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Genius! Federal Pension Guarantor Switched From Bonds To Risky Stocks Last Year
In the highly competitive race for the title of "Stupidest Recent Financial Decision Made By A Government Official", this one's got to be a strong contender....
The Boston Globe reports:
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.
Who was responsible for the switch? Meet Charles Millard, a former Lehman exec (great pedigree there) who ran the agency from 2007 until the end of the Bush administration. Millard told the Globe: "The new investment policy is not riskier than the old one," and added that a riskier strategy was justified to give the agency a chance to raise enough money to eliminate its deficit.
It appears to have had the opposite effect though. The agency's stock-related investments were down 23 percent since the end of last September. But as the Globe notes, that was before the major downturn in the market triggered by the financial crisis. So the losses now are probably considerably higher. "This could be huge," Zvi Bodie, a finance professor who in 2002 advised the agency to rely on bonds, told the Globe. "This has the potential to be another several hundred billion dollars."
And those losses, of course, are coming at the worst possible time -- when many private pension plans are themselves suffering losses, so the need for a robust and healthy PBGC is greatest. For instance, if the auto companies go bust, the responsibility for enormous pension plans would fall on the PBGC.
That's the whole point of the agency. Mark Ruloff, who works for an independent monitor of pension plans, told the Globe that the agency directors "fail to realize that they are an insurer of pension plans and therefore should be investing differently than the risk their participants are taking." Ruloff added: "The worst case scenario is coming to pass."
It's not like no one warned the PBGC against this approach. In addition to Bodie's 2002 advice, Peter Orszag, the respected numbers geek who runs the White House Office of Management and Budget, flagged the problem last year, when he headed the Congressional Budget Office. Orszag warned that the PBGC was "investing a greater share of its assets in risky securities," making it "more likely to experience a decline in the value of its portfolio during an economic downturn the point at which it is most likely to have to assume responsibility for a larger number of underfunded pension plans."
And the Government Accountability Office concluded that the strategy "will likely carry more risk," which the agency wasn't acknowledging.
For his part, Millard appears sanguine. Asked by the Globe whether, given the market's decline, the strategy was a mistake, he replied: "Ask me in 20 years. The question is whether policymakers will have the fortitude to stick with it."
Josh
Zachary
I'd love to see the money trail to see who profitted from this move. More looting by the Bush Admin and the Banksters.
John
March 30, 2009 11:57 AM | Reply | Permalink
So, you think possibly someone "earned" a commission from this criminal enterprise? Good point. Now, let's see just how big the new Justice Department's balls are.
March 30, 2009 12:25 PM | Reply | Permalink
Some one earned a commission, and someone was able to unload their stocks when tens of billions of dollars was dumped into a declining market.
This is really brutal.
John
March 30, 2009 1:35 PM | Reply | Permalink
I think both points are perceptive, not just about bonuses but about someone close to Cheney (or Bush) on the cui bono side of that exchange. Both in terms of dumping stocks they knew were potentially toxic, and in shoring up some of their marginal stocks that should have been subject to the market forces.
Seriously, just what does that stock portfolio look like? It would be very revealing to see where the lion's share went. And from whom those stocks were purchased directly.
March 31, 2009 3:30 PM | Reply | Permalink
Remember, folks...
The Republican AND Democrat run congresses have NEVER passed a law requiring a standardized accounting system... nor a standardized auditing system....
Anyone out there ever try to run a business without either of these in place?
Of course, the national interest never has really been a priority with mobsters...
Just another minor inconvenience as we continue to make sure one of the two mobs stay in power... IMHO
March 30, 2009 12:13 PM | Reply | Permalink
What mob would you place in power instead of the current leading two? My theory is that when a $billion is waved in anyone's face there is little that that person won't do to grab it. I have never had the pleasure of testing my theory, so it just remains a theory.
March 30, 2009 12:27 PM | Reply | Permalink
I've got a simpler explanation -- they were relying on that $64 Very Large to help artifically support the market prior to the November elections.
Shorter: its the PPT "operation" that's been half-jestingly mentioned every time the market does some crazy unexplained end-of-day reversal. I long thought it was fantasy, but now I'm not so sure.
