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Oregon Investment Council

October 27, 2004

** Unofficial Minutes Prepared by Bill Parish of Parish and Company **

The Oregon Investment Council was called to order at 9:15 by Chair Gerard Drummond. This monthly meeting occurred at the Willamette Country Club in Canby, Oregon and was classified as a workshop/retreat rather than a normal business meeting.  As a result, the minutes for the previous month were neither discussed nor approved and it was explicitly stated by both Chair Drummond and Chief Investment Officer Ron Schmitz that no public comment would be allowed.  A tape of the meeting was made and is available by contacting the Treasurer's office.

OIC Members Present Included:  Paul Cleary, Gerard Drummond, Mark Gardiner and Randall Edwards.  Also present was Richard Solomon who has been nominated to the council but not yet confirmed by the legislature.

Staff Members Present Included:  Jay Fewel, Linda Haglund, Norma Harvey, Perrin Lim, Michael Mueller, Kevin Nordhill and Ron Schmitz

Consultants Present Included:  Michael Beasley, Strategic Investment Solutions (SIS)
                                                    Allen Emkin, Pension Consulting Alliance

Legal Counsel:                           D. Kevin Carlson, Oregon Department of Justice

I.  Summary of Agenda

The agenda listed 10 topics, the last of which was "Other Topics the OIC may choose to discuss."  No mention was made in the agenda, and no details provided in writing, regarding the cancellation of the upcoming November meeting in addition to the decision to reduce the monthly meetings in 2005 from 12 to 8, even though the proposed meeting schedule for 2005 in the written packet listed 12 meeting dates.

II.  Review and Approval of Minutes for September 28, 2004 Meeting

There was no discussion and related approval of the minutes for the September 28, 2004 meeting nor any reference to the fact that Diana Goldschmidt was removed from the Council by Governor Kulongowski the day before the same meeting.  This is highly unusual given that it is usually the first order of business and never exceeds more than 5 minutes of the council's time. As a result, anyone following the council minutes would have no idea that Goldschmidt was removed due to her refusal to resign, even though numerous major stories appeared in various newspapers.  Clearly, Chair Drummond has a unique concept of what constitutes events worthy of noting in the official minutes in addition to not being an advocate of public oversight for this most important public board.  One can only speculate what other significant issues are not being disclosed.

Due to past problems reflecting public comments, Chief Investment Officer Ron Schmitz made a pledge at the September 2004 meeting that he would be more cognizant of the importance of accurately reflecting public comments in the minutes. This past failure is graphically illustrated in the August 2004 minutes which stated that "Bill Parish commented."  Schmitz has broken that pledge.

Curiously, one council member, Gerry Bidwell, resigned immediately after the August meeting when concern was expressed with respect to conflicts of interest.  Bidwell had failed to disclose a major business partnership with Neil Goldschmidt and at the same time was voting to provide public pension assets to firms supporting Goldschmidt in the takeover of Portland General Electric.

The comment provided to Schmitz at the September 2004 meeting was as follows:  Bill Parish of Parish and Company requested that  State Treasurer Randall Edwards instruct Chief Investment Officer Ron Schmitz to meet with City of Portland officials to discuss the future of  PGE in the event the Oregon PUC rejects TPG's application or other civil or criminal actions involving various parties to the transaction cause TPG to withdraw its proposal.  Schmitz was also provided a specific alternative proposal for PGE and asked that it be maintained as a public record and part of this meeting."

As the State's Chief Financial Officer it is Edwards role to show leadership and bring various parties together for constructive dialogue on key issues impacting Oregonians.  Even today he has still done nothing to examine how the State's interest in supporting TPG relates to the City of Portland's plans for the future of Portland General Electric.  Clearly, a regional corporate governance structure would be important to any such City effort yet Edwards has turned his back on helping the City examine such a possibility and instead aligned himself with the Texas Pacific Group and against Oregonians.

III.  Barclays Global Presentation Titled "The Surprising Impact of the Long Only Constraint." 

Kenneth F. Kroner of Barclays Global presented a math laden scenario supporting adding the capability of shorting equities and other speculations in order to achieve higher returns.   The basic formula he used as a basis for explaining his theory was as follows:  Investment Return  =  Skill  X  Square Root of Breadth  X  Transfer Coefficient    Yes, this is the kind of logic that Ken Lay of Enron would recognize.
Kroner used examples leaning on Las Vegas and Baseball dynamics.  Both Jay Fewel of the Treasury department and retained consultant Beasley of Pacific Corporate Group support relaxing the "shorting" constraint.  Beasley was particularly critical of ERISA guidelines that inhibit shorting. Apparently, both have forgotten that they are working with public pension assets financed by taxpayers rather than private pools of assets.

