Today I am reviewing some of the journalism surrounding pensions and public retirement accounts. We know they are used for fodder and we know that there are no attempts to protect and recover all of the people's wealth lost to financial fraud from all of our savings. NPR likes to call it a failure of Americans to save enough for retirement as they laugh at this massive fraud of public wealth with no justice. Make no mistake.......baby boomers saved enough/paid enough taxes into social programs, and had equity in homes before the crash. It is the effects on the economy of this massive fraud that is draining all resources and IT IS DAMAGES FROM FRAUD THAT MUST COME BACK TO THE PEOPLE! They are draining all public money to the top earners through deliberate public policy investments like pension funds supporting urban projects.....pensions as 401Ks........pensions attached to bad banks and this is all malfeasance and conspiracy to defraud. We all knew the crash was coming in 2008 and we know it is coming again soon. WE DO NOT WANT TO HEAR.....HOW COULD WE KNOW....IT WAS ALL A SECRET!
Corporate neo-liberals in Maryland are moving public pensions into market-based programs like 401Ks even as we all know that the system is criminal....if no one is able or willing to invest in the stock market....they have to throw more and more public retirement in to support it. Look at Medicare and Medicaid Trusts heading into these private health insurance systems and Social Security as individual savings all pushed by neo-liberals.
Almost Two-Thirds of Your 401(k) Will Wind Up in Wall Street’s Pockets Posted on May 23, 2013 by mikethemadbiologist
We’ve discussed many times before how the 401(k) retirement system is a scam, but, if you don’t believe me, how about some basic arithmetic for ya–it’s the ‘management fees’ that fleece you (boldface mine):
Pull up a compounding calculator on line. Take an account with a $100,000 balance and compound it at 7 percent for 50 years. That gives you a return of $3,278,041.36. Now change the calculation to a 5 percent return (reduced by the 2 percent annual fee) for the same $100,000 over the same 50 years. That delivers a return of $1,211,938.32. That’s a difference of $2,066,103.04 – the same 63 percent reduction in value that Smith’s example showed.
While passively managed funds such as index funds (e.g., Vanguard) charge much lower fees, many employees don’t have that option (I don’t), and are placed into high fee accounts. As always, those who need the most help in retirement–less sophisticated investors–are more likely to get suckered into high fee plans.
John Bogle, founder of the Vanguard Group, describes the system like so (boldface mine):
What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact. There’s no getting around it. The fact that we don’t look at it— too bad for us….
Well, you have to rely on somebody to get out a compound interest table and look at the impact over an investment lifetime. Do you really want to invest in a system where you put up 100 percent of the capital, you the mutual fund shareholder, you take 100 percent of the risk and you get 30 percent of the return?
I really don’t. I can’t help but think how much better off most of us would have been if we had simply been allowed to supplement our Social Security retirement accounts–especially those, who by being born at the wrong time, ‘mistimed’ the stock market.
And the congregation responds: this is yet another reason why we can’t have nice things.
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This is a good look at the policy Obama and neo-liberals are pushing and it is not good for the 99%. Nowhere will you hear that the purpose of this private IRA policy that has businesses paying into a retirement account with workers contributions added (IRA) is to create a privatized Social Security system that replaces payroll taxes sent to the Trust funds of Social Security and Medicare. This is a long-standing republican policy that is designed to end these social programs and place all retirement money into the stock market.
THAT IS WHAT THIS POLICY IS DESIGNED TO DO. REMEMBER, NEO-LIBERALS WANT AS MUCH AS REPUBLICANS TO END ALL WAR ON POVERTY AND NEW DEAL PROGRAMS. ENDING MEDICARE/MEDICAID BY THROWING THEM INTO HEALTH INSURANCE SYSTEMS CREATED IN EACH STATE WILL MIRROR ENDING SOCIAL SECURITY BY HAVING THESE PRIVATE RETIREMENT FUNDS WITH CONTRIBUTIONS JUST LIKE SOCIAL SECURITY MINUS THE TRUST THAT KEEPS THESE FUNDS OUT OF THE MARKET!
They are making what is privatization of retirement savings sound as if it is a socialist plot just as is being done in health care.
STOP BELIEVING THEM!!!
Ask FactCheck
No Government 401(k) Takeover
A: No. Obama endorses a proposal that would require businesses without retirement plans to establish private IRAs for their employees and deposit a percentage of wages into the accounts. Employees could opt out.
FULL QUESTION
I have started seeing postings on Facebook and other web sites referring to “recent hearings” sponsored by the Labor Department and Treasury Department. The hearings are being referred to as “the beginning of the Obama administration’s effort to nationalize the nation’s pension system and to eliminate private retirement accounts…” The whole thing sounds bogus, and I have been unable to find anything to support the claim other than those sites making the claim.
One site claiming this, National Seniors Council, appears to be basing the entire claim on the testimony of some of the groups and individuals, which seems weak at best.
What are the real facts?
FULL ANSWER
Our inbox was recently flooded by emails referring to this 2010 article from the National Seniors Council, titled “Obama Begins Push for New National Retirement System.” The NSC calls itself a “national conservative senior citizens organization.” It advocates for limited government and against President Obama, claiming that the administration has a “big-government anti-seniors agenda” and that “Social Security and Medicare are both on the chopping block in order to pay for the liberals’ welfare programs and bailouts.” It’s also a committee of the National Grassroots Advocacy, a 501(c)4 founded in 2009 that advocates for the repeal of the president’s health care law.
The group drew attention to its two-year-old article in a “Director’s report” posted in November after the election. It stated: “In the coming months and years there will be huge battles over ObamaCare, Social Security, and even Obama’s dream of establishing a new ‘national retirement system.’ ” However, the group’s 2010 article is an opinion piece full of misleading information and misguided speculation. The administration hasn’t proposed any “national retirement system.”
The article focuses on a September 2010 joint hearing of the Department of Labor and the Treasury. NSC National Director Robert Crone acknowledges in the article that the hearing “was set up to explore why Americans are not saving as much for their retirement as they could,” but he goes on to claim, without any evidence, that “it is clear that this is the first step towards a government takeover.” The article also mentions the Automatic IRA Act. Crone claims that if the bill passed, “the government will be just one step away from being able to confiscate all these retirement accounts.” He goes on to say that the government would ultimately “redistribute the wealth of America’s older citizens.” But the Automatic IRA legislation doesn’t call for any sort of “government takeover” of retirement accounts, nor is there evidence of a sinister plan to redistribute seniors’ retirement dollars.
Instead, the legislation is a long-standing proposal that was originally developed in 2006 by David C. John, senior research fellow in retirement security and financial institutions at the conservative Heritage Foundation, and J. Mark Iwry, then of the Brookings Institution and now with the Treasury Department. The bill aims to expand retirement savings among Americans. It would require businesses that don’t have retirement plans to establish private, employer-sponsored IRA plans and automatically deposit contributions from employees, unless employees opt out.
John told us that it “would not make it any easier for a government to confiscate retirement savings.” He said that currently only about half of the U.S. workforce is able to contribute to retirement funds with payroll deductions. The bill would increase that to about 90 percent.
As for the 2010 hearing on retirement options, the NSC focused on one speaker, Rebecca Davis, of a consumer advocacy group, who called for additional government assistance in retirement funding for lower-income workers. But Iwry, now senior advisor to the Secretary of the Treasury, opened the hearing by stating that the meeting was “in the context of the department’s support for the private pension system.”
