Friday, May 21, 2010

Morgan Stanley Real Estate Funds V and VI Go Belly Up; and What's the Nexus Between Dartmouth and North Carolina?

Morgan Stanley Real Estate Funds (MSREF) V and VI, which were the beneficiaries of Dartmouth's conflicted investment policy (Dartmouth Charter Trustee R. Bradford Evans is a Managing Director at Morgan Stanley), are apparently tanking - fast.
As indicated in the last post (see below), Dartmouth invested $20 million in MSREF V in March 2005. It also invested an undisclosed amount in MSREF VI in March 2007. The investment committee that manages Dartmouth's endowment investments (Dartmouth has been operating without a Chief Investment Officer since David Russ left Hanover to head Credit Suisse's Investment Strategies group last June) is overseen and directed by the Board of Trustees.
Now those Morgan Stanley funds are hitting the skids: according to a December article in the Wall Street Journal, MSREF V lost quite a bit of money. The California State Teachers' Retirement System had a $137 million investment in MSREF V. By last summer, the value of that investment was $300,000.
WSJ also reported that MSREF V bought eight luxury properties at the top of the market in 2007, taking out a $1 billion mortgage to finance the deal. That mortgage was subsequently carved up into mortgage-backed securities and sold to investors.
The Wall Street Journal reported on May 11, 2010 that SEC investigators are currently looking into bringing criminal charges against Morgan Stanley for misleading investors about collateralized-debt obligations (CDOs) tied to mortgage-backed securities. But Morgan Stanley's real estate division came in for investigation well before that: according to a March 2009 article in the New York Times, Morgan Stanley reported to the SEC that its star real estate investor in China had violated US law by bribing Chinese officials in Shanghai to smooth out a few multimillion dollar investments.
MSREF V wasn't the only Morgan Stanley real estate investment to flop. MSREF VI also lost 61% of its value between 2007 and today. It might lose $5.4 billion on its original $8.8 billion, making it "the worst loss in the history of private real estate equity." That report comes from the Carolina Journal, which documents the decline of North Carolina's state pension fund, also invested heavily in MSREF V and VI.
In an interesting coincidence (?) Carolina Journal reported in October 2009 - in a story headlined "New Questions Surround Ousted Treasury Official and Fund Managers" - that Pamela Joyner '79, a Dartmouth Charter Trustee, acted as the "placement agent" for a 2005 deal that invested $150 million from the North Carolina state pension endowment into a fund run by Apollo Investment Management, founded by Dartmouth Charter Trustee Leon Black '73.
The same article also raised questions about the relationship Joyner and her husband, whose firm Horsley Bridge Partners managed $225 million of the NC state pension, had with a state treasury official who was recently fired. A law professor at Duke, James Cox, commented that "it is certainly something that raises eyebrows and needs explaining."


We Need Zywicki Back said...

Arrogance this blatant borders on criminal behavior.

Anonymous said...

Nice to see Dartlog using two terms inaccurately in the first sentence -- to those in finance, "beneficiaries" and "conflicted" both mean something different from what Dartlog is trying to say.

Anonymous said...
This comment has been removed by a blog administrator.
Scott Swenson '95 said...

Hey Mr. Anonymous – I hope you are not a Dartmouth grad, because if you are, it is an embarrassment to the liberal arts education. While I am not the author of this post, I have to assume the use of the words were used for their more common meanings found in the Oxford Dictionary and not implying the more narrow connotations of Wall Street speak.

Lose the arrogance and realize that this author makes a serious accusation that should be answered by our Board of Trustees. There needs to be independence in the investment decisions for our endowment to avoid such self-dealing, if it occured. Our college is facing serious budgetary strains that is only getting worse for several factors (rising expenses caused by out-of-control faculty expenses vs. slowing endowment growth due to various macroeconomic and population dynamics).

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