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Hullabaloo


Monday, March 30, 2009

 
Play Money

by dday

From the Boston Globe, a terrifying report about how the Pension Benefit Guaranty Corporation, the agency that insures retirement funds, decided to play in the stock market at precisely the wrong time:

WASHINGTON - Just months before the start of last year's stock market collapse, the federal agency that insures the retirement funds of 44 million Americans departed from its conservative investment strategy and decided to put much of its $64 billion insurance fund into stocks.

Switching from a heavy reliance on bonds, the Pension Benefit Guaranty Corporation decided to pour billions of dollars into speculative investments such as stocks in emerging foreign markets, real estate, and private equity funds.

The agency refused to say how much of the new investment strategy has been implemented or how the fund has fared during the downturn. The agency would only say that its fund was down 6.5 percent - and all of its stock-related investments were down 23 percent - as of last Sept. 30, the end of its fiscal year. But that was before most of the recent stock market decline and just before the investment switch was scheduled to begin in earnest.


The PBGC is a backstop against major losses by private pension funds and the parent companies slipping into bankruptcy. Especially at this time, with the economy struggling, the PBGC could be called on more than ever to help protect pensioners. Just as an example, a structured bankruptcy by GM or Chrysler would mean that huge liabilities would be passed on to this agency. Which apparently gambled and lost tons of money. That's exactly the opposite investment strategy that should be taken by what amounts to an insurer.

David Kurtz is blunt and right on the money.

A finance professor who had previously advised the agency not to make the switch away from bonds compared the move to an insurance company writing policies to cover hurricane damage and then investing the premiums in beachfront property.

Bush was able to do for the PBGC what he tried and failed to do for Social Security.


Josh Marshall concurs. These were Bush Administration officials who, in the wake of losing their battle to privatize Social Security, had this big pot of money - close to $64 billion - that they sunk into stocks, providing more money to Wall Street for them to keep pushing asset values higher. The timing of it happening just at the time before the market began to crash suggests that the Administration viewed this as perhaps a last-ditch effort to prop up Wall Street. The director of the PBGC, who advised and directed this strategy, is Charles E.F. Millard, a former managing director at LEHMAN BROTHERS, just to give you some more assurance. In the article he practically admits that he was just taking a whirl at the casino with public money:

He said the previous strategy of relying mostly on bonds would never garner enough money to eliminate the agency's deficit. "The prior policy virtually guaranteed that some day a multibillion-dollar bailout would be required from Congress," Millard said.

He said he believed the new policy - which includes such potentially higher-growth investments as foreign stocks and private real estate - would lessen, but not eliminate, the possibility that a bailout is needed.

Asked whether the strategy was a mistake, given the subsequent declines in stocks and real estate, Millard said, "Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it."


I don't think policymakers will be sticking with it, because there's probably almost no money left in that portfolio. Money that was designed to insure pensions.

This is a crime.


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