Readers also have sent us a World Net Daily article by Jerome Corsi titled “Now Obama Wants your 401(k).” Corsi was the author of a 2008 book, “The Obama Nation,” which was critical of then-presidential candidate Obama and, we found in fact-checking it, “a mishmash of unsupported conjecture, half-truths, logical fallacies and outright falsehoods.” Corsi’s article for the WND claims that Obama, with help from the Departments of Treasury and Labor, is “eyeing the opportunity to redistribute private retirement savings to less affluent Americans and to force the retirement savings out of the private market and into government-controlled programs investing in government-issued debt.” Corsi cites the same things the NSC does — the 2010 joint hearing and the Automatic IRA bill.
Automatic IRA
In the President’s Budget for Fiscal Year 2013 (page 147), the administration endorses an Automatic IRA proposal that would require businesses without retirement plans to establish employer-sponsored IRA plans. In the House, Democratic Rep. Richard Neal of Massachusetts introduced the most recent version of the bill on Feb. 16, 2012. No action has been taken on the bill since March, when it was referred to the House Subcommittee on Health, Employment, Labor, and Pensions. The bill would require employers to automatically enroll employees in an IRA by directly depositing 3 percent of wages into the fund. Employees may opt out of the IRA at any time, and the program would be strictly voluntary. Businesses with 10 or fewer workers would be exempt.
Corresponding legislation in the Senate, the Automatic IRA Act of 2011, was introduced in September 2011 by Democratic Sens. John Kerry and Jeff Bingaman. It was promptly referred to committee, and no action has been taken since. Neal and Bingaman had previously introduced the same legislation in 2010. The legislation was also introduced back in 2006 and 2007. None of those bills has come to a vote — they all have died in committee.
The Labor Department’s Phyllis C. Borzi, an assistant secretary for the Employee Benefits Security Administration, testified on the latest legislation before the Senate Special Committee on Aging on March 7, 2012.
Phyllis C. Borzi, March 7, 2012: Under the budget proposal, the Administration projects that the new system of automatic workplace pensions will expand access to tens of millions of workers who currently lack pensions. Coverage will be expanded by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA account compatible with existing direct-deposit payroll systems. Employees would be permitted to opt-out if they choose. Employers with ten or fewer employees and employers in existence for less than two years would be exempt. Employers with fewer than 100 employees who set up these arrangements would be eligible for temporary business tax credits.
The Heritage Foundation’s John, who developed the original Automatic IRA proposal, told us that the Automatic IRAs “would be invested using private sector providers chosen by the employer.” As for government’s role, John said it would be “limited to requiring businesses with more than 10 employees (below that would be exempt) that don’t offer their employees any other type of pension or retirement savings account to offer their employees [the] opportunity to save for retirement with an Automatic IRA. It would also provide guidance about the types of investments allowed and help employers to connect with a private sector investment manager.”
There’s also the possibility that Treasury bonds could be used initially for “first-time savers.”
John, Dec. 4, 2012: There could be an R-Bond account at Treasury for first-time savers, but that money would be rolled into private sector accounts once the individual accounts reached a certain size. The R-Bond is designed to enable small savers to build up a balance up to $5,000 without any administrative fees. It has the support of many private financials, and private sector managers could substitute a private sector alternative if they wished.
On April 17, 2012, John testified on the same topic before the House Ways and Means Committee. He approved of the legislation, saying that it was “not a partisan or ideological proposal.”
John, April 17, 2012: This is not a partisan or ideological proposal. In 2008, the Automatic IRA won the endorsement of both the Obama and McCain campaigns, and it has continued to enjoy support from all sides of the ideological spectrum. Earlier this year, Rep. Richard Neal of the committee introduced HR 4049, the Automatic IRA Act of 2012. While the Heritage Foundation as a 501(C)3 nonprofit does not and cannot endorse any legislation, let me say that the policy contained in his bill would significantly improve our retirement savings system.
John went on to say that the proposal wouldn’t result in large costs to businesses. “For employers, offering an Automatic IRA would involve little or no cost or regulatory burden. The employer would not be maintaining a retirement plan, and employer contributions would be neither required nor permitted.”
According to John’s testimony, tax credits would cover any costs to employers. The White House Budget for 2013 says employers could receive tax credits of up to $250 per year for six years to cover costs, and that the administration’s budget would double the current tax credit for small employers offering retirement plans for the next four years (from $500 to $1,000 per year).
Labor Department Hearings
The 2010 National Seniors Council article also focuses on a joint hearing of the Departments of Treasury and Labor that, according to the group, “marked the beginning of the Obama Administration’s effort to nationalize the nation’s pension system and to eliminate private retirement accounts including IRA’s and 401k plans.”
But the hearing, which took place September 14 and 15, 2010, didn’t focus on eliminating private retirement accounts. In fact, Iwry, senior advisor to the secretary of the Treasury and deputy assistant Treasury secretary for retirement and health policy, said at the hearing that it was “in the context of the department’s support for the private pension system and especially for employer sponsored retirement plans, both defined benefit and defined contribution.” Its purpose was to discuss lifetime retirement payment options for seniors.
The various speakers included many from private companies and investment firms. But the NSC focuses on the testimony of one person — Rebecca Davis of the Pension Rights Center, a consumer advocacy group. Davis called for a “government sponsored program” to help low-income individuals buy annuities.
Rebecca Davis, Sept. 14, 2010: Private annuities are problematic, primarily because of their high cost and the negligible monthly benefits that small account balances can purchase. For these reasons, an annuity option within a 401k for participants with low balances would not be a realistic choice for most low and moderate income participants. Yet these are the individuals most in need of lifetime income in retirement. Therefore, we suggest that serious consideration be given to the concept of establishing a government sponsored program, ideally administered by the [Pension Benefit Guarantee Corporation] where participants with low account balances could purchase low cost annuities.
But that’s simply Davis’ opinion, offered among many in two days of hearings. Iwry made clear that the hearing “does not reflect any intention to require a purchase of annuities or any other particular investment.” He said the discussion was about choices. “We’re here to consider whether and how we might increase people’s choices, not limit them.”
John, of the Heritage Foundation, confirmed that the hearing “focused totally on products offered through the private sector.” We asked if he had seen any other effort by the Obama administration to create a “national retirement system” that could lead to the government confiscating accounts, as the National Seniors Council claims. John responded: “I have seen no indication that this is an Obama administration goal.”
– Jesse DuBois
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We know that pension funds were used in 2007 as fodder in holding up big banks long enough to make billions more in transaction profits before the crash and now banks like Bank of America and Citigroup ....the zombie banks are filled with pension investments and this is the main reason 1/2 of pension value was lost. These pensions are still there as these banks that should have gone to bankruptcy pretend to be on the mend. PIMCO and pension fund management corporations do not appear to be working for their clients. As we see in this article now that big banks are buying smaller banks and choosing not to lend to average citizens pension funds are being moved in. In Baltimore the state and city pension funds finance all the growth downtown that has taxpayers and now retirement funds footing risky development in cities that may not be the luxury global cities planners set their sights. When the next economic crash comes....and it will....who will own the debt on all this manufactured luxury? Taxpayers and pension funds. Pension funds building toll roads......with pensioners paying the tolls to their own pension fund profit? REALLY?
INVESTING IN BUILDING DOWNTOWN BALTIMORE IN THE MIDST OF GREAT ECONOMIC UNCERTAINTY.......IS THAT GOOD FOR LONG-TERM RETIREMENT FUNDS? ARE YOU CRAZY?
Friday, March 8, 2013
Are Pension Funds The New Banks?
