had a great idea for how New Haven could save money—by doing business with Morgan Stanley.
Morgan Stanley Has a great idea alright.
Morgan Stanley Broker, Law Clerk Charged in Insider Plot
Morgan Stanley To Pay $4.8 Million To Settle Price-Fixing Charges That Cost New Yorkers $300 Million
Morgan Stanley pays damages for Precious Metals Fraud
People wake up.Look at the list of players.
Murdoch Firm Snags $94K For Principal Training.
Now Morgan Stanley.I told you all.Down the road the shylocks must be paid back.This is what going to happen to New Haven just like it happen in New York.Read this Book.
City for Sale: Ed Koch and the Betrayal of New York
By Wayne Barrett
Keep voting them in.
posted by: Gretchen Pritchard on May 3, 2014 12:45am
“Daryl Jones, the city’s new controller”
ANOTHER of my former Sunday School pupils! Along with chef Jason Sobocinski, school principal Medria Blue, NHPD officer Lucille Roach—the list goes on—all mentioned in the NH Independent in the last few months. New Haven’s a small world after all.
Nice goin’, kids.
posted by: Pat from Westville on May 3, 2014 6:05am
City Pays Morgan Stanley To Steer Itself Business
?? As written, this is not according to English grammar. “Itself” is not an adjective which its position between the verb (steer) and its object (business) would indicate.
Does the headline mean to say “to steer ITS business”?
Or “to steer itself AS A business”?
posted by: Noteworthy on May 3, 2014 7:04am
The people in power change, but nothing else ever does. The same poor decisions and ignorance of clear conflicts of interest are a violation of common sense and best practices. Why would the city’s controller and union big Kottage make such a poor decision? This was the only way to achieve savings? Hardly.
That’s before one considers Morgan Stanley’s long history of violating banking and trading rules, paying out huge fines for knowingly, willfully, selling mortgages to investors that Morgan Stanley knew were likely to fail, were poorly documented, even fraudulently packaged. Through its self-dealing and self-enriching schemes, Morgan Stanley profited in the real estate bubble, and then profited as it tanked. Are we surprised that Morgan Stanley is back to its self dealing, screw the client practices that made it a monster bank? No. What is surprising is that the Harp Administration and Controller Jones sees no conflicts, no problems. Where have these people been?
If this is the best Controller Jones has to offer, he should resign. This decision should be revisited and reversed. We need city employees who are not seduced by fast talking wolves, can see potential conflicts and problems through the long lens of history and not repeat them again and again.
posted by: Don in New Haven on May 3, 2014 7:49pm
How many companies (banks) does MS have in NH? Has our Mayor noticed the big presence of JP Morgan Chase? There are two offices within walking distance of her office. Why didn’t she think of dealing with JPM? Does she realize placing SOME of this responsibility in JPM would INCREASE jobs in NH and help existing companies here?
Or, did she think MS is the same family as JPM? So…what difference does it make?
Why just one bank, instead of two or more?
I can only wish this was a funny cartoon film on TV. But…NO! It is sad truth that we must stop at all cost before more pension funds slide down the slippery drain of corruption, then out of sight forever.
posted by: citoyen on May 4, 2014 2:19pm
Reminds me of Dick Cheney heading the committee that recommended Dick Cheney as the Republican vice-presidential nominee in 2000.
Which turned out so very well, as we all know.
Or is the apt comparison to the Emperor’s New Clothes—conscious, willful denial that there is any problem?
posted by: DingDong on May 4, 2014 3:25pm
Paul, is there money for the Coliseum project in the new state budget?
[Paul: I believe there is state bonding money coming for the project; we’ll know for sure as the election approaches.]
posted by: Don in New Haven on May 5, 2014 8:34am
I agree 10,000%!!
Yale has more reason to help NH than MS does.
If NH needs a bank to hold the money, there are many banks in town but not one is MS.
How do we get NH to put your idea to work and waive goodbye to MS???
posted by: Threefifths on May 5, 2014 1:01pm
posted by: SteveOnAnderson on May 5, 2014 10:51am
This is absurd, but unsurprising. It’s exactly the kind of move that is applauded by ratings agencies like Moody’s that have recently downgraded New Haven. These institutions are applying the same logic to American cities that entities like the IMF and World Bank have been wielding against “Third World” countries for decades. The only way out of this situation is to stand up and fight against the underlying neoliberal logic driving the new urban restructuring.
On point.But to late.The lost sheep have voted them in already.New Haven is for sale.
posted by: Melissa Bailey on May 9, 2014 6:18pm
City Controller Daryl Jones sent in the following comment in response to this story:
Facts on New Haven City Pensions utilizing Morgan Stanley:
● There is no conflict or perceived conflict of interest; the
advisors from Morgan Stanley are consultants
recommending managers, not portfolio managers.
● Trades are merely being done at Morgan Stanley.
● The Morgan Stanley advisors are reducing all manager fees “On
Platform” to the lowest on the street
through Morgan Stanley having negotiated “Most
Favored Nations Clause” into every Morgan Stanley
● If you go “off platform” the fee is whatever the city board
can negotiate with manager. (In this case
we used Northern Trust)
● Morgan Stanley is reducing manger fee or staying the same,
mitigating custodial fees, and
eliminating all commissions placed through Morgan
● Morgan Stanley advisors do a manager search of the
“Universe” and notify pension trustees if the
manager is “on platform” or “off” and discuss
the fees accordingly
● Morgan Stanley will not recommend ANY Morgan Stanley money
managers (even though there is no
conflict of interest to avoid “perceived”