March 30, 2009 12:44 PM | Reply | Permalink
No Republican should ever be allowed control of, or near really, any public money, unless we can afford to have that money, lost, stolen or gambled away. It is in their DNA to see any pot of money as theirs to use for whatever purposes they choose and damn the consequences. Look at the last eight years or 25 years for that matter, and show me where I am wrong?
March 30, 2009 1:27 PM | Reply | Permalink
Can someone tell me where Charles E.F. Millard is today? What has he been doing since he left PBGC?
March 30, 2009 1:36 PM | Reply | Permalink
Is there a chance for any of these clowns to be held criminally liable for these actions? Conspiracy? Criminal negligence? Depraved indifference to human life? Some other words that are used in scripts for "Law and Order"?
March 30, 2009 2:00 PM | Reply | Permalink
You're barking up the wrong tree here.
Since ERISA there's been an ongoing intellectual battle in the pension world as to what's the right way to manage pension assets: 1) allocation only to high grade bonds (as the cash flow comes in you apply it to zero out future liabilities [a process called defeasement], and 2) allocation across all asset classes (cash, stock, bonds) to get a total rate of return, up and down, which presumably will average out over time to some decent gain.
Although I personally think #1 is correct, #2 has been the more widely utilized methodology by a significant margin.
Add to this two facts:
a) Interest rates were so low for so long that #1 became a very difficult strategy to manage (and justify), and
b) By 2007 everyone around the pension biz knew that the PBGC was woefully underfunded for the tsunami of pension problems that were clearly visble on the horizon (Read: Ford, GM, etc, etc).
I think it's pretty fair to assume that Millard was just trying to get higher returns by moving more aggressively to equities and alternatives, and it didn't work out for him. He was by no means alone in this mistake -- #2 style pension funds got crushed last year.
March 30, 2009 2:08 PM | Reply | Permalink
Makes sense. Except that the stock decline last year was pretty rpedictable. It was clear that the economy was going down, and that the housing bubble was going to explode, and that the market was going to tank. Perhaps not to the degree that it did (though I was pretty gloomy about it).
I'm no expert, but I read enough to get my retirement funds largely out of the market into bonds in early 2008.
Perhaps it's only the Dirty Fucking Hippies who read Liberal Blogs with a financial bent (atrios, CalculatedRisk, Delong, Krugman, etc) who weren't buying the CNBC/MSM/Serious Economists bullshit. Well... them and John Paulson. ;)
John
March 30, 2009 2:19 PM | Reply | Permalink
I suspect it had to do with propping up the market before the election, but it's not like either theory can be proven at this point. Usually someone is dub enough to put it in an e-mail.
I would challenge the idea that it was predictable the market was going down. It was widely predicted, true, but those same people have probably had many wrong predictions. It's just not that predictable. That supports the notion is was just a strategy that didn't work out.
On the other hand, is it so hard to believe Bush appointees would screw up to help the Republican Party?
March 30, 2009 2:35 PM | Reply | Permalink
I think by early 2008, it was very predictable that the market was going down. It already was down, and the only thing propping it up from total collapse was the "Want To Believe" crowd that causes small upswings through each long period of downward trending. We still have those "Want To Believe" folks now, which is the only reason the market is down around 3000.
John
March 30, 2009 3:12 PM | Reply | Permalink
Thank you, Boston Globe! I'm very fearful for the day when our newspapers disappear and these scandals never see the light of day.
March 30, 2009 2:18 PM | Reply | Permalink
My questions concern whether the markets were being manipulated by these big purchases.
What was traded?
What else was going on around the time of the trades?
This was during an election year. Were the trades meant to try and influence the election? or the electorate?
Yes, there's a problem with losses. But what was the PURPOSE of the trades?
March 30, 2009 2:19 PM | Reply | Permalink
TheraP, I really think it may be as simple as John and Hoppy have suggested in the early comments to this post.
Your hints that it was to protect McCain's chances certainly might have been a facet they added to their pernicious construct, but when "they" saw the writing on the wall starting in 2006, "they" set to work assuring their own benefit.
The book-cookers really hit their stride with this one. Unfortunately for them, money is measured in empirical terms, and they made deals which can be recounted retrospectively, even if they couldn't be counted while the books were cooking.
