Mislabelling Risk

To address the question of “who’s responsible for this mess” and “how could this have happened”, one needs to make a brief foray into CEF’s history.

CEF was founded in the early 1900s with the “core principle” of helping church members help other church members construct church buildings in return for a modest return on their deposit. CEFs initial investment style was to make a number of smaller investments against properties that would retain their value and could be easily be sold to recover the fund’s money if things didn’t work out. This kept the fund’s risk at a low level, which means it was a secure, “don’t think about it” place for depositing your money.

When the CEF Board decided to develop the Prince of Peace retirement village, there were a number of challenges they had to overcome in order for the project to be successful. It would need specialized expertise to perform the up-front due diligence, then design, build, and operate at a profit in order to pay the principal and interest back to the fund’s depositors and make a profit. If the project’s building phase needed more money to cover contingencies, or ongoing expenses exceeded its income, then further injections of money would be required along with a potential change in management to bring the project to a profitable state. Finally, if enough depositors wanted their money back at some point in time, management would have to either re-finance the project by getting a loan from a regular bank, or sell the property outright in the hopes of recovering its accumulated investment – both of which would take a long time to complete with no guarantee of success or profit.

Contrast this with CEF’s previous activities and one can see that committing to the Prince of Peace project meant that CEF left it’s historical, low-risk portfolio of relatively small investments and exchanged it for a single real estate development project that would require committing a substantial portion of CEF deposits in a complex, “all-or-nothing” type of investment. Yet CEF continued to issue marketing material that stated “nobody had ever lost money in CEF.” While this statement was “literally true” as far as it went, it falsely implied that the CEF deposits enjoyed the same low level of risk after the start of the Prince of Peace development as the deposits had prior to the development’s start.

This “mislabelling of risk” is exactly the kind of behavior that resulted in the Financial Crisis of 2008 – ratings agencies labeled investments as “safe”, “AAA”, and “investment grade” – which meant that anyone who needed a safe place to put their money could include these investments in their portfolio. The reality was that these investments should’ve been labelled as high-risk junk that only experienced investors with deep pockets should even consider – with the consequences that millions of people and organizations – including pension funds – lost money they wouldn’t have lost if the investments had been properly labelled.

In CEF’s case, a change in risk level has huge implications for their depositors – particularly the elderly for whom security is an absolute priority before returns due to their ongoing need for access to their funds and the limited amount of time and opportunity they have to recover from any losses. If the Board failed to inform the fund depositors of the change in their risk profile, then the depositors were denied the opportunity to make an informed decision about participating in the Prince of Peace development. This, in turn, meant that the Board took advantage of the depositors’ trust and the reputation that prior CEF managers had earned over the decades in order to advance the Prince of Peace project.

Barring evidence to the contrary, the only conclusion one can arrive at is that the Board misled the CEF depositors by omitting the truth about what was being done with their money, that this action was either intentional or reckless, and that any accounting for responsibility must start with them.


5 thoughts on “Mislabelling Risk

  1. s

    It seems that it was much easier for the people involved to have free access to CEF funds through misrepresenting it to depositors than it would have been to do the work involved in convincing the average conservative Lutheran depositor to invest in this project. If it was publicized for what it was, I believe it would have been a no go.

    Our congregation had the paper work done to take out a loan from CEF. It meant our congregation and it’s committees were in contact with ABC District during the time they knew insolvency was a reality and District representatives were presenting themselves as if nothing had changed and were very eager to have us start a loan with them. This is what I believed CEF was being used for and I had no reason to doubt that. It was how it was represented to us and it is how we were seeking to use it. Had we known CEF had become primarily an investment fund for PoP, we would have used our funds (mostly deposited in the 2012 time frame) to fund our Church project privately. By mislabeling risk through promoting the same mandate and not addressing the problems at hand, the District made the risks far greater to individuals, businesses and congregations and the carnage more widespread than it should have been.

    The risks we have been exposed to go far beyond financial risks though and are far more costly too. They risked our relationships to one another as children of God and what it means to serve our Lord, trust and respect our leaders and one another and work together as good neighbors and faithful stewards of the gifts God has entrusted us with. In risking how we think of one another and treat one another, (not as someone simply there to exploit), they’ve risked also how we witness to the world outside of us what it means to be a Christian. They’ve risked people’s physical, emotional and spiritual well being and put some people’s faith to the test, risking salvation itself. There is much work to be done in making things right and healing these wounds as we humbly seek God’s help so that we don’t respond with the same recklessness as we were shown.

    • ANO

      S – The risks we have been exposed to go far beyond financial risks though and are far more costly too.

      As bad as the financial loss is, you are quite right that this is an even greater concern. I’ve got a blog post in the works to address this very topic in the near future.

  2. LS

    ANO, your analysis is spot-on. This is probably the most succinct and concise summary of events we’ve seen so far. It goes a long way to providing an answer to the burning question, “How did this happen?”, a question that District itself has been unwilling or unable to address to anyone’s satisfaction.

    After all that has transpired in the last 9 months, it comes as no surprise that the District board misled depositors. They did so again in January of this year, when they assured us that DIL deposits were “safe.” Still, I cannot help but wonder if the Board members were not themselves misled at some point (by whom and for what reason I do not speculate). However, regardless of whether or not such deception was intentional, it was certainly reckless. Unethical? Probably. Reprehensible? Undoubtedly. Ah — but was it criminal? That, of course, is for the courts to decide. Nonetheless, it was the responsibility of Board of Directors to provide oversight and guidance. If, in their “missionary zeal” they neglected, ignored , or did not understand their feduciary responsibilities, they are nonetheless culpable.

    To say that “we erred on the side of the Gospel” is no excuse, for to say such implies that the Gospel is somehow at fault (add blasphemy to the list of transgressions!).

    Your concluding comment is a telling one: “. . . by omitting the truth . . . any accounting of responsibility MUST start with them.” A sin of omission is still a sin. Ignorance of the law is no excuse. The unjust steward will be called to account.

    Pastor Nolan Astley, are you listening?

  3. Darlene

    Thank you, ANO, for providing the historical background for CEF and the changes that the Board undertook to develop Prince of Peace. It’s unfortunate that the Board didn’t openly offer the venture as higher risk and give depositors the option of participating or not. That would have avoided the entire situation.

  4. kb

    Thank you for this analysis. I concur.

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