Sophie Baker, Mark Cobley and Mike Foster of Dow Jones Financial News report, Pension funds are the new banks:
Steven Daniels, chief investment officer at Tesco Pension Investment – the principal investment manager for the supermarket giant’s £7bn UK staff pension scheme – told delegates at the National Association of Pension Funds conference yesterday: “Pension funds are the new banks. Everyone sees us as long-term lenders, and that is great. I’m happy to participate. We are the new banks, good banks potentially. But we are not mugs.”
His comments echo those of Martin Mannion, chairman of the NAPF’s investment council and director of finance and risk for GlaxoSmithKline’s £11bn UK pension funds, who warned on Wednesday that governments should not treat pension schemes as “a kind of slush fund that can be dipped into when the going gets tough”.
As long-term investors, pension funds are increasingly being seen as an alternative financing option as banks, under balance sheet pressure, continue to deleverage and decrease lending. The UK government has been urging pension schemes to step in to fund initiatives, such as infrastructure projects, where public investment has dried up.
But pension funds point out that the lack of suitable investment and financing vehicles is limiting their activity.
James Duberly, director of pensions investments at the BBC Pensions Trust, said: “It’s a brilliant idea. It works to the advantage of pension schemes with a long-term horizons.” But he told delegates that there was a shortage of sufficiently simple structures. The BBC has yet to make a big move.
Michelle McGregor Smith, chief executive of British Airways Pension Investment Management, is also interested in the idea, and said consultants had been pushing the concept. “The opportunity is there, but it is difficult to find the right vehicle,” she said.
Pension schemes are looking to diversify their holdings. According to an NAPF conference poll, 78% of defined-benefit scheme delegates confirmed they were moving away from equities.
Mike O’Brien, global head of JP Morgan Asset Management’s institutional client group, said: “There is a structural move away from equities within institutional portfolios worldwide. The next great rotation will be into bricks and mortar.”
He added that sovereign wealth funds were making a big move into direct investment in real estate and infrastructure. No doubt about it, the next great rotation is in bricks and mortar. As financial repression hits pension funds, heaping on liability risks, global pensions are moving assets into private equity, real estate and infrastructure, and some are worried they're taking on too much illiquidity risk at the wrong time.
Nonetheless, faced with historic low bond yields and volatile equity markets, pensions are moving more of their assets in bricks and mortar. In the UK, the government is letting public pension funds raise stakes in infrastructure:
The British government has made it easier for local authority pension schemes to invest in infrastructure by doubling the amount they can invest to up to 30 percent of their assets, paving the way potentially for billions of pounds of investment to be made in projects such as new roads and railways.
The National Association of Pension Funds (NAPF) said on Wednesday that from April local government pension funds will be able to raise the amount they can invest in key infrastructure projects from 15 percent to 30 percent of their assets under new rules set by the government's Department for Communities and Local Government.
Britain's local authority pension schemes had been lobbying the government for more leeway to invest in infrastructure, arguing that current rules were hampering their investment in the sector.
"Many local authority pension funds have told us that they are prevented from making the best decision on investments because of outdated rules which place limits on the amount that can be invested in infrastructure," Darren Philp, policy director at the NAPF, said in a statement.
A new Pensions Infrastructure Platform (PIP) has been launched as a way for pension funds to invest in capital projects with the backing of six large pension schemes, including the London Pension Fund Authority (LPFA), West Midlands Pension Fund and Strathclyde Pension Fund.
Volatile equity markets and rock-bottom interest rates have already caused a surge in new pension fund money going into transport and other major facility projects. It's about time the British government does something to help UK pensions invest in their crumbling infrastructure. Canadian pensioners already own a good chunk of Britain's infrastructure.
And it's not just British pensions that are looking to boost their investments in infrastructure. Dutch News reports, Pension asset manager APG to boost spending on infrastructure:
Asset manager APG, which runs the giant ABP pension fund and construction sector fund bfpBouw, is planning to increase its investment in infrastructure by some 50% over the ‘coming years’, the Financieele Dagblad reports on Tuesday.
The increase will take APG’s investment in building projects up to some €9bn, the FD quotes portfolio manager Jan-Willem Ruisbroek as saying.
‘Our clients want to invest up to 3% of their assets in this investment category. At the moment it is around 2%,’ he said.
This may seem like a small shift, but in absolute terms it means billions of euros extra to be spent on toll roads, wind farms, bridges and utilities, the FD said.
Nevertheless, the Netherlands will not profit enormously from this change in strategy. APG has a minimum investment of €100m and this means Dutch projects will be too small or will not meet other demands, the FD said. The Netherlands will not profit enormously from this change in strategy but APG is a global powerhouse and can invest in infrastructure assets across the world.
It's critical to understand why pensions are becoming the long-term financiers of these infrastructure projects and what risks these assets carry as pensions flood into this space. David Campbell of Citywire Wealth Manager reports, Yield hunters drive infrastructure debt boom:
Income seekers are flooding into the space vacated by deleveraging banks to replace traditional funding sources for infrastructure debt issuance.
The hunt for yield is tempting many institutional and fund investors to consider the asset class, while project managers are casting around for a replacement to reduced bank finance.
In the first six weeks of 2013 alone, around $900 million was raised for new fund issues, a third of the $2.7 billion raised during the whole of 2012, reports research house Prequin.
Funds being marketed are targeting a total raise of more than $8 billion, it said.
That has tempted new entrants to the market, such as JP Morgan and BlackRock, which both poached management teams and announced plans to launch funds in the second half of 2012, while more traditional mixed debt/equity infrastructure funds have flourished.
‘In the past, the infrastructure debt fund market has been a fairly niche part of the asset class, but it is growing in prominence,’ said Prequin.
‘This shift is partially being driven by incoming capital adequacy requirements for banks [Basel III], which are making new debt investments in illiquid infrastructure assets a more difficult prospect and are forcing banks out of the space.
‘This is creating a gap in the infrastructure debt market for non-traditional lenders that are attracted to the stable revenue streams and the long-term liability matching characteristics of infrastructure debt.’
Boe Pahari of AMP Capital Investors added: ‘Banks have a changed appetite in terms of leveraged ratios and tenders after the credit crunch. As a result, there is a space where pension funds can participate on the debt side, particularly in mezzanine [lending].’
The long-term fixed capital structures of infrastructure contracts make them particularly suitable for matching liabilities over potential multi-decade periods and a potential substitute for managers who might be wary of sovereign duration risk.
Infrastructure credit typically offers a premium of around 2.5% to 3% above Treasuries. Apart from credit risk, that prices in some fairly unusual contract risks that investors need to understand, however.
‘In an infrastructure loan, the issuer agrees to pay a floating rate coupon plus spread, based on a fixed principal repayment schedule,’ warned JP Morgan’s sector specialist team. ‘This amortisation schedule cannot be altered without the agreement of the lenders, nor can coupon payments be altered. However, the borrower has the option to repay the loan partially, or in its entirety, at par and would not have to pay any further coupons or compensate the lender for the loss of future spread payments.’
‘Although borrowers have this option, prepayment rates have historically been extremely low. Full prepayment rates for infrastructure, as defined by Standard & Poor’s and maintained on a bank consortia database, have been 1.6% in total in western Europe and virtually 0% in the UK since the database’s inception in the 1980s.’
The relative illiquidity of the market has also been one of the major factors deterring wider take-up of the asset class until now. Harder to quantify are political risks. For instance, in the UK, the government last year pledged to underwrite up to £40 billion in infrastructure credit.
