Deficit Doubles for Government's Pension Benefit Guaranty Corp
Economics / US Debt Nov 15, 2009 - 06:10 PMBy: Trader_Mark
So many future bailouts to look forward to, so little time. So many cans do kick down the road via accounting adjustments, so few feet do keep doing the kicking. While I read this piece I was struck by my own reaction... not even $30 billion in deficit? This is peanuts! We've become so numb to bailouts that anything less than hundreds of billions seems like a normal part of Bailout Nation. Yet just over a decade ago the world was in a panic over hedge fund Long Term Capital and its gaping hole of $3.6 billion.
How quickly we've adjusted to brushing off our shoulders handouts and bailouts 10 times that size. The cost for one of the smallest handouts, Cash for Clunkers was more than the bailout of LTCM in 1998. Need to manipulate housing prices higher? It's worth it! Only costs $16 billion; or with Cash for Cul de Sacs v 2.0 - $30B+. Peanuts.
So let's take a look at the Pension Benefit Guaranty Corp - another Ponzi scheme in a country now running a series of them, full tilt, concurrently. Also known as "prosperity". The PBGC bailout will just be a pebble versus what could be faced in the greater pension system as a whole... $1 trillion ? Now we're talking real money. [Mar 4, 2009: Bloomberg - Hidden Pension Fiasco May Foment Another $1 Trillion Bailout] Until then... kick the can son (and while you are at it, change some accounting rules so we pretend this is not a problem - works for the banks, zombie style!)
As an aside, we've covered this lovely fund once before - if you want an eye opening look at the "investment acumen" of those running this fund; a piece we wrote back in April . [Apr 1, 2009: Pension Benefit Guaranty Insurance Fund Made Huge Switch into Stocks Last Summer] The managers decided it would be brilliant to go "all in" on stocks... summer 2008. Right before the crashes of Sep/Oct 08 and Jan/Feb 09. But not to worry - a few tens of billions of new printed US currency and all our problems go away into the night. To see what happened to Mr. Millman (he who made such a grand decision) see the end of this entry.
Our thoughts from April:
Once more, this is not an April Fool's joke... it just feels like it is. Chalk up another one in the "future bailout via robbery of grandchildren's living standard" list. From my estimates we shall see bailouts in insurance co. annuities, commercial real estate, state pension liabilities, federal corporate pension liabilities...
Might there indeed be a great reason for the government to stoke this stock market by any means possible? Nah, that would be tin foil-ish.
The scary thing is we only have federal pension guarantee fund's results though Sept 30, 2008. And it was already $11 Billion in the hole. Should be a DANDY report coming up once we're updated
--> 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.
--> Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20, dismissed such concerns. Millard, a former managing director of Lehman Brothers, said flatly that "the new investment policy is not riskier than the old one."
$11B in the hole at the end of Sept 2008 - they've doubled their shortfall since then, up to $22B. The bright side? It's better than $33B which was peak losses! You might ask why all these government agencies, pension funds, and the like continue to make larger and larger risks. It's quite simple - they have promised far too much to the public sector employees, and realize they cannot make their obligations using "relatively low risk" investments. So the snake oil salesmen from "the Street" come to them with cute products that guarantee great returns for the snake oil salesmen (fees fees fees!) - but usually end up blowing up for the investor. Snake oil salesman screams "Black Swan!" - and that they have a new scheme investment that will help get investment fund back on its feet. Keep repeating this cycle over a 10, 20, 30 year lifespan and eventually the financial oligarch makes a ton of money from the snake oil (if he does not blow himself up i.e. Bear Stearns, Lehman) - and the transfer of wealth is complete. Left holding the bag? Look in them mirror.
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Anyhow enough about that, let's see what you will be on the hook for in the future. Via AP:
- The government-chartered company that insures the pensions of one in seven Americans said Friday that its deficit this year nearly doubled to $22 billion. (not too shabby, only a doubling of loss from last year at this time; but really what's $11 billion more among taxpayer friends?) That's an improvement over the Pension Benefit Guaranty Corp.'s midyear record deficit of $33.5 billion, which spiked as auto makers and other companies faltered and caused the insurance fund's liabilities to spike. (see, told you there was a silver lining.... the fund had actually dropped from a $11 billion deficit to $33 billion before rebounding)
- Yet experts and officials say the long-term picture is grim. They say that without major changes, such as higher insurance premiums and less risky investments, the fund eventually will require a taxpayer bailout. We could face much higher deficits in the future," PBGC acting director Vincent Snowbarger said in a statement. "We won't fail to meet our obligations to retirees, but ultimately we will need a long-term solution." (codeword: taxpayer)
- These fluctuations can hide the fundamental problems with the pension insurance system, said Bradley Belt, a former PBGC executive director and now CEO of the financial consulting firm Palisades Capital Advisors LLC. "People focus too much on what the number is," Belt said. "A lot of what's going on is bookkeeping or accounting that mask, unfortunately, the long-term problem." (which is identical to the masking going on in many individual pension plans as detailed in earlier pieces... remember, if you have a problem in America you don't want to admit to; just change the accounting)
- The PBGC is responsible for the benefits of 1.5 million Americans. It sends checks each month to 740,000 pensioners. It is funded entirely by fees on the companies whose pensions it insures. But Congress sets those fees, and it's been reluctant to raise them in the face of opposition from business and labor groups. Because the fund isn't expected to run out for a decade or more, there is little impetus to raise rates. (kick the can!)
- Indeed, some lawmakers have introduced legislation that experts say could further expand the PBGC's deficit. A bill introduced last month by Rep. Earl Pomeroy, D-N.D., and others would allow employers to reduce contributions to pension funds.
- Congress' reluctance to increase costs to employers has led to growing shortfalls. The PBGC has been in the red for 29 of its 35 years of operation. The fund still has plenty of money to operate now. But unless pension funds adopt less risky investment strategies or Congress raises insurance premiums, it eventually will run out of money to pay the pensioners it supports.
- That would force Congress to choose between bailing out the fund and depriving more than a million people, many of them elderly, of a key income source. Experts say an eventual bailout is almost inevitable.
- "The only loser in all this is the taxpayer," said Douglas Elliott, a fellow at the Brookings Institution who has studied pension insurance for years.
p.s. you might be wondering what happened to Mr. Millard - he who came from Lehman Brothers (whatever happened to those guys?) and decided to go "all in" on stocks summer 2008 declaring there was "no extra risk".
- Earlier this year, a PBGC inspector general report alleged that former director Charles Millard had improper contacts with several Wall Street firms that were up for multimillion-dollar contracts to manage PBGC assets.
- Millard invoked the Fifth Amendment when asked about allegations by a Senate panel in May.
Oh.
By Trader Mark
http://www.fundmymutualfund.com
Mark is a self taught private investor who operates the website Fund My Mutual Fund (http://www.fundmymutualfund.com); a daily mix of market, economic, and stock specific commentary.
See our story as told in Barron's Magazine [A New Kind of Fund Manager] (July 28, 2008)
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