Americans should be wary of letting the government invest $700 billion of taxpayer money on highly illiquid, difficult-to-price assets. To say that we're virtually guaranteed to turn a profit is offensive and insulting to anyone with a sense of how convoluted, risky and opaque these securities really are.

Indeed, it appears even politicians are no longer sure this is a such good idea.

For evidence of just how well government-run bureaucracies manage vast pools of money, one need look no further than the nation’s largest pension fund, the California Public Employees’ Retirement System, or Calpers.

This June, a joint venture between the fund and a California developer filed for bankruptcy. Calpers had dumped almost $1 billion into raw land outside Los Angeles at the height of the real estate boom, which turned out to be kind of a bad idea: Calpers could lose its entire investment.

In late 2006, the fund made another equally ill-timed bet on highly speculative real estate.

Together with developer Tishman Spears, Calpers plunked down $500 million to buy the 80-acre swath of housing developments that make up Peter Cooper Village and Stuyvesant Town on Manhattan’s east side. After much debate in New York about the fate of the developments -- whose thousands of units were formerly reserved for low-income renters -- MetLife sold the 56-building complex for $5.4 billion.

With the New York economy beginning to slow and property values showing cracks up and down Manhattan, Calpers may have yet again bought at the top.

According to the Wall Street Journal, the deal was financed with $4.4 billion in debt from Wachovia (WB) and Merrill Lynch (MER). Now, Standard and Poor’s (MHP) has downgraded a portion of that debt connected with a $3 billion mortgage used to fund the project.

S&P is concerned not only about the 10% drop in the property’s value, but also about whether rental cash flow and money generated from selling off individual units will be able to cover the debt service. Tishman, for its part, says cash flow is improving, and that credit markets have prematurely written an unhappy ending for the investment.

The continued inability of government-run investment funds to make good decisions is deeply unnerving, given the fact that bureaucrats could soon have their grubby little paws on a slush fund of unparalleled size.

Actionable ideas, instant analysis. Real-time from bell to bell.
Minyanville's Buzz & Banter - 14 day FREE trial