(This is a letter written to the Alaska Permanent Fund Board of Directors.)

It’s been over a year since I vigorously alerted Alaska Permanent Fund Executive Director Michael Burns and board Chair Steve Frank of the coming real estate deflation and accurately pointed out that the Permanent Fund portfolio was leveraged to the belief that real estate always goes up and would suffer severe losses, which it did.  Additionally, I argued that U.S. treasuries would be your only hedge to the real estate deflation. Besides being the safest asset, they have outperformed the fund many times over.

I don’t believe any of you, including your advisors at Callan and Associates, own the portfolio that has been recommended and purchased for us, the shareholders of the Permanent Fund, over the last five years. This is disturbing to say the least. The Permanent Fund is not permanent, not diversified in that the amount of losses over the last 12 months exceed the market losses of the general market averages. (PFD shows 22 percent in bonds that would offset losses if they had been Treasuries.) This certainly proves that it was leveraged to the real estate market as I stated in 2007, 2006 and 2005. The fund was supposed to be conservative and prudent, yet purchased mortgage bonds that have no market, and has vastly overstated those holdings on our balance sheet. The bonds of the PFD have not performed as you’ve indicated in some of the annual reports. Therefore, you knowingly overstated the value of those bonds since 2006 and 2007 to the detriment of the fund holders and delayed action, which would have mitigated the losses that the PFD now faces. These are serious implications for the managers and directors of the fund.

The simple truth is this: If you don’t personally own what you’ve recommended to the fund all of you have done a disservice to the shareholders. If any of you recommended buying derivatives without a full understanding, you have done harm to the fund without any idea of how we would recoup our money. The fees paid to Callan based on advice and performance of the fund cannot continue unless Callan has tenure? It would be cheaper for the fund to pay Callan fees and not take the company’s advice because it has become obvious to me that friendship must play a role in keeping them as your advisors, certainly not their advice.

Lastly, we are in deflation. This economic event will continue to destroy the wealth of those portfolios, such as the Alaska Permanent Fund, that were not diversified and placed most of the fund assets in real estate of some type tied to a inflation belief. My projection is that the PFD will lose the last 10 years’ worth of gains once the fund recognizes the losses in its bond and real estate portfolios and deflation sets in.

The worst is still ahead for you and  it is unfortunate for us and next generation of Alaskans. The fund needs to take action now!

If the fund had considered and purchased long-term treasuries, paid all the staff, sent them home five years ago, paid Callan his ridiculous fees and didn’t take their advice, the fund would now be approximate $12 billion higher, but what is a billion?

This economic event is long term and you have reduced our chances to preserve the fund balance by your actions. The reason for not buying treasuries is still a loss to me so I assume we must be waiting for Callan to give you the go ahead. Frankly I’m upset because this should not have happened to the good citizens of Alaska.

Bob  Andres

Wasilla