Former Head of PBGC Alleged to Have Had "Improper" Contact with Several Wall Street Firms

Remember a few months ago when we told you about the PBGC's switch to a higher risk strategy just before the markets collapsed in late 2008?

Remember when we told you that Charles Millard, a former Lehman Brothers executive who ran the agency from 2007 until the end of the Bush Administration, was behind the change in strategy? And that the change in strategy came just before the massive market sell-off in the fall of 2008?

If you don't remember, you can read that article here.

Well, senators asked Millard about allegations that he had "inappropriate contacts with Wall Street firms" while running the PBGC, and Millard elected to take the Fifth.

The PBGC is the Pension Benefit Guaranty Corporation. This is a federal agency that "insures the retirement funds of 44 million Americans". Basically, private pension funds pay premiums to the agency in exchange for the agency promising to back the pensioners (up to a certain amount per year) in the event that a company goes bankrupt and loses the worker's retirement funds.

Bradley Belt ran the agency until Millard took over in 2007. Belt favored a more conservative investment strategy that saw just 15-25% of the fund's money invested into the stock market.

Millard, citing a need to eliminate the deficit that the fund was running, elected to plunge much of the fund's capital into "riskier" investments when he took over.

Millard decided that 55% of the funds would be invested in stocks and real estate. The 55% was to be divided up like this:

20% US stocks
19% foreign stocks
6% emerging market stocks
5% private real estate
5% private equity firms

At the time, many people (including myself) were wondering just how some of these investments would be chosen. Namely, which private equity firms would receive capital, and why.

Allegations about Millard's possible improper conduct surfaced in a PBGC inspector general's report last week.

The report stated that Millard had "hundreds" of phone conversations and e-mails with Wall Street firms who were vying for multi-million contracts that would see the firms advise the agency on their riskier investment strategy.

According to reports, three firms (Goldman Sachs, BlackRock and JP Morgan) won contracts to invest "up to $2.5 billion dollars of PBGC assets in real estate and private equity".

In return, according to the reports, these three firms were slated to receive as much as $100 million dollars over 10 years in fees.

Millard's attorney advised his client to take the Fifth Amendment in response to the questions at the Senate Special Committee meeting. Millard's attorney said that some of the senators had already reached "negative" conclusions, and that he was simply shielding his "innocent" client from a hostile environment.

I suspect that there will be much more information coming out about this situation over the coming weeks and months.

Filed under: Stock Market Scandals