While generating favourable headlines, Capital Economics said it would be prudent to take the commitments with a large pinch of salt.
‘Some of these measures are not quite as generous as they look,’ said the company’s chief UK economist Vicky Redwood. ‘For example, the money for the temporary lending programme will come out of departments’ existing budgets. And the investment in the railways will be funded by fare rises and efficiency savings rather than extra public sector money.
‘Meanwhile, take-up of the guarantees scheme may be limited due to the long list of conditions that companies have to fulfill. To qualify, projects have to be nationally significant, ready to start construction within a year, have equity finance already committed, be good value to the taxpayer and have acceptable credit quality.
‘Accordingly, it is questionable whether there are many projects that meet these criteria but cannot find full funding from the markets anyway.’ Apart from infrastructure, Sarah McFarlane of Reuters reports, Pension funds join forces to invest in farmland:
Major asset managers, cowed by the cost, the risk and the controversy involved in investing in farmland, are joining forces to increase investment in the historically under-capitalised sector.
In one example, Swiss fund of funds Adveq is in talks with three European pension funds, a private family and a Korean asset manager to buy farmland, in which it will act as the originator and lead investor.
Last year one of the world's largest institutional investors, TIAA-CREF, partnered with pension funds including British Colombia Investment Management Corporation and AP2 to create a $2 billion investment vehicle to buy farmland.
The new approach is likely to attract significant amounts of money from pension funds and other institutional investors into farmland, a sector in which they are reluctant to go it alone.
"We see agriculture and farmland as an asset class that's still being shaped," said Biff Ourso, director and portfolio manager of farmland investments at U.S. asset manager TIAA-CREF.
"It (working together) creates alignment for investors, economies of scale, cost-sharing and the transparency that a lot of investors want today," he added.
Adveq expects three institutional investor club deals to close in the next 12 months, each between $200 million and $400 million in size.
Investors are attracted into farmland by the rising global demand for food and a low correlation of agricultural land prices with traditional asset classes.
Pension funds have been cautious in how they approach the sector, however, because charities worldwide have voiced concern that large-scale land grabs by foreign investors could push up food prices, push farmers off the land and increase hunger.
"Agriculture is a very sensitive subject for two reasons, one is the fundamental human right for food in a food-insecure world, and secondly land is sacred to every country. To sell land in some societies is not acceptable," said independent consultant Mahendra Shah, member of a panel advising Adveq on agricultural investment strategy.
"My personal view is these pension funds are afraid to go into the field alone, and they want to spread their bet or their risk by having partners join them."
FLEDGLING ASSET CLASS
By working together, pension funds aim to create bespoke investment vehicles in a fledgling asset class that meet requirements for responsible investment in a sensitive area.
Research by Macquarie in 2012 showed institutional investment at a meagre $30 billion to $40 billion out of a total global value for farmland of $8.4 trillion.
Most farmland is owned by family farmers, giving institutional investors huge scope for buying up individual properties to form larger operations.
Institutional investors say that by working together they have a much better chance of being successful in terms of social responsibility as well as economic returns.
But some agricultural experts questioned the benefits.
"It's not absolutely clear to me that the simple fact that just a few of them come together is going to produce a better overall result," said David Hallam, director of trade and markets at the United Nations food agency (FAO).
"Unless the nature of the actual investments changes substantially, then I don't see the fact that a few companies get together would necessarily improve things," he added.
RICH SEAM
Institutional investors have generally focused on regions that are net exporters of food including North America, Australia, South America and Central and Eastern Europe.
"We like to be a in a situation where we're not taking food from the local market, where we are not taking food away from its natural value chain for speculation purposes, (where) on the contrary we contribute to increasing food production," said Berry Polmann, executive director at Adveq.
"While doing so, we don't want to undercut local farmers by producing more at lower costs, eroding their competitive power and wiping them out. That's one of the reasons why Africa for us is very difficult."
Adveq's group is looking for farmland assets in North America, Central and Eastern Europe, Latin America and Oceania.
Through partnering, institutional investors aim to become more efficient and share knowledge.
"We prefer to go with other institutional investors," said Ibrahim Abdulkhaliq, portfolio manager, alternative investments at MASIC, a Saudi Arabian institutional family office.
Abdulkhaliq cited two reasons for the trend - more difficult governance and due diligence in farmland and the ability to reduce costs, making investments more viable. I've already covered bcIMC and PSPIB's joint venture in TimberWest and how Harvard is betting big on timberland. Farmland is a bit more tricky as pensions are sensitive about the appearance of gambling on hunger, but here too you will see many club deals in the future.
Finally, as some question whether pensions are the new banks, Neil Weinberg, Editor-in-Chief at American Banker warns, Beware of a New Banking Bubble:
“As long as the music is playing, you’ve got to get up and dance.” With those immortal words, then-Citigroup (NYSE:C) Chief Executive Charles Prince explained in July 2007 what had motivated his managers to steer their bank into insolvency.
The multi-trillion dollar question that regulators and investors ought to be asking is whether bankers are again succumbing to the urge to shimmy while the shimmying is good.
There are a number of reasons to think they’re doing just that. Tops is the fact that with interest rates so low, there’s been a breakdown in the traditional “3-5-3” banking model—pay 3% on deposits, lend the money out at 5% and be on the golf course by 3 p.m.
Compressed net interest margins mean bankers face pressure to under-price risk to win loan business and to look to other questionable tactics to turn a buck.
Regulators’ ever-tightening grip on how bankers run their businesses is taking a bite out of fee revenue, too. Until recently, banks propagated the fiction that they offered “free” services like checking accounts, which in fact cost them around $350 a year to maintain. They recouped their costs and earned a profit by charging fees on the back-end. Some were of the “gotcha” variety, like those for over-drawing accounts, paying card balances late or for credit card payment protection plans of marginal value to buyers. The newly empowered Consumer Financial Protection Bureau has put a plug in many such revenue streams.
In addition to narrow lending margins and increased regulation, bankers are living in a world where animal spirits have returned to financial markets. Stocks and other “risk” assets are back in vogue. Greed is again trumping fear.
In what imprudent ways are bankers likely to respond to these various pressures? Take your pick.
Comptroller of the Currency Thomas Curry warned back in October that regulators were "ready to take action" against banks that boost earnings by releasing reserves with excessive haste. Comptrollers do not tend to talk in such hypotheticals unless there’s a genuine cause for concern behind them. Federal Reserve Governor Sarah Bloom Raskin warned last month that “The pressure to generate enhanced profits through high fees is palpable, and banks may choose to move aggressively down these paths.”
One banking insider also pointed out to me this week that the owners of many small banks are looking to sell. With a high price tag as their beacon, the temptation to pretty the financials is strong. That may help explain the fevered competition to write commercial and industrial loans, he added.
“There are more people in the marketplace and they’re not acting entirely rational, so we all have to end up being more competitive and that means we have to sacrifice margin,” US Bank (USB) Chief Executive Richard Davis said earlier this week of the loan market.
Froth is bubbling up in bank M&A too. Three recent deals involved premiums of 32% to 83% above tangible book value, implying that buyers are willing to bet on the prospect that the targets will be worth more in the future than they are today. "We are seeing in-market [banks buying banks] deals with big expectations around cost savings,” Phil Weaver, a partner at PricewaterhouseCoopers told American Banker recently.
Cost-savings is another term for “synergy,” the buzz-word that over the years has impoverished shareholders and enriched investment bankers in roughly equal measure.
