When I first started reading this article about Morgan Stanley taking some big write-offs in a real estate fund my attitude was just more of the same. The article turned out to contain a little more information than I thought.

First, the loss. Morgan Stanley told its investors in MSREF Vl International fund that it expected a 60% fourth quarter write-down. The fund originally raised $8.8 billion in June 2007. Approximately $6.5 billion had been invested. In the first nine months of 2008 $1 billion was written off, so with this additional hit, the fund will have lost about 66% of its value.

The fund was set up as an “opportunity fund” which was the first time I had ever heard that euphemism. According to the article it’s short hand for using a lot of leverage in commercial real estate investments. That they evidently did in spades since that would seem to be the only way to blow through that much money in such a short period of time. For instance, they bought two dozen German office buildings for $3 billion in July 2007. The fund’s investment was $350 million. In September 2008 the equity was valued at $23 million. Go figure.

The thing that really got my attention in the article was the fact that these funds were used, by state pension funds. It seems that the promised returns were just what the doctored ordered to make good on promises to teachers and policemen that local governments have no hope of ever delivering on. Morgan’s fund had Pennsylvania’s school teacher pension plan and Montana’s state employee pension fund as investors.

I suppose I really shouldn’t have been too surprised by the fact that the pension funds were loading up on this stuff. But nagging at me now is how many really were invested in junk like this and how much money have they blown through. Given the lack of transparency in state and municipal pension funds, it’s entirely possible that they are in much more dire shape than even the skeptics suggest.

more: here