Texas v. Iran: About the order banning public pension fund investments

by Lucius Lomax

http://newspapertree.com/opinion/2770-texas-v-iran-about-the-order-banning-public-pension-fund-investments

The on-going episode, which is the talk of the state’s investment community, might say more about Perry and the limits of his power than about Sudan, Iran, AIPAC or the American Enterprise Institute.

Posted on August 22, 2008

What’s the similarity between the U.S. invasion of Iraq and Gov. Rick Perry’s order that Texas’ public pension funds divest themselves of stock in companies doing business with Iran?

Yes, Texans were in charge in both cases. No points will be awarded for that answer.

In addition, both decisions were based upon bad intelligence about Al Qaeda, both featured input from influential neoconservative Washington think tanks, and in both cases there was ineffective resistance from people who knew better but were afraid to speak up.

And, in both cases, there’s oil involved. Or—in the case of Iran—natural gas. But this time around, energy is not a spoil of war, it has become a weapon.

The governor’s order has proved problematic but is going forward in an “engagement” phase with almost two dozen foreign energy companies. The principal Texas funds—the Teachers Retirement System and the Employees Retirement System, both headquartered in Austin and with combined assets of about $131 billion—have more than $1 billion total invested in potentially-affected businesses.

Slowing divestiture efforts have been accusations of inflated rhetoric by Perry, yes, and also what appears to be a general dislike among some legislators and pension managers of so-called “social investing”—investing to achieve social or political goals as much as financial returns. The move to divest, which the governor likes to compare to the international struggle against apartheid in South Africa, follows recent state legislation to restrict public investment in businesses with interests in Sudan and has attracted limited bi-partisan support.

It has also attracted the interest of key Washington players, including the powerful American Israel Public Affairs Committee (AIPAC) and the American Enterprise Institute, or AEI, which the New York Times recently described as the conservative think tank “that has had more influence within the Bush White House” than any other. Caught in the middle are the state’s pension fund managers, who are supposed to have only the retirement benefits and healthcare of more than one million teachers and other public employees in mind. Instead, the two funds have been asked by the governor to help fight Al Qaeda.

The fund managers are now evaluating responses from the top names among foreign energy companies, including France’s Total and Great Britain’s Royal Dutch Shell. These “second responses” from the companies were due in July and follow the State of Texas’s initial attempts at engagement, part of a process that must be followed before selling off stock begins.

Both the American Enterprise Institute and AIPAC—together with corporate consulting firm RiskMetrics—have helped the Texas funds to perfect a list of major energy companies actually doing significant business in Iran which, depending on what list you’re looking at, averages 20 or more names. The states of Ohio and Illinois, with help from Florida, have also provided direction to Texas based upon those states’ own divestiture approaches. But AIPAC in particular is actually helping the state of Texas to refine the financial attack on Iran.

While noting that U.S. law already penalizes companies for investing more than $20 million in any given year in Iran’s petroleum sector, AIPAC has urged Texas to limit its targets to Iran’s energy sector because, as AIPAC Southwest Regional Political Director Jessie Dickerman wrote to TRS earlier this year, “Iran desperately needs foreign investment in their petroleum sector, which accounts for 80 percent of the country’s hard currency and over 50 percent of the government’s annual budget. By targeting this sector, divestment will directly impact the most critical sector of Iran’s economy.”

AIPAC became involved in TRS’s decision-making with the assistance of Democratic State Rep. Scott Hochberg of Houston, who approached the Teachers Retirement System with the offer that AIPAC “would like to help.”

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The origins of the changes in Texas’s investment strategy appear to be in Jerusalem.

Last summer Perry returned from a visit to Israel where he held meetings with high government officials including Prime Minister Ehud Olmert. In September the governor wrote a letter to both state funds, TRS and ERS, directing them “to begin the process of divesting investments that do direct business with Iran.”

In his letter Perry described Iran “as an epicenter for terrorist activity, having provided a safe haven, training and equipment to Al Qaeda.” The governor noted the large size of the Texas economy and, denying any effort to have a Texan foreign policy, he nonetheless suggested that Austin could be influential in world affairs. While the likelihood of any ties between majority-Shiite Iran and Sunni-dominated Al Qaeda have recently been ridiculed in Washington—Republican presidential candidate John McCain was dinged publicly for making the same mistake on a tour of the Middle East earlier this year—in Austin the concern about the divestiture plan seems to have focused as much on risk to bottom lines as on foreign policy gaffes by Rick Perry.

Shortly after the Perry letter, Texas pension fund managers received a second piece of important correspondence from a Republican lawmaker: this time from Vicki Truitt, chairwoman of the Texas House of Representatives’ Committee on Pensions & Investments. Her message was different from the governor’s. Rep. Truitt counseled caution on using the state’s money for political ends.