Think this time regulators will remove the punch bowl in time? Don’t fool yourself. Consider how blind they were to JPMorgan Chase’s (JPM) multi-billion dollar London Whale until they read about him in the press. Their early warning systems appear to be no better today than they were when Chuck Prince was leading the dance at Citi. While there are reasons to be concerned about a new banking bubble, I remain favorable on US financials. Steady US job gains and an improving global economy will support their earnings going forward but money for nothing and risk for free can't go on forever as it will inevitably lead to another global banking debacle in the future.
Below, Bloomberg's chief Washington correspondent Peter Cook reports that payrolls increased more than forecast in February and the jobless rate unexpectedly fell to a five-year low of 7.7 percent. He speaks on Bloomberg Television's "In The Loop."
And Bloomberg’s Michael Mckee reports in-depth on the stronger than forecasted jobs report and the details that shed light on the 7.7% unemployment rate. Mckee and Julie Hyman also break down the components of the February jobs report. They speak on Bloomberg Television's "In The Loop."
Posted by Leo Kolivakis at 10:30 AM
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``I have trouble understanding public pension funds' delving into equity tranches, unless they know something the market doesn't know,'' says Edward Altman, director of the Fixed Income and Credit Markets program at New York University's Salomon Center for the Study of Financial Institutions.
That hasn't stopped pension funds from taking high risks with the retirement plans of teachers, firefighters and police.
BELOW IS A 2007 ARTICLE THAT ASKS 'WHY ARE PUBLIC PENSION FUNDS INVESTING IN TOXIC SUBPRIME MORTGAGE WASTE? STOP ALLOWING NEO-LIBERALS TO DENY JUSTICE IN GETTING THESE RETIREMENT FUND LOSSES RECOVERED!
Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund
By David Evans - June 1, 2007 00:03 EDT
Chriss Street, the treasurer of Orange County, Californi
June 1 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.
At a sales presentation of the bank's CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO.
``It has a very high cash yield to it,'' Fleischhacker says at the March convention. ``I think a lot of people are confused about what this product is and how it works.''
Worldwide sales of CDOs -- which are packages of securities backed by bonds, mortgages and other loans -- have soared since 2003, reaching $503 billion last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches.
They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out.
Fleischhacker, 45, says she doesn't associate toxic waste with the equity tranches she's selling. Pension funds in the U.S. have bought these CDO portions in efforts to boost returns.
Many pension funds, facing growing numbers of retirees, are still reeling from investments that went sour after technology stocks peaked in March 2000. Fund managers buy equity tranches, which are also called ``first loss'' portions, even though those investments are never given a credit rating by Fitch Group Inc., Moody's Investors Service or Standard & Poor's.
`I Have Trouble'
The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.
``I have trouble understanding public pension funds' delving into equity tranches, unless they know something the market doesn't know,'' says Edward Altman, director of the Fixed Income and Credit Markets program at New York University's Salomon Center for the Study of Financial Institutions.
``That's obviously a very risky play,'' he says. ``If there's a meltdown, which I expect, it will hit those tranches first.''
Calpers spokesman Clark McKinley declined to comment.
Because CDO contents are secretive, fund managers can't easily track the value of the components that go into these bundles. ``You need to monitor the collateral in your investment and make sure you're comfortable there will be no defaults,'' says Satyajit Das, a former Citigroup banker who has written 10 books on debt analysis.
Tough to Track
Most investors can't do that because it's extremely difficult to track the contents of any CDO or its current value, he says. About half of all CDOs sold in the U.S. in 2006 were loaded with subprime mortgage debt, according to Moody's and Morgan Stanley.
Since CDO managers can change the contents of a CDO after it's sold, investors may not know how much subprime risk they face, Das says.
As the $503 billion-a-year CDO market thrives, CDO marketers like Bear Stearns and Citigroup find buyers for the portions known as toxic waste, the equity tranches.
A typical $500 million CDO requires a $40 million unrated equity tranche, says Fleischhacker, who addressed the 12th annual Public Funds Summit, a meeting of pension fund managers, at the Loews Lake Las Vegas Resort on March 12.
`Lipstick on a Pig'
Chriss Street, treasurer of Orange County, California, the fifth-most-populous county in the U.S., says no public fund should invest in equity tranches. He says fund managers are ignoring their fiduciary responsibilities by placing even 1 percent of pension assets into the riskiest portion of a CDO.
``It's grossly inappropriate to take this level of risk,'' he says. ``Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig.''
Seven percent of all the equity tranches sold in the U.S. in the past decade were purchased by pension funds, endowments and religious organizations, Fleischhacker says.
Public pension funds have bought more than $500 million in CDO equity tranches in the past five years, according to data from public records requests.
The New Mexico State Investment Council, which funds education and government services for children, has $222.5 million invested in equity tranches. The council decided in April to buy an additional $300 million of them. That investment would be 2 percent of the $15 billion it manages.
Broker Suggested Purchases
The General Retirement System of Detroit holds three equity tranches it bought for $38.8 million. The Teachers Retirement System of Texas owns $62.8 million of them. The Missouri State Employees' Retirement System owns a $25 million equity tranche.
Ronald Zajac, spokesman for the Detroit pension fund, declined to comment on the fund's equity tranche investments.
Kay Chippeaux, fixed-income portfolio manager of the New Mexico council, says it decided to buy equity tranches after listening to pitches from Merrill Lynch & Co., Wachovia Corp. and Bear Stearns.
``We got very interested in them just because a broker brought them to our attention,'' Chippeaux, 50, says. She says the investment is worth the risk because the fund may be able to get higher returns than it can from bonds. The council has purchased equity tranches from Bear Stearns, Citigroup, Merrill Lynch and Morgan Stanley.
The council is relying on advice from bankers who are selling the CDOs, Chippeaux says. ``We manage risk through who we invest with,'' she says. ``I don't have a lot of control over individual pieces of the subprime.''
Return: 6.1 Percent
As of March 31, the Texas teachers pension fund's CDO investments had returned a total of 6.1 percent since December 2005, spokeswoman Juliana Fernandez Helton says. They include the fund's $62.8 million in equity tranches, which were purchased from Credit Suisse Group, Goldman Sachs Group Inc., Citigroup and other banks.
The Texas fund also bought $10.1 million in investment-grade tranches from Merrill Lynch and RBS Greenwich Capital Markets, a unit of Royal Bank of Scotland Group Plc.
The Texas fund managers won't put more than 1 percent of the fund's assets into CDO investments, Helton says. They review CDO managers' capabilities and the design of an individual CDO before making a purchase, she says.
Last September, the Missouri retirement system bought half of the equity tranche of the BlackRock Senior Income Series 2006 collateralized loan obligation, managed by New York-based BlackRock Inc. A CLO is a CDO that invests exclusively in loans, not bonds.
`Ahead of Curve'
The Missouri pension system invested $25 million of its $7.7 billion fund. Jim Mullen, fixed-income director of the fund, says he thinks the investment will pay off because he got into that market before most others did. ``We tend to be ahead of the curve,'' he says.
The investment didn't require board approval, Mullen, 60, says, adding that he relied on the fund's 12-year relationship with BlackRock.
Das says banks have good intentions when they create a CDO; what they lack is control of the performance of subprime loans and other bad debt. ``To just rely on somebody's reputation is absolving your own fiduciary responsibility as a manager,'' he says.
Helton declined to comment in response to Das. Charles Wollman, public information officer for the New Mexico fund, says it evaluates the performance of each CDO at least once a month. Citigroup spokesman Stephen Cohen says public funds pick CDOs based on their management. ``The evaluation centers on the track record and expertise of the manager,'' he says.
