Page One

Turning Public Assets into Private Gold

By Peter Byrne
Friday September 27, 2013 - 09:55:00 AM

[This is a chapter excerpted from the new e-book by Peter Byrne called Going Postal – U.S Senator Dianne Feinstein's husband is selling post offices to his friends, cheap, The book is available here from Amazon]

How CBRE and Blum Capital tick-tock

CBRE Group, Inc is a one-stop shop. It acts as the realtor and investment banker to hundreds of international corporations and public and private investment funds, and to governments of all sorts, as well as small businesses. It buys and sells and finances billions of dollars worth of commercial properties every year on its own behalf and for its clients.

In 2012, CBRE turned over capital transactions worth $72 billion in the Americas. Ten percent of its business is transacted in one state: California. But 40 percent of its annual revenue flows from its foreign business. Worldwide, it controls 37,000 employees; its recent acquisitions of Trammel Crowe and ING Clarion make it the world's largest commercial real estate company. The secret of its rapid growth has been a willingness to assume massive indebtedness in order to gobble up competitors. Such "leveraged buyouts" are a risky business practice: the firm carries a $2.1 billion debt burden which "constrains the operation of our business," CBRE reported in March 2013 to the Securities & Exchange Commission. 

From its Santa Monica, California headquarters, the CBRE Group operates nearly three dozen subsidiaries that monetize anything that smells of real estate. Leveraging cash from private equity investors and public employee pension funds, it buys, sells, and leases properties all over the planet; it conducts property appraisals and provides accounting services; it manages the daily operations of 1.5 billion square feet of public and private property; it performs construction management services and environmental reviews for state and federal governments; it holds the lead contracts with the Postal Service and the General Services Administration (GSA) for managing the bulk of the federal government's non-military properties. 

The price of goodwill

CBRE is not so much a real estate brokerage firm as it is a money manager. The firm's core operation, the $92 billion CBRE Global Investors, is smaller than Goldman Sachs (which wields a capital of $779 billion), but it beats out the so-called barbarians at the gate, Kohlberg Kravis Roberts & Co. ($59 billion) and Mitt Romney's Bain Capital ($11 billion). And it has juice. 

Democratic Party leader Dianne Feinstein has long been the most powerful politician in California. Her husband, Richard C. Blum, is not only the chairman of CBRE Group, he is also a regent of the University of California, which has co-mixed its retirement and endowment funds with Blum Capital Partner's private equity deals and has invested in CBRE. 

California public employees have been very good to CBRE: Much of the conglomerate's investment portfolio is financed by preferred access to billions of dollars controlled by the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS). Both institutions are governed by campaign-fund-seeking politicians, mostly Democrats. 

Given the ups and downs of the global real estate market, CBRE relies upon dozens of contracts with local, state, and federal government agencies to provide it with five percent of its annual revenue—a cash infusion that nearly equals its annual profit margin. To balance its books each year, CBRE depends upon capitalizing a subjectively-valued asset called "good will". Every year the dollar value of its goodwill miraculously equals the gap between its assets and liabilities to the penny. Without the ability of its accountants to create net worth-healing goodwill out of thin air, CBRE's balance sheet would have bled $1.8 billion last year. 

Last year, by the way, CBRE paid taxes on a declared profit of $315 million, but it still owes the United States Treasury taxes on the $1.1 billion of earnings that CBRE keeps in foreign tax havens in order to escape paying U.S. taxes. 

Blum Capital in trouble

CBRE-owner, Blum Capital Partners, is hurting, bad. The overall value of its investment portfolio has plummeted 80 percent, dropping from $3 billion in June 2007 to $612 million in July 2013. Last year, CalPERS recalled what was left of the $500 million it had invested in Blum Capital's Strategic Partners funds, which were down about 20 percent in value and falling. 

Remarkably, CalPERS still pays Blum $3 million a year in investment management fees, even though his funds have cost the pension fund $124 million, according to public records. These loser funds were heavily leveraged to Blum Capital Partner's largest investments: CBRE Group, Career Education Corporation, and ITT Educational Services. After negative publicity concerning the failure of expensive for-profit educational corporations to deliver adequate educational services, the stock prices of Career Education and ITT have plunged exponentially: Career Education dropped from $33 in early 2010 to less than $3 in early 2013; ITT plummeted from $130 in early 2009 to the mid-$20s. 

The California State Teachers Retirement Fund is, likewise, watching its $162 million investment in Blum Capital Partners' funds trickle down to nothingness. 

The poor performance of Blum Capital in comparison to similar funds has caused the Los Angeles City Employees Retirement System (LACERS) to divest itself of $50 million in two Blum funds. Wilshire Consulting (which advises public pension funds) told LACERS, last year, that it "recommends immediate withdrawal of funds from Blum Capital." Wilshire reported that about half of Blum's partners had left his firm as profits evaporated. 

During the spring and summer of 2012 emails subject to the California Public Records Act flew back and forth between Sacramento and San Francisco like screech owls as CalPERS tried, unsuccessfully, to meet directly with Blum to discuss the untenable situation with his funds. 

In July 2012, Blum summoned Joseph A. Dear, CalPERS' chief investment officer, by email, to his $10.3 million home in Aspen, Colorado. Blum and the Brookings Institute and the Gates Foundation were hosting a meeting with staffers from the Obama White House, the World Bank, and MasterCard: 

Dear Joe, 

Please come to our dinner. We also encourage you to attend the Brookings Blum Gates Roundtable sessions. They are only in the mornings and we take great hikes in the afternoons. I'd be happy to show you and Anne around. Please do come to the barbeque. We'd love to have you join us. 

Blum attached an invitation decorated with a pair of cowboy boots to the couple's $10 million Bear Paw Ranch: 

"We are pleased to invite you to a casual country western gathering at the Aspen ranch of Senator Dianne Feinstein and Mr. Richard C. Blum. Casual 'Cowboy' Dress" 

A CALPERS spokesperson said that Dear did not go to Aspen that summer. 

But the terrible returns on its Blum-managed funds have not stopped CalPERS from investing $4.1 billion in GI Partners, a real estate speculation fund created by CBRE Group. And CalPERS holds more than $1 billion invested in several other entities at which Blum is also an executive: TPG Capital and TPG Newbridge Capital. 

But it is clear that without regular injections of the public's wealth, Blum Capital Partners and CBRE would be scrounging for their last meal—if corporations really were people. It almost goes without saying that the Blum-Feinstein family fortune is founded upon its uncanny ability to command billions of dollars in publicly-owned capital, cowboy dresses and barbecues notwithstanding. 

Blum did not return emails and telephone calls requesting comment for this story.