Dienstag, Juni 15, 2010

But The Pension Fund Was Just Sitting There...

That's a line, of course, from one of the early Doonesbury comic strips, where Duke, the character that Trudeau modeled on Hunter S. Thompson, uses the Pension Fund to finance hiring a Samoan for the football team, which Duke was coaching. Duke's idea was to surprise opponent teams with this huge player and use judicially placed bets to ensure that the money could be won back before anyone noticed.

The problem was that the Samoan was uncontrollable, and Duke spoke these immortal lines: "Get me the dart gun..."

Now, and a hat tip to Zero Hedge, we seem to find a modern-day variance of this, with the Illinois Teacher's Pension Fund entering the arena for sheer and utter insanity.

Go read the article for a taste of the future.

Fundamentally, this is a prime example of private profits and public losses: the fiduciaries of the fund - who apparently, even if they are nice folks, really are playing the wrong game without the necessary training and competence (and the 32 hours of training they get is a hoot) - are heavily into extremely leveraged plays, knowing that at the end of the day, if all goes belly up, the taxpayers will assume the losses. Given that, there is no incentive for them not to go broke.

And go broke they will. They lost money in years the market went up, and are underfunded to the tune of over $40bn, or roughly 60% of their total liabilities: this means that they have only 40% of the money they are supposed to have at this point in time, which normally means that school teacher's pensions are, largely speaking, worth less than half of what the future pensioners think they are going to get.

Solution? Bet everything that they can pull themselves out of the hole that they've dug. As an informed observer put it, the portfolio is aimed purely at generating the highest possible returns without consideration of risk.

That's fine if you're a trust fund kid playing with your inheritance from Grandpa: if everything goes down the toilet, you might have to work for a living, but at least you're not going to screw over innocents. This is far from the case: here the fund is going for broke, with no less than over 80% of its investments in highly risky instruments, and Illinois TSR, the fund, is on the risk-carrying side of the OTC deals it is investing in, cashing in the risk fees to take on the risk. To repeat: the Illinois TSR isn't merely investing in risky instruments, it is generating them.

The leverage? According to Illinois TSR, the notional value of their OTC business is $1.1bn, but the market value is $5mn. So far, they're losing money.

Now, to be clear, there is nothing preventing them from doing this. No legal obstacles, no clearly laid out investment guides, zilch.

But to paraphrase Hadrian: Just because you can doesn't mean you should.

Recourse for the teachers if it all collapses? They can sue the fiduciaries. That's it. The government - which means the taxpayers - will have to turn things around for them.

Hence: we continue to see, all around us, continuing evidence that no one, really no one, appears to be actually looking at what is happening in the world and adjusting their behavior appropriately. A pension fund should be invested in very long-term, prosaic investments generating modest returns, well funded and with moderate liquidity.

Instead it's uncontrollable. Where is that dart gun when you need it?

1 Kommentar:

Anonym hat gesagt…

I'm a teacher in the US. We have a good retirement pension where I am, but I put no faith whatsoever in it. I'm doing my dead level best to set aside enough for my own retirement in case my "betters" in the union or the government drop the ball. As a member of Generation X, I know that Social Security won't be there for me(God knows I've never had any faith in that). And reading stories like this one makes me think that my union could just as easily drop the ball too.

If I didn't have to be in a union to be a teacher, I wouldn't. :P