Orange County Similarities
Fleischhacker says Bear Stearns provides a prospectus on all CDO transactions, including terms, structure and risk. Credit Suisse, Goldman Sachs, Merrill Lynch, Morgan Stanley, RBS Greenwich and Wachovia declined to comment.
Orange County's Street says he sees similarities between that county's 1994 bankruptcy, which was the largest municipal bankruptcy in U.S. history, and investments by pension funds in equity tranches.
In the 18 months before the collapse, Street, 56, who then ran financial advisory firm Chriss Street & Co., alerted the U.S. Securities and Exchange Commission and the Office of the Comptroller of the Currency, or OCC, that the county faced a financial disaster.
The manager of the Orange County fund, which included pension money, had borrowed more than $12 billion and speculated that short-term interest rates would remain low. ``The county was earning 8 percent in what was a 3½ percent world,'' Street recalls telling federal regulators.
`Spiked Up Yield'
Those returns ended when rates rose in 1994. Street's warnings went unheeded. Orange County's investment losses totaled $1.69 billion.
Street says the big risks taken by public pension funds managers to juice up their investment performance with CDO equity tranches could result in big losses. Those tranches are filled with risky debt, which is sometimes in the form of subprime mortgages, he says.
``Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans,'' he says. ``They spiked up the yield, but that yield means nothing when the defaults start to mount, as we know they will. The funds will take big losses.''
Foreclosure filings in the U.S. jumped to 147,708 in April, up 62 percent from a year earlier, as subprime borrowers stopped making mortgage payments, according to data released by research company RealtyTrac Inc. on May 15.
As foreclosures rise, the subprime-mortgage-backed securities in CDOs begin to crumble.
`Eager to Learn'
At its sales presentation at the pension conference in Las Vegas, Bear Stearns has set up a booth stacked with literature about CDOs, including a 14-page primer titled `Collateralized Debt Obligations (CDOs): An Introduction.' Fleischhacker stands in front of the display of brochures after she speaks.
``They should be looking at these types of asset classes,'' she says. ``They're eager to learn. We're doing lots of education.''
Fleischhacker tells the public pension managers that a CDO is like a financial institution: Both have strict oversight, she says. ``The outside agencies that oversee these structures are the rating agencies,'' she says, comparing them with the Federal Deposit Insurance Corp. and the OCC, which regulates banks.
Fleischhacker's comparison is disputed by Gloria Aviotti, Fitch's group managing director of global structured finance, which includes CDOs. ``It's not accurate,'' she says. ``We don't provide any oversight.''
`A Common Misperception'
Yuri Yoshizawa, group managing director of structured finance at Moody's, says people often think of credit raters as investor advocates or oversight groups. ``It's a common misperception,'' he says. ``All we're providing is a credit assessment and comments.''
Darrell Duffie, a professor of finance at the Stanford Graduate School of Business in Stanford, California, says he's concerned about public pension trustees' getting their CDO education from the banks that are selling the investment.
``Either they need to be very sophisticated themselves or they have to know that they're getting into something that could be quite risky,'' he says. Pension fund managers should get advice from independent financial consultants, Duffie says.
Some public fund investors are forbidden from buying junk-rated or unrated portions of CDOs. Wall Street has come up with ways to sell dressed-up CDO toxic waste so that it qualifies as investment grade. One is called principal protection.
Bear Stearns offered this hypothetical example at its Las Vegas presentation: A pension fund wants to buy $100 of CDO equity. Instead of buying it directly, the fund buys a zero-coupon government bond for $46 that will be redeemed for $100 in 12 years. That bond is paired with a $54 investment in CDO equity.
Zero-coupon bonds pay no interest; the investor is paid the full face amount -- that's $100 in this hypothetical situation -- when the bond matures.
Principal Protection
``Principal protection is guaranteed,'' Fleischhacker says. ``It's AAA since you're buying a U.S. Treasury.'' If there are no defaults, this method of investing in CDO equity would return 9.3 percent annually, she says.
The presence of the zero-coupon bond ensures the pension fund will recover its $100 investment even if the equity tranche becomes worthless. While the fund wouldn't lose any money if that happened, there would be no return on the investment for 12 years.
If a fund manager puts all of the same hypothetical $100 into zero-coupon bonds only, it would more than double its money in 12 years, Das says. ``I would have thought with pension fund money, they don't really want to lose principal,'' Das says of this equity tranche sales technique. ``And clearly here the principal is very much at risk. You've got a highly leveraged bet on no defaults, or very minimal defaults.''
Chippeaux says she concluded the principal-protection plan was good for her fund in New Mexico at a time when the state required that public funds buy only investment-grade debt.
`Smoke and Mirrors'
Chippeaux says she knows there are subprime loans in the New Mexico fund's CDO investments. Wollman says he's confident New Mexico doesn't hold many of the poorest-performing subprime loans that were made at the height of the real estate boom in 2006.
``One of the things that's going to be helpful to us is that we don't have a lot of exposure to 2006 subprime loans,'' he says. ``I think that is going to help us deflect any exposure should subprime collapse.''
Pension fund managers face the same hurdle as all CDO investors: The market has almost no transparency, with both current prices and contents of CDOs almost impossible to find, says Frank Partnoy, a former debt trader who's now a law professor at the University of San Diego.
The murky nature of the CDO market presents danger for the unwary investor, and it's particularly unsuitable for public pension money, Partnoy says.
``I think `smoke and mirrors' in some sense understates the problem,'' he says. ``You can see through smoke. You can see something reflected in a mirror. But when you look at the CDO market, you really can't see enough information to enable you to make a rational investment decision.''
That hasn't stopped pension funds from taking high risks with the retirement plans of teachers, firefighters and police.
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Did you hear about yet another bank fraud that targeted already struggling pension funds. Banks are using them as ATM machines as neo-liberals work to take all public retirements to market! NO JUSTICE FROM FRAUD!
Saturday, August 20, 2011
Big Banks Ripping Off Pension Funds?
My favorite Greek-American whistleblower, Harry Markopolos, is back at it, exposing how big banks are ripping off pension funds:
Amid all the market volatility and weakness in the financial sector of late, you may have missed this WSJ front page story: "States Go After Big Bank on Forex".
The story is about growing scandal in the banking industry centered around banks allegedly overcharging pension funds for currency transactions.
"Attorneys general in Virginia and Florida filed civil suits against BNY Mellon alleging that the bank cheated pension funds in those states by choosing improper prices for currency trades the bank processed for the funds," The WSJ reports. "The Virginia lawsuit, filed in a Fairfax, Va., state court, cites internal bank emails allegedly showing that senior bank officials knew about, and endorsed, a currency-trading method that hurt state pensioners."
In addition to Virginia and Florida, California and Tennessee are also suing BNY Mellon and State Street Corp. over the alleged fraud.
The man who uncovered the alleged scam, Harry Markopolos, expects all 50 states to eventually join the suit. If the name sounds familiar that's because Markopolos was a whistleblower on the Madoff Ponzi scheme, only to have his claims ignored by the SEC for the better par of a decade. (See: Harry Markopolos Says Big Banks Worse Than Madoff)
In this case, Markopolos says BNY Mellon and State Street we're taking about "three tenths of a percent from every forex transaction for pension funds" by back-timing the trade to benefit banks at the detriment of their pension fund clients. "It's almost the exact same scheme as the market timing scandals of 2003," he claims.
