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In February 1999, when Parsky chaired the Investment Committee of the UC Regents, he convened a series of closed-door meetings with a select panel of regents, at which the regents hired Wilshire Associates to analyze the UC pension fund's performance. For this, the Los Angeles investment firm was paid nearly $350,000. A few months later, its analysts returned with a dire forecast: The fund had serious problems.
As the dot-com boom went into overdrive, Small had dumped some stock and bought up long-term bonds. Because interest rates were remarkably high at the time, her move locked in a steady flow of cash as a hedge against a market crash. But Wilshire claimed that her plan exposed the pension plan to too much risk by holding so much in long-term bonds and investing in just eighty companies. The consultant recommended dumping many of the long-term bonds and reinvesting as much as half of the domestic stock in index funds: large, diversified collections of securities designed to mimic overall market performance.
Small and her staff fought back in reports and letters to the regents. Long-term bonds actually lowered the risk, she said, because their lifetimes are better synchronized with the way the fund pays out retirement benefits. And selling and reinvesting billions in assets would cost millions in brokerage commissions and fees. If the university did what Wilshire asked, it would spend a fortune just moving cash around.
But what really bothered Small was more fundamental. As she recalled in a 2004 letter to the regents, she was worried that the university was poised to radically and swiftly change its investment philosophy on the advice of a single consultant. Furthermore, she wrote, Wilshire never properly analyzed the risks of its own investment strategy. And those risks were clear to any prudent investor. By spring of 2000, the dot-com bubble was beginning to burst, and the financial press was filled with trepidation.
Wilshire's people were barely interested in her opinion, Small wrote in 2004. "The only time the treasurer's office met with Wilshire for the 'office review' was for one day in the month of February 1999," she wrote. "As treasurer I was dumbstruck that not once did Wilshire ask about portfolio risk, how it was measured and controlled. I was so startled that I complained immediately to the Investment Committee Chairman. ... I was told 'not' to pursue the issue."
In fact, according to Small's letter, her access to the regents was suddenly, inexplicably curtailed. In January 2000 she was ordered not to talk to any regents about investment matters outside of their board meetings. University vice president Michael Reese denies that Small was forbidden to talk to the regents, but refused to elaborate, citing confidentiality issues.
Former regent Ward Connerly is best known as the man who ended UC's affirmative action policy, but he also was dedicated to its finances. He chaired both the finance and audit committees and sat on the Investment Committee. Connerly recalled that Wilshire's people ruled the day, baffling regents who thought the fund was doing just fine. "The whole field of money management is surrounded by such mysteries," he said in a recent interview. "Deliberately, in many cases. They come in with all these actuarial studies and dazzle you with bullshit. ... And so these people came in and threw all this nonsense at you about what Harvard and Yale are earning, even though you believe your performance is doing a magnificent job."
Parsky made Wilshire's job easier, Connerly added, by attacking Small's job performance in ways that seemed a little too enthusiastic. "We didn't want to challenge the chair of the committee who was himself sort of involved in this area," the former regent said. "There were those, however, who were wondering whether this was a personal dispute between the chair and the treasurer."
By late spring of 2000, Small was fighting for her career. In a May 15 letter to Parsky that was copied to the rest of the regents, she said that Parsky had apparently decided her conduct was so unprofessional that he was doing a "performance review." This, she wrote, was based not upon her years of service, but the previous two months of what Parsky had allegedly characterized as "evidence of poor attitude, a lack of commitment to the Board of Regents, or incompetence."
UC vice president Reese responds that "annual performance reviews are standard practice for all employees." But judging from Small's letter, this review was anything but commonplace. Indeed, her tone was almost frantic. "I respectfully note that there seems to be a high level of miscommunication and misunderstanding as to the reasons for my recent actions, and a misconstruing of my motives," Small wrote. "I have no agenda other than the best interest of the regents, the beneficiaries of the investment portfolios, and the financial protection of the university investable assets."
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