Calpers Doubles Down on Distressed Debt

This post first appeared on Minyanville.

The country's largest pension fund keeps pouring money into losing bets.

According to Bloomberg, the California Public Employees' Retirement System, or Calpers, dumped $1.7 billion dollars into Leon Black's private equity giant Apollo Management LP last year, hoping to profit from ongoing credit market dislocation. Calpers, which mangages pension money for 1.6 million public employees in California, has invested more than $3.5 billion with Apollo since 2006.

Apollo, which focuses on private equity investments as well as distressed debt, has shown investors outsized returns for the past two decades: 25% annually. Recently, however, as the economy has turned south, Apollo is facing mounting troubles with investments gone bad: Linens 'N Things and Harrahs Casino, 2 of its biggest profile private equity deals, are either bankrupt or struggling to restructure debt, respectively.

Meanwhile, Calpers is smarting from more than a few ill-advised bets of it's own, having effectively top-ticked the New York City real estate market in 2006. Together with developer Tishman Speyer, Calpers dumped $500 million into Peter Cooper Village and Stuyvesant Town, a massive residential housing project just south of midtown. The deal now faces cash flow and valuation issues, as the New York real estate markets has officially cracked.

Closer to home, displaying its aptitude for buying at the top, Calpers invested in a speculative land deal on the outskirts of Los Angeles in early 2007. The partnership, LandSource Community Development LLC, filed for bankruptcy a little more than a year later. Lennar (LEN), the developer that sold Calpers the land, recently bought it back for a song.

Pension funds as a whole are reeling from ongoing turmoil in the financial markets. It's estimated that funds are short $237 billion nationwide, according to a recent study. Never fear; Treasury Secretary Tim Geithner is working on a solution.

The recently announced Public-Private Investment Program, or PPIP, is encouraging pension funds to spot the cash to buy distressed assets from the likes of JPMorgan (JPM), Citibank (C) and Bank of America (BAC).

In other words, the federal government is asking money managers with a fiduciary responsibility to safeguard the retirements of millions of public employees to plunk down tens of billions of dollars to clean up the collective balance sheet of the American banking system.

And people are up in arms over AIG (AIG).