When and if these cases go to trial is unknown, but Markopolos sure hopes to avoid a settlement. "I want to see them admit guilt," he tells Aaron Task in the accompanying interview. "If [banks] settle it feel like justice denied because they also will settle without admitting or denying guilt. That's just too easy. "
I have already discussed the topics of defrauding pension funds and how banks are overcharging pension funds on currency transactions (and other transactions). Thank God there are people like Harry Markopolos out there, chasing the Madoffs of this word, and now taking on a much bigger cause.
It was almost three years ago since I wrote a comment on how the pension Ponzi scheme dwarfs the Madoff scam. Watch the interview below and pay close attention to what Markopolos is saying. "Someone has to chase the bad guys" or else they will loot trillions in pensions.
Corporate neo-liberals in Maryland are moving public pensions into market-based programs like 401Ks even as we all know that the system is criminal....if no one is able or willing to invest in the stock market....they have to throw more and more public retirement in to support it. Look at Medicare and Medicaid Trusts heading into these private health insurance systems and Social Security as individual savings all pushed by neo-liberals.
Almost Two-Thirds of Your 401(k) Will Wind Up in Wall Street’s Pockets Posted on May 23, 2013 by mikethemadbiologist
We’ve discussed many times before how the 401(k) retirement system is a scam, but, if you don’t believe me, how about some basic arithmetic for ya–it’s the ‘management fees’ that fleece you (boldface mine):
Pull up a compounding calculator on line. Take an account with a $100,000 balance and compound it at 7 percent for 50 years. That gives you a return of $3,278,041.36. Now change the calculation to a 5 percent return (reduced by the 2 percent annual fee) for the same $100,000 over the same 50 years. That delivers a return of $1,211,938.32. That’s a difference of $2,066,103.04 – the same 63 percent reduction in value that Smith’s example showed.
While passively managed funds such as index funds (e.g., Vanguard) charge much lower fees, many employees don’t have that option (I don’t), and are placed into high fee accounts. As always, those who need the most help in retirement–less sophisticated investors–are more likely to get suckered into high fee plans.
John Bogle, founder of the Vanguard Group, describes the system like so (boldface mine):
What happens in the fund business is the magic of compound returns is overwhelmed by the tyranny of compounding costs. It’s a mathematical fact. There’s no getting around it. The fact that we don’t look at it— too bad for us….
Well, you have to rely on somebody to get out a compound interest table and look at the impact over an investment lifetime. Do you really want to invest in a system where you put up 100 percent of the capital, you the mutual fund shareholder, you take 100 percent of the risk and you get 30 percent of the return?
I really don’t. I can’t help but think how much better off most of us would have been if we had simply been allowed to supplement our Social Security retirement accounts–especially those, who by being born at the wrong time, ‘mistimed’ the stock market.
And the congregation responds: this is yet another reason why we can’t have nice things.
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This is a good look at the policy Obama and neo-liberals are pushing and it is not good for the 99%. Nowhere will you hear that the purpose of this private IRA policy that has businesses paying into a retirement account with workers contributions added (IRA) is to create a privatized Social Security system that replaces payroll taxes sent to the Trust funds of Social Security and Medicare. This is a long-standing republican policy that is designed to end these social programs and place all retirement money into the stock market.
THAT IS WHAT THIS POLICY IS DESIGNED TO DO. REMEMBER, NEO-LIBERALS WANT AS MUCH AS REPUBLICANS TO END ALL WAR ON POVERTY AND NEW DEAL PROGRAMS. ENDING MEDICARE/MEDICAID BY THROWING THEM INTO HEALTH INSURANCE SYSTEMS CREATED IN EACH STATE WILL MIRROR ENDING SOCIAL SECURITY BY HAVING THESE PRIVATE RETIREMENT FUNDS WITH CONTRIBUTIONS JUST LIKE SOCIAL SECURITY MINUS THE TRUST THAT KEEPS THESE FUNDS OUT OF THE MARKET!
They are making what is privatization of retirement savings sound as if it is a socialist plot just as is being done in health care.
STOP BELIEVING THEM!!!
Ask FactCheck
No Government 401(k) Takeover
- Posted on December 11, 2012
A: No. Obama endorses a proposal that would require businesses without retirement plans to establish private IRAs for their employees and deposit a percentage of wages into the accounts. Employees could opt out.
FULL QUESTION
I have started seeing postings on Facebook and other web sites referring to “recent hearings” sponsored by the Labor Department and Treasury Department. The hearings are being referred to as “the beginning of the Obama administration’s effort to nationalize the nation’s pension system and to eliminate private retirement accounts…” The whole thing sounds bogus, and I have been unable to find anything to support the claim other than those sites making the claim.
One site claiming this, National Seniors Council, appears to be basing the entire claim on the testimony of some of the groups and individuals, which seems weak at best.
What are the real facts?
FULL ANSWER
Our inbox was recently flooded by emails referring to this 2010 article from the National Seniors Council, titled “Obama Begins Push for New National Retirement System.” The NSC calls itself a “national conservative senior citizens organization.” It advocates for limited government and against President Obama, claiming that the administration has a “big-government anti-seniors agenda” and that “Social Security and Medicare are both on the chopping block in order to pay for the liberals’ welfare programs and bailouts.” It’s also a committee of the National Grassroots Advocacy, a 501(c)4 founded in 2009 that advocates for the repeal of the president’s health care law.
The group drew attention to its two-year-old article in a “Director’s report” posted in November after the election. It stated: “In the coming months and years there will be huge battles over ObamaCare, Social Security, and even Obama’s dream of establishing a new ‘national retirement system.’ ” However, the group’s 2010 article is an opinion piece full of misleading information and misguided speculation. The administration hasn’t proposed any “national retirement system.”
The article focuses on a September 2010 joint hearing of the Department of Labor and the Treasury. NSC National Director Robert Crone acknowledges in the article that the hearing “was set up to explore why Americans are not saving as much for their retirement as they could,” but he goes on to claim, without any evidence, that “it is clear that this is the first step towards a government takeover.” The article also mentions the Automatic IRA Act. Crone claims that if the bill passed, “the government will be just one step away from being able to confiscate all these retirement accounts.” He goes on to say that the government would ultimately “redistribute the wealth of America’s older citizens.” But the Automatic IRA legislation doesn’t call for any sort of “government takeover” of retirement accounts, nor is there evidence of a sinister plan to redistribute seniors’ retirement dollars.
Instead, the legislation is a long-standing proposal that was originally developed in 2006 by David C. John, senior research fellow in retirement security and financial institutions at the conservative Heritage Foundation, and J. Mark Iwry, then of the Brookings Institution and now with the Treasury Department. The bill aims to expand retirement savings among Americans. It would require businesses that don’t have retirement plans to establish private, employer-sponsored IRA plans and automatically deposit contributions from employees, unless employees opt out.
John told us that it “would not make it any easier for a government to confiscate retirement savings.” He said that currently only about half of the U.S. workforce is able to contribute to retirement funds with payroll deductions. The bill would increase that to about 90 percent.
As for the 2010 hearing on retirement options, the NSC focused on one speaker, Rebecca Davis, of a consumer advocacy group, who called for additional government assistance in retirement funding for lower-income workers. But Iwry, now senior advisor to the Secretary of the Treasury, opened the hearing by stating that the meeting was “in the context of the department’s support for the private pension system.”