Math "errors", whether contrived or accidental, always show up when an honest auditor is auditing.
March 31, 2009 3:43 PM | Reply | Permalink
Remember, they wanted to work the same magic with Social Security.
March 30, 2009 2:53 PM | Reply | Permalink
Heckuva job!
We're casting the Medal of Freedom right now!
March 30, 2009 2:55 PM | Reply | Permalink
Heckuvajob Charlie?
There's a nickname that might stick.
Deja-vu all over again.
March 31, 2009 3:46 PM | Reply | Permalink
Competence? We don’t need no stinking competence. We are the Bush administration!
March 30, 2009 3:40 PM | Reply | Permalink
I can save the fund! I got a hunch on a horse called Criminally Irresponsible Bastard in the 4th at Hialeah! Bet it all!
March 30, 2009 3:42 PM | Reply | Permalink
when you consider the timing of these events, the timing of the changes in bankruptcy law that, among other things (like making it harder for individuals declaring bankruptcy to write off their debts), essentially made it impossible to dismiss CDS contracts through the bankruptcy process, and the fact of bush's renewed push to put the future of social security fully into the stock market (and considering the hard right have wanted to destroy--not reform but destroy--SS since its inception), and it really does look more and more to me like the economic crisis may actually be the outcome of a deliberate plan to bankrupt the public sector to prevent any democratic administration from making progress on an expansive public policy agenda.
remember, greenspan actually admitted in interviews after leaving his post, that the administration had embraced a deliberate policy of burning through the budget surplus out of fear that large surpluses would be used to give the federal government too much influence in the markets (no lie--this was one explanation greenspan offered). so the priorities these guys have had all along are quite clear.
March 30, 2009 4:03 PM | Reply | Permalink
"If money isn’t loosened up, this sucker could go down." --George W. Bush, September 2007
The movement of assets by the PBGC was just another half-assed maneuver by the Bush administration to try to hold off the implosion of their bad economic decisions until the next guy got in office. Prop the stock market, screw the taxpayer.
Come to think of it, there have been a lot of supposedly free market commentators saying the same thing over the past 6 months.
March 30, 2009 4:15 PM | Reply | Permalink
Sorry, but that should be September 2008.
March 30, 2009 5:14 PM | Reply | Permalink
In and of itself, such a shift isn't necessarily a bad move. There are basically two schools of thought when it comes to managing big endowments such as the fund. There is the conservative method, with high levels of liquidity and low levels of risk. Then there's what's called the Yale method, which takes a more active approach. Schools such as Yale and Harvard were able to grow their endowments many times over by investing in securities and other higher-risk vehicles. And despite seeing a big chunk of its endowment evaporate over the last year, Yale in particular remains in strong shape. So I can see why an investment manager would want to shift the nature of the pension fund. The issues are timing and the competence of the manager. I wonder if the Bush administration knew the GOP would lose the White House, so this was their chance to make the change, foreseeing any drop in the market as small and temporary. Millard's comment about seeing the result in 20 years sounds a lot like Yale's David Swensen. But the Yale endowment could sustain a 30 percent drop because of 20 years of remarkable returns. Does the pension fund have the same luxury? There's the rub. I get the feeling Millard is like so many other Bush appointees: incompetent.
March 30, 2009 5:19 PM | Reply | Permalink
FYI:
I agree that ever letting Republicans manage public funds is usually a mistake. However:
According to the article Millard raised the PBGC's investment allocation in stocks, real estate, int'l & hedge funds by 35%.
35% of $65B = $22.75B
The total capitalization of the stock market in 2007 was ~ $55 Trillion.
Therefore $22.75B would've equalled .04% of the market's total cap, or in other words, a drop in the bucket.
Millard may have had some bad ideas, bad strategy, or nefarious reasons for changing the allocation, but $22.75B isn't remotely enough to "prop up the stock market."
Just sayin'...
March 30, 2009 5:23 PM | Reply | Permalink
Well, I just find it odd how virtually every economic problem we're facing now seems to lead predictably and inevitably to a raid on the public coffers, by one route or another. I mean, really regardless of what path Obama chooses, massive public expenditures are unavoidable in every case.