“The goal of the investment portfolio and the policy guiding the decisions affecting the portfolio must be to maximize investment return,” she wrote, telling TRS and ERS leaders that their responsibility was to provide safe and healthy returns “exclusively for the benefit of the members.” She said that decisions based upon any other standard risked violating the Texas Constitution, “endangers the system’s tax exempt status and potentially breaches the board’s fiduciary duties as trustees.” Her message couldn’t have been more direct, and in early meetings of pension board meetings there was indeed some grumbling at the Perry directive. That apparently didn’t go over well at the governor’s office.

“This is just another example of issues in working with TRS management and the TRS board chair,” Natalie Foerster, the governor’s point person on Iran wrote ominously in a November email to Perry’s chief of staff, referring to TRS’s slow pace of obedience to Perry’s marching order. In March, after the TRS chairman’s term was allowed to expire he was replaced. But concerns about the wisdom of the governor’s decision continue.

Four years ago, both TRS and ERS got into hot water after multi-million dollar investments in a private company that bought interests in businesses across the state as part of a policy goal of “creating jobs.” Unfortunately, some of the investments were questioned for being politically-motivated, or as bailouts of failing companies with well-connected owners, and then there were poor financial returns—and the Teacher’s Retirement System was warned by outside counsel about the dangers of “social investing.” TRS was told that given two investments, the pension fund could choose the one that met social goals only if the returns were equal to the one that did not.

With that warning in mind, Texas is theoretically attempting to find equally-lucrative investments to replace those stocks that will be eliminated from the state portfolio. But since most of the eliminated stocks are energy companies, during a time of booming energy prices, it’s hard to see how the state will find equally-lucrative investments (if there were equally profitable stocks available the funds presumably would already have invested in those too). As a practical matter the state is divesting first and looking for other stocks second.

There is an added complication. Texas—indeed, the United States—no longer has unchallenged economic power. With huge sovereign wealth investment organizations in Asia and the Middle East ready to invest in Iran, using pools of capital far bigger than the state of Texas’s checkbook, it’s hard to believe that foreign energy companies really are afraid of what Austin will do.

“You can be sure,” AIPAC’s Dickerson told ERS as letters first went out to the targeted businesses, “that some companies will attempt to rhetorically obfuscate their involvement with Iran so as to avoid any consequences.” That may have happened. But some of the replies the state received previously to its divestiture calls, in the case of Sudan for example, were pretty clear: “It does not appear from these responses that any of the responding companies, which included Alstom, Wartsila Oyl, PetroChina, and BHEL, provided information or displayed a willingness to embark on Substantial Action in a way that would warrant their removal from the Texas TRS scrutinized companies list,” a Texas government analyst wrote after reading the companies´ answers to TRS and ERS correspondence. Only one company, Spanish energy conglomerate Repsol, appeared willing to bow down before Austin: “Let me tell you first that I appreciate the opportunity you are giving our company,” Repsol Director of Investor Relations Alejandro Plaza wrote to the Employees Retirement System, “to explain the involvement we have in the Islamic Republic of Iran for the time being.”

For their part the French were characteristically nonchalant. Total, the French energy giant, noted that it is acting within the bounds of French and European law, and has received exemptions in the past from U.S. sanctions. It also suggested that Iran’s oil and gas business should not be confused with Iran’s nuclear ambitions. And in another echo of the prelude to the Iraq war, when the Bush administration ignored world opinion, Total noted that “our position is strengthened by the fact that the United Nations Security Council, in its resolutions aimed at suspending Iran’s nuclear enrichment program, established a clear distinction between potentially proliferating forbidden activities and customary authorized industrial activities like those we are conducting.”

But in perhaps the most important response to Perry’s decree, J. Harold Hatchett III, Royal Dutch Shell’s Vice-President for Investor Relations remarked on the small amount of business the company does in Sudan and its humanitarian works there. Then, on the subject of Iran, he explained the reality of the energy business to the people of Texas (who actually invented that business):

Iran is a major resource holder. It has the second largest natural Oil and Gas resources. At current global gas usage, Iran’s gas is enough to supply the entire world for about ten years. Given the size and global importance of Iranian hydrocarbon resources, the Group finds it hard to see a future in which production of these resources would not, at some point, play a role in the global energy supply and demand balance.”

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Meanwhile, a mystery has arisen in Austin not about who is being asked to divest, but who is not being asked to make their portfolio politically correct. Any move to promote non-fiduciary ends—in other words to implement “social investing”—at one of the state’s other publicly-owned funds, the $25 billion at the University of Texas Investment Management Company, were stopped dead in December.

Regarding the Sudan divestiture legislation, passed in 2007 by the Texas Legislature, UTIMCO CEO Bruce Zimmerman wrote to the chairman of the UT System Board of Regents, “UTIMCO invests solely in the interests of its beneficiaries . . . . Specifically, the Board’s Investment Policies prohibit UTIMCO from investing the board’s funds ‘so as to achieve temporal benefits for any purpose including use of its economic power to advance social or political purposes.’

