Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan
Gold Price Back Below $1,800! - 10th Sep 21
The Inflation/Deflation debate wears on… - 10th Sep 21
Silver Price seen tracking Copper prices higher - 10th Sep 21
The Pitfalls of Not Using a Solicitor for Your Divorce - 10th Sep 21
Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
This Boom-Bust Cycle in US Home Ownership Should Give Home Shoppers Pause - 9th Sep 21
Stock Market September Smackdown Coming Next? - 9th Sep 21 - Monica_Kingsley
Crazy Crypto Markets How to Buy Bitcoin, Litecoin for Half Market Price and Sell for TRIPLE! - 8th Sep 21
Sun Sea and Sand UK Holidays 2021, Scarborough in VR 180 3D! - 8th Sep 21
Bitcoin BTC Price Detailed Trend Forecast Into End 2021 - 8th Sep 21
Hyper Growth Stocks - This billionaire is now using one of our top strategies - 8th Sep 21
6 common trading mistakes to avoid at all costs - 8th Sep 21
US Dollar Upswing, S&P 500 and Nasdaq Outlook - 7th Sep 21
Dovish Assassins of the USD Index - 7th Sep 21
Weak August Payrolls: Why We Should Care - 7th Sep 21
A Mixed Stock Market - Still - 6th Sep 21
Energy Metals Build Momentum; Silver & Platinum May Follow - 6th Sep 21
What‘s Not to Love About Crypto Market Fireworks - 6th Sep 21
Surging US Home Prices and Gold – What’s the Link? - 6th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Pension Benefit Guaranty Corporation Defies Risk Suggesting Another Future Taxpayer Bailout

Companies / Credit Crisis 2008 Aug 28, 2008 - 07:40 AM GMT

By: Joe_Nicholson

Companies At the heart of every financial transaction is risk. With few exceptions, the only way to increase what you have using investments is to shoulder some risk. This can work, growing your money and creating much more than id you had not done a thing. And if it doesn't work, you could lose all of the money you invested or just a portion.


Even a grade school kid can understand that concept, albeit on a smaller scale, one akin to “if I give you my ball, will I get it back or will you lose it.” For the rest of their lives, they will always weigh those sorts of balances hovering between what could have happened had they taken the risk and what should have happened because they did not. Some of these kids grow up to be investors.

Investors should always have a clear understanding of what risk is and how to project its potential worth. Some do it better than others; some simply employ age-old techniques such as value investing or use extensive research and analytical tools to help offset what would otherwise be the gut instinct that almost all investors wished they had.

The best investors spurn these very human emotional impulses. These are not the ones who buy when the markets are on the way up and sell when they are on the way down but instead weigh the possibilities independent of what their gut suggests. They know that gut instinct is wholly unreliable over the long-term because risks can and almost always shift. Seasoned investors know this. Speculators thrive on it. Most folks get caught up in it and attempt to determine risks often with limited amounts of (much-needed) information.

Some investors should not take risks. By taking the low road so to speak and assuming no more risk than is absolutely necessary to protect the underlying investments and those they invest for, they are performing the job with fiduciary responsibility. But when they do not, no matter what they assume they can achieve of the skills they think they possess, they forget that risk exists.

Such is the new policy being hoisted on Congress by the PBGC. This new policy offered to Congress in lieu of a potential $14 billion deficit is expected to close that gap between solvency and trouble.

The previous investment policy invested in Treasuries and high yielding corporate bond. This now considered too conservative and over the long haul, will not close the gap. Only it wasn't the old policy that was at fault.

If you are not aware how the PBGC operates, here is a brief explanation. It was created by the government just like Freddie Mac and Fannie Mae, and like those troubled companies it is not inherently a government run entity. The Pension Benefit Guaranty Corporation guarantees the promise of a pension made by certain companies to their workers mostly in the hope of garnering their long-term loyalty. Currently, pensions are only offered to about 21% of the workforce and by their nature, lack the portability that the wildly popular defined contribution plans have.

But as they became less profitable to these companies, because the stocks that the pension may have invested in have not performed as projected - that last phrase is key and worth remembering - they have begun to jettison these plans in a variety of ways. Sales, mergers, etc. have left pensioners and those who had been counting on these plans out in the cold as freezes, closures or defaults have increased over the last ten-years.

The PBGC essentially guarantees those pensions by collecting insurance premiums from companies who offer them. The $14 billion deficit is the direct result of these companies under-funding those promises, defaulting on their premiums and in the end, just turning over the poorly managed pension to the insurer.

Now the PBGC sees the way out using the stock market. If it “performs as projected” the deficit could be wiped out in a number of years, or as the new policy suggests, 20 years.

Ultimately, the goal is increase the profits of the portfolio without losing any money while doing so. Charles Millard, PBGC director is a former investment banker and Bush appointee who believes that turning to the stock market to erase the deficit between obligations the PBGC knows it has or will have in the future is sound management.

Do they really believe that they can gamble their way out of this mess? The author of the old plan, Zvi Bodie, a finance professor at Boston University doesn't think so. Nor does he believe that the projections take into consideration the short-term movements of the stock market and the often sudden need to finance pensions that have defaulted.

Mr. Millard claims that too conservative of an investment model will ultimately put the taxpayer at risk. But there is growing concern that they are already at risk. While acknowledging that the plan to increase profits is not necessarily a bad one, the General Accounting Office or GAO, thinks that this is the wrong investor shouldering the risk.

One of the main concerns that the GAO has lies in the projections made by the risk assessment firm hired by the PBGC. In the new policy, the belief that if something hasn't happened, it will not likely happen in the future does not sound as responsible as it should be. According to CFO.com, “ The agency's investment targets now include 40 percent fixed-income, 39 percent equities, 10 percent real estate and private equity, 6 percent alternative equities, and 5 percent alternative fixed-income.”

Is this head-in-the-sand logic or perhaps just a way to shelve the problem for the next administration? It could be a response to the sudden swings in the number of fully funded pensions from $60 billion surplus just a year ago to a $110 billion shortfall this past July. While those companies react to these problems by shifting their investments from equities to much more conservative instruments to make up for those losses, Mr. Millard is taking his company in the opposite direction. While those of us who do not have a pension seem to care less, it will be all of us who eventually bear the burden should the new policy at the PBGC fail. Is there yet another bailout on the horizon?

By Paul Petillo
Managing Editor
http://bluecollardollar.com

Paul Petillo is the Managing Editor of the http://bluecollardollar.com and the author of several books on personal finance including "Building Wealth in a Paycheck-to-Paycheck World" (McGraw-Hill 2004) and "Investing for the Utterly Confused (McGraw-Hill 2007). He can be reached for comment via: editor@bluecollardollar.com

Paul Petillo Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in