It is exactly these attitudes and presentations that make strong oversight of Treasury staff by the Council especially important.

IV.  Individual Manager Allocations:

The top two managers employed by the Council are Barclays Global, based in the United Kingdom, and Alliance Capital, a subsidiary of the AXA Group based in Paris.  Together these two alone 42.8 percent of the primary $36 billion fund, prior to considering other managers whose parent offices are also outside the U.S.  One might ask why such an important government contract is not awarded to domestic managers when they can do an equally fine job, especially with respect to indexing the domestic U.S. market, which is where the largest percent of Barclays funds reside for OIC managed investments. 

Two council members also spoke with particular distain with respect to local oriented investments, referring to such projects as "SLP's (Stupid local projects)."

This is the second year in a row that Barclays Global has been allowed to lead the annual OIC workshop and imbed a sophisticated derivative and speculative oriented sales pitch within its presentation.  

V.  Private Equity Co-Investment Proposal and Conflict of Interest Discussion with the independent general consultants to the OIC, Strategic Investment Solutions(SIS) and the Pension Consulting Alliance (PCA), regarding a Co-Investment proposal by the Pacific Corporate Group, the independent alternative equities consultant to the OIC.  General Comment on the Texas Pacific Group also discussed:

Once again Treasury staff attempted to push through a proposal to allow its supposedly independent alternative equities consultant, Pacific Corporate Group, to manage $100 million in assets as a co-investor.  Former council member Gerry Bidwell, an experienced investment manager, strongly opposed this calling it a "clear conflict of interest."  The council's other general consultant Allan Emkrin of the Pension Consulting Alliance (PCA) suggested it was also a clear conflict and recommended giving the Pacific Corporate Group the option of remaining a consultant or being given $100 million to manage.  He added they would clearly take the $100 million and run. Michael Beasley, another independent general consultant to the council, supported the co-investment plan.

Treasury staff member Jay Fewel took exception and again noted that he saw no conflict of interest, which again probably highlights the importance of maintaining a strong independent council to prevent staff from making key decisions that are not in the fund's best interest.  If Gerry Bidwell and the OIC's lead consultant see a conflict of interest and Fewel still does not, more oversight is required.

Fewel also provided copies of the October 2004 Dow Jones Private Equity Analyst newsletter indicating that many private equity firms are now borrowing from institutional investors in order to pay shareholders a cash dividend because there investments are not generating enough cash.  No one knows exactly how much creative accounting firms like the Texas Pacific Group are using yet one thing is for sure and that is the value of a cash rich firm like PGE if indeed there other investments are accounting rich and cash poor.  The Public Utility Commission should demand a complete cash flow statement of TPG and specifically ask if it has borrowed funds from any institutional investors, including Credit Suisse, during the last 3 years in order to pay distributions.

VI.  Meeting Schedule for 2005:

Ron Schmitz led a discussion with Chair Drummond and Treasurer Edwards recommending that the monthly OIC meeting be abolished and a schedule of 8 meetings, dates to be selected, adopted.  There was no discussion of this in the agenda, in fact the meeting packet noted a proposed list of monthly meeting dates for 2005, a direct conflict with the discussion.

They also agreed to cancel the upcoming November meeting and therefore the public comment requesting that Treasurer Edwards lead a discussion of regional governance considerations with respect to the future of Portland General Electric made in the September meeting will not be posted on the Treasury's website until late December.  This is conveniently after the PUC commissioners will hear TPG's case.

Schmitz, Drummond and Edwards went on to note that conference calls might be a more effective way to conduct the meetings, citing their busy schedules.  What this would effectively do is remove key decisions made by the council from any realistic level of public scrutiny.  My response is simple, $56 billion.

VII.  Post Meeting Discussion between Chair Drummond and Bill Parish

After the meeting, for the first time in 18 months, Chair Drummond asked if he might discuss something with me.  Oddly, his topic of choice was Portland General Electric and he specifically tried to sell me on the idea that "Isn't it better working with a willing sellor, that being TPG."  Drummond was implying that a TPG takeover was good and would provide the city a good opportunity to purchase PGE directly from TPG in the future.  My response was that the bankruptcy court is also a most willing seller and that if the City matched TPG's offer the law firm representing unsecured creditors would be responsible for presenting the offer to creditors, especially given the City's capacity to condemn PGE if the offer is not accepted.

Drummond added that the OIC did not receive a valid proposal from the City for consideration.  My response was clear, why don't you or Treasurer Edwards instruct Ron Schmitz to ask the City if they would like to discuss PGE"s future, whatever that future may be.

Clearly, Schmitz, Treasurer Edwards and Drummond, by stonewalling the City and suppressing public discussion at all levels with respect to PGE's future,  have become de-facto sales reps for the theft of PGE by TPG.

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