“The list of social or political causes that have lobbied for investment restrictions in just the recent few years includes, but is not limited to, alcohol, tobacco, gambling, pornography, nuclear proliferation, environmental and other issues,” Zimmerman continued in his thinly-veiled “no” to the governor and, indeed, to the legislature. “Finally, while it appears likely that investment restrictions will have cost implications for the investments funds, it is less likely that such restrictions would have any meaningful long-term effect upon the targeted companies.” In a brief interview at the most recent UTIMCO board meeting in July, Zimmerman said that prohibitions against social investing would also prevent divesting in stocks of companies doing business in Iran. He called such divestiture, at least for UTIMCO, “unconstitutional,” which was also the phrase invoked by Representative Truitt of the Committee on Pensions & Investments. The divestiture moves at ERS and TRS continue, however.

“They’re not punishing Iran and Phillip Morris, or whoever, they’re punishing the teachers of Texas,” a former TRS fund manager complained earlier this month, noting the efforts to use schoolteachers´ pensions to achieve the political ends of high government officials.

The reality may be that the on-going episode, which is the talk of the state’s investment community, says more about Perry and the limits of his power than about Sudan, Iran, AIPAC or the American Enterprise Institute.

First, Rick Perry does not like to be confused with the facts. As with his role model George W. Bush, attention to details is not the governor’s strong point. But no one—not his enemies among Democrats, or in his own party—underestimates Rick Perry’s political instincts. His timing, after all, generally has been excellent. He knew when to abandon the Democratic Party, when to run for statewide office, when to grab the Bush coattails, and now, it makes people wonder, what does he know about Iran that has prompted this action?

Because the issue of divestiture is much about appearances as reality. As Bruce Zimmerman, the UTIMCO CEO, concluded in his “no” letter to the regents, “Perhaps most importantly, while UTIMCO does not engage in social investing, we do understand that social or political considerations may very well have a bearing on the ultimate value of certain investments.” That means that divestiture can become a self-fulfilling prophecy. If Iran is attacked militarily, or even credibly threatened with attack, such action could make the stocks of companies doing business there bad investments; it doesn’t matter what’s right or wrong, just how the market reacts. In that sense—claims about Al Qaeda and the “epicenter” of terrorism notwithstanding—Governor Perry’s instincts may be right, and his action may have the result of protecting the value of the state’s portfolio.

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But even if Rick Perry is ready to take on “enemies” abroad, that doesn’t mean he is equally fearless at home. The governor appears to have chosen TRS and ERS to do his bidding because the state’s teachers and public employers are relatively powerless in Austin. UTIMCO, on the other hand (whose total value equals the size of the ERS portfolio and would seem, by the governor’s logic, to be just as strong a weapon against Al Qaeda) has enormous political clout at the Legislature. UTIMCO’s funds represent the University of Texas, Texas A&M—and, in effect, the two school’s influential alumni. Even Rick Perry treads lightly there. Were UTIMCO’s Zimmerman working for ERS or TRS, his refusal to divest, or his talk of “unconstitutionality” would likely be seen as insubordination by the governor’s office and his fate would be in doubt. Instead it’s a closed subject, as the universities continue to put their money where they can get the biggest bang for their bucks.

There may have been a dose of hypocrisy in the governor’s stance, as well. While Perry cites the success of sanctions against South Africa in the 1980s, the state of Texas initially fought tooth and nail against joining sanctions. And the wave of divestiture from South Africa was not exactly a product of conservative thinking—a la the American Enterprise Institute—but the work of starry-eyed liberals, many of them university students. So it’s odd now that this governor, who prides himself on social conservatism and being hard right, is using South Africa divestiture as a battle standard. Had Rick Perry been governor back then, and had it been up to the state of Texas, Nelson Mandela might still be in prison today.

Iran divestiture did not pass the last legislative session but has suddenly been accomplished by the governor’s order. Sudan divestiture legislation, which did pass last legislative session, after eloquent support by the state’s most prominent African-American leaders—including Railroad Commission Chairman Michael Williams—actually has offered a more compelling case than that of Iran, where there is reason to suspect that confrontation with Tehran is being pushed by interested parties in Washington.

Finally, and perhaps most critically, the governor seems to be taking a risk that makes some Texas business leaders especially nervous.

The Lone Star State has a large energy industry too and, like Iran, the United States recently has not been the most popular government in the world. Norway’s huge sovereign investment fund, for example—which is three times the size of the Teachers Retirement System of Texas—also has a long blacklist of companies that Norway will not invest in. The majority of the names on the Norwegian list are American.

They are mostly arms companies not energy conglomerates but, in the future, anyone who wants to “punish” the United States may now have a blueprint for action, and a precedent, courtesy of Governor Rick Perry.

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Lucius Lomax is a freelance writer in Austin and can be reached
at lulo23us@yahoo.com.