Readers also have sent us a World Net Daily article by Jerome Corsi titled “Now Obama Wants your 401(k).” Corsi was the author of a 2008 book, “The Obama Nation,” which was critical of then-presidential candidate Obama and, we found in fact-checking it, “a mishmash of unsupported conjecture, half-truths, logical fallacies and outright falsehoods.” Corsi’s article for the WND claims that Obama, with help from the Departments of Treasury and Labor, is “eyeing the opportunity to redistribute private retirement savings to less affluent Americans and to force the retirement savings out of the private market and into government-controlled programs investing in government-issued debt.” Corsi cites the same things the NSC does — the 2010 joint hearing and the Automatic IRA bill.
Automatic IRA
In the President’s Budget for Fiscal Year 2013 (page 147), the administration endorses an Automatic IRA proposal that would require businesses without retirement plans to establish employer-sponsored IRA plans. In the House, Democratic Rep. Richard Neal of Massachusetts introduced the most recent version of the bill on Feb. 16, 2012. No action has been taken on the bill since March, when it was referred to the House Subcommittee on Health, Employment, Labor, and Pensions. The bill would require employers to automatically enroll employees in an IRA by directly depositing 3 percent of wages into the fund. Employees may opt out of the IRA at any time, and the program would be strictly voluntary. Businesses with 10 or fewer workers would be exempt.
Corresponding legislation in the Senate, the Automatic IRA Act of 2011, was introduced in September 2011 by Democratic Sens. John Kerry and Jeff Bingaman. It was promptly referred to committee, and no action has been taken since. Neal and Bingaman had previously introduced the same legislation in 2010. The legislation was also introduced back in 2006 and 2007. None of those bills has come to a vote — they all have died in committee.
The Labor Department’s Phyllis C. Borzi, an assistant secretary for the Employee Benefits Security Administration, testified on the latest legislation before the Senate Special Committee on Aging on March 7, 2012.
Phyllis C. Borzi, March 7, 2012: Under the budget proposal, the Administration projects that the new system of automatic workplace pensions will expand access to tens of millions of workers who currently lack pensions. Coverage will be expanded by requiring employers who do not currently offer a retirement plan to enroll their employees in a direct-deposit IRA account compatible with existing direct-deposit payroll systems. Employees would be permitted to opt-out if they choose. Employers with ten or fewer employees and employers in existence for less than two years would be exempt. Employers with fewer than 100 employees who set up these arrangements would be eligible for temporary business tax credits.
The Heritage Foundation’s John, who developed the original Automatic IRA proposal, told us that the Automatic IRAs “would be invested using private sector providers chosen by the employer.” As for government’s role, John said it would be “limited to requiring businesses with more than 10 employees (below that would be exempt) that don’t offer their employees any other type of pension or retirement savings account to offer their employees [the] opportunity to save for retirement with an Automatic IRA. It would also provide guidance about the types of investments allowed and help employers to connect with a private sector investment manager.”
There’s also the possibility that Treasury bonds could be used initially for “first-time savers.”
John, Dec. 4, 2012: There could be an R-Bond account at Treasury for first-time savers, but that money would be rolled into private sector accounts once the individual accounts reached a certain size. The R-Bond is designed to enable small savers to build up a balance up to $5,000 without any administrative fees. It has the support of many private financials, and private sector managers could substitute a private sector alternative if they wished.
On April 17, 2012, John testified on the same topic before the House Ways and Means Committee. He approved of the legislation, saying that it was “not a partisan or ideological proposal.”
John, April 17, 2012: This is not a partisan or ideological proposal. In 2008, the Automatic IRA won the endorsement of both the Obama and McCain campaigns, and it has continued to enjoy support from all sides of the ideological spectrum. Earlier this year, Rep. Richard Neal of the committee introduced HR 4049, the Automatic IRA Act of 2012. While the Heritage Foundation as a 501(C)3 nonprofit does not and cannot endorse any legislation, let me say that the policy contained in his bill would significantly improve our retirement savings system.
John went on to say that the proposal wouldn’t result in large costs to businesses. “For employers, offering an Automatic IRA would involve little or no cost or regulatory burden. The employer would not be maintaining a retirement plan, and employer contributions would be neither required nor permitted.”
According to John’s testimony, tax credits would cover any costs to employers. The White House Budget for 2013 says employers could receive tax credits of up to $250 per year for six years to cover costs, and that the administration’s budget would double the current tax credit for small employers offering retirement plans for the next four years (from $500 to $1,000 per year).
Labor Department Hearings
The 2010 National Seniors Council article also focuses on a joint hearing of the Departments of Treasury and Labor that, according to the group, “marked the beginning of the Obama Administration’s effort to nationalize the nation’s pension system and to eliminate private retirement accounts including IRA’s and 401k plans.”
But the hearing, which took place September 14 and 15, 2010, didn’t focus on eliminating private retirement accounts. In fact, Iwry, senior advisor to the secretary of the Treasury and deputy assistant Treasury secretary for retirement and health policy, said at the hearing that it was “in the context of the department’s support for the private pension system and especially for employer sponsored retirement plans, both defined benefit and defined contribution.” Its purpose was to discuss lifetime retirement payment options for seniors.
The various speakers included many from private companies and investment firms. But the NSC focuses on the testimony of one person — Rebecca Davis of the Pension Rights Center, a consumer advocacy group. Davis called for a “government sponsored program” to help low-income individuals buy annuities.
Rebecca Davis, Sept. 14, 2010: Private annuities are problematic, primarily because of their high cost and the negligible monthly benefits that small account balances can purchase. For these reasons, an annuity option within a 401k for participants with low balances would not be a realistic choice for most low and moderate income participants. Yet these are the individuals most in need of lifetime income in retirement. Therefore, we suggest that serious consideration be given to the concept of establishing a government sponsored program, ideally administered by the [Pension Benefit Guarantee Corporation] where participants with low account balances could purchase low cost annuities.
But that’s simply Davis’ opinion, offered among many in two days of hearings. Iwry made clear that the hearing “does not reflect any intention to require a purchase of annuities or any other particular investment.” He said the discussion was about choices. “We’re here to consider whether and how we might increase people’s choices, not limit them.”
John, of the Heritage Foundation, confirmed that the hearing “focused totally on products offered through the private sector.” We asked if he had seen any other effort by the Obama administration to create a “national retirement system” that could lead to the government confiscating accounts, as the National Seniors Council claims. John responded: “I have seen no indication that this is an Obama administration goal.”
– Jesse DuBois
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We know that pension funds were used in 2007 as fodder in holding up big banks long enough to make billions more in transaction profits before the crash and now banks like Bank of America and Citigroup ....the zombie banks are filled with pension investments and this is the main reason 1/2 of pension value was lost. These pensions are still there as these banks that should have gone to bankruptcy pretend to be on the mend. PIMCO and pension fund management corporations do not appear to be working for their clients. As we see in this article now that big banks are buying smaller banks and choosing not to lend to average citizens pension funds are being moved in. In Baltimore the state and city pension funds finance all the growth downtown that has taxpayers and now retirement funds footing risky development in cities that may not be the luxury global cities planners set their sights. When the next economic crash comes....and it will....who will own the debt on all this manufactured luxury? Taxpayers and pension funds. Pension funds building toll roads......with pensioners paying the tolls to their own pension fund profit? REALLY?
INVESTING IN BUILDING DOWNTOWN BALTIMORE IN THE MIDST OF GREAT ECONOMIC UNCERTAINTY.......IS THAT GOOD FOR LONG-TERM RETIREMENT FUNDS? ARE YOU CRAZY?
Friday, March 8, 2013
Are Pension Funds The New Banks?
Sophie Baker, Mark Cobley and Mike Foster of Dow Jones Financial News report, Pension funds are the new banks:
Steven Daniels, chief