Bad Timing

by digby

Well it looks like we may get a little inkling of what would have happened if the GOP's social security privatization plans had been implemented:

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.

No statistics on the fund's subsequent performance were released.

Nonetheless, analysts expressed concern that large portions of the trust fund might have been lost at a time when many private pension plans are suffering major losses. The guarantee fund would be the only way to cover the plans if their companies go into bankruptcy.

"The truth is, this could be huge," said Zvi Bodie, a Boston University finance professor who in 2002 advised the agency to rely almost entirely on bonds. "This has the potential to be another several hundred billion dollars. If the auto companies go under, they have huge unfunded liabilities" in pension plans that would be passed on to the agency.


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."

But Bodie, the BU professor who advised the agency, questioned why a government entity that is supposed to be insuring pension funds should be investing in stocks and real estate at all. Bodie once likened the agency's strategy to a company that insures against hurricane damage and then invests the premiums in beachfront property.

Millard could be right that his diversification of the fund will result in a good return over 20 years. For all of our sakes, let's hope so. But putting pension fund money into the inflated real estate market in 2007 was just stupid and in retrospect entering the stock market at that point was a case of very bad timing at the very least. It will probably take years for the fund to recover what it lost in the crash. That is a very big "oops."

There has been no doubt for years that the fund was going to come up short with guaranteed pension plans going belly up, even in the good times. (See: airlines.) But instead of changing the agency's conservative investment strategy, they could have lobbied to change the law to allow them charge higher premiums to the companies they insure or find some other less risky way to boost their returns. Of course, in the Bush years, that was the kind of thing that could get you kicked out of the Big Boyz club.

But even the original Bush appointee was a prudent investor who didn't just start gambling with the pension insurance. Then they hired a Brownie:

In the early years of the George W. Bush presidency, the agency took a conservative investment approach under director Bradley N. Belt, who favored putting only between 15 and 25 percent of the fund into stocks.

Belt said in an interview that he operated under "a more prudent risk management" style and said he "would have maintained the investment strategy we had in place." Belt left in 2006 and Millard arrived in 2007.

Under Millard's strategy, the pension agency was directed to invest 55 percent of its funds in stocks and real estate. That included 20 percent in US stocks, 19 percent in foreign stocks, 6 percent in what the agency's records term "emerging market" stocks, 5 percent in private real estate and 5 percent in private equity firms.

The PBGC is all that stands between a lot of retired people and penury, after a lifetime of paying into a guaranteed pension plan. Is it even remotely reasonable that a major change in investment strategy of an insurance fund like this could be done without any oversight or input? And yet it did. As usual, the best and the brightest were all partying 24/7 and nobody wanted to call the cops.

This could be a huge problem before long. And one of the saddest, yet inevitable, consequences of the opaque trillion dollar financial system bailouts and million dollar bonus pools for greedy bankers will be that when average pensioners need bailing out there will be no political capital left to do it.