Lots of people have a low opinion of the financial industry and I can’t say I blame them. From mega-banks opening up fake accounts to financial advisors charging excessive fees, it’s no wonder that the financial industry fails to build up a high level of trust in society.
Well, let’s just add one more log to the fire. The other day, a news story broke about the global insurance company Allianz and how their US asset management business basically defrauded some pensions funds to the tune of around $6 billion.
Here is an article that summarizes the basics. But if you really want to see the absurdity of the whole situation, I highly recommend reading through this Twitter thread.
In a nutshell, here are the facts of the case:
- Allianz had a hedge fund called Structured Alpha (SA). It pitched the fund to a bunch of pension fund managers.
- The pension fund manager decided to invest pension assets with SA.
- Employees at SA lied about the investment strategy of the fund and hid the underlying returns and risks.
- COVID happened. SA imploded and the pension funds lost a lot of money.
Nobody comes out looking good here.
Allianz did a very poor job of managing risk, which is ironic because insurance companies are supposed to be the best risk managers in the world. They have legions of actuaries and computer programmers who can model and plan for complex risks both financial and real world. But in this case, Allianz failed to oversee the employees at SA and detect some pretty amateurish fraud. Allianz also had a compensation system in place that incentivized employees to put themselves ahead of clients.
The employees at SA can best be described as garden variety crooks. They got greedy and decided to lie in order to get paid more. Seems pretty straightforward.
But let’s not forget the pension fund managers. If someone came to you and said, “Hey, so I have this great investment opportunity. You’ll earn 10% every year, but you don’t need to take any risk!”, you would likely wonder what kind of snake oil they are selling. I mean that is some real Bernie Madoff type of stuff.
And that’s what happened here. In effect, Allianz was pitching a very low risk way to earn very high returns. Sounds pretty nice. In fact, it sounds too good to be true. If such an investment opportunity truly existed, it would be by far the most popular investment choice in history. Every retiree on earth would love the chance to take almost zero risk, and earn 10% per year.
And the pension fund managers should have known this all sounded fishy! Did they not read the offering documents? Did they not ask any hard questions of the managers at SA? How did they fall into this trap in the first place? My guess is either laziness or incompetence. As mentioned in the Twitter thread above, it’s almost like everyone assumed that SA had created some sort of magical money tree. Well, unfortunately, magical money trees don’t really exist (or at least you can’t access them).
And this went on for years! All the employees at SA had to do was alter a few spreadsheets here and there and nobody knew what was going on (hilariously, they even created “instructions” on how to alter their spreadsheets). Aren’t pension fund managers supposed to do ongoing due diligence and comprehensive audits to make sure they aren’t getting ripped off?
Thankfully, it appears that Allianz will pay restitution to the pension funds, so that leaves Allianz shareholders holding the bag. As usually happens with these situations, Allianz likely made way more money over the years than they now have to pay back. I guess it’s just another absurd cost of doing business in the financial world.
At the end of the day, we’re left with another poor showing overall by the financial industry. At every point along the way, the so called “financial experts” who were supposed to be looking out for the best interests of the pension fund participants failed to do so. We are talking about teachers, bus drivers, engineers, and religious workers. Regular folks who are just trying to live a decent life. And the financial industry let them down. It’s a real shame.