Obviously, in this case, the federal government is still on the hook for its pension obligations whether the fund stays in the black or not, so its obvious how a sudden failure of the pension fund leads to additional public expenditures.
The AIG matter is more subtle, but it basically boils down to this: If the government didn't bail out AIG, many existing state and municipal bonds would become worthless and the ability for states and municipalities to issue bonds in the future would be severely undermined. Also, if AIG failed outright and couldn't meet its swap contract obligations, triggering changes in the ratings of many securitized debt instruments previously rated AAA, deposit banks all over the place would instantly be considered under-capitalized, and all sorts of other chain reactions would follow, forcing the FDIC to intervene and make good on their deposit insurance, which would quickly make the FDIC go bust and pretty much destroy the credibility of the FDIC guarantee, which in turn, could cause runs on the banks.
It's like a bunch of evil asshats got together and formulated a plan to systematically turn every government mechanism meant to protect the overall well-being and stability of the markets or to provide other benefits to the public into liabilities so they could then turn around and blame the existence of those mechanisms for the collapse, never mind that the mechanisms only became liabilities because they were purposefully subverted.
March 30, 2009 5:47 PM | Reply | Permalink
My handle says it all...
Thieves
March 30, 2009 6:01 PM | Reply | Permalink
When somebody loses, somebody wins? This investment switch was no accident of bad timing, but a calculated move.
So, who are the insiders who won?
You don't have to be a blind conservative not to see it, just an ignorant one to deny it.
March 31, 2009 9:41 AM | Reply | Permalink
100% chance that this was a conspiracy to slow the crash as pals tried to liquidate.
March 31, 2009 12:08 PM | Reply | Permalink
You who blame Bush for buying stocks could ask Congress for an audit financial report from PBGC to back up your assumptions. It may be that diversifying PBGC assets by buying fewer domestic stocks and more foreign stocks and assets other than safe, zero-return Treasuries, will, over the longterm, actuarial requirements of paying off liabilities to retirees, make money for PBGC and avoid a bailout. If this is the market bottom, as Obama's team says in their budget, and their discount rate for the market in the future is warranted, PBGC may balance its budget. As long as auto industry and municipality liabilities are not too large, and then $6.5b stock market loss will be insignificant.
You have to understand that PGBC is established by Congress like Fannie Mae not with taxpayer money assets but charged with making money (by investing assets) as well as insuring against risk, and often these goals conflict and cannot be resolved by more Congressional pressure. A lot of the assets come when failed pension plans are taken over, and these employer plans might be funded with stock; selling that might depress the market when it might be held to match later withdrawals. Nevertheless, domestic stock assets of PBGC have been reduced from 60 in the 1990s to 20 if the plan were implemented, which it has not been fully.
One alternative would be to rely on increased assessments for employers. But then the system would collapse actuarily--municipalities such as Vallejo signed pension contracts with police, firefighters, and teachers, that would require now 50% of salary go to pension contributions if enforced, and so the cities seek bankruptcy to shed pension liabilities before a taxpayer revolt.
The problem like Fannie Mae is moral hazard. Both are implicitly backed by full faith and credit of the US taxpayer. Defined benefit pensions are a bedrock of the hard-working middle class, manufacturing and public service. Failure to bailout the system risks great social unrest. But the systems cannot eliminate risk and are actuarily unsound without investment of assets. The point is that there is a difference between results needed in the short term and long term.
Another alternative is to consider fixing the system. If you think Mr Obama could run it better, then nationalize it like Social Security, do away with 401Ks and require defined benefits for everyone. Then we could have a system like Hungary's, a free lunch for everyone with its 13th month payments from the Chinese. If not, consider fully privatizing pension insurance, get PBGC out of the business just like Fannie Mae and Freddie Mac cut up so not too big to fail and sold off. Or prevent employers and employees from negotiating pension plans that are not fiscally sustainable, let them rely on 201Ks invested in Treasuries.
In any case, not Bush's fault. Any political decisions should be informed by wise economic thinking and that has been sorely lacking by everyone, especially the economists, Congress, and media.
April 1, 2009 10:11 AM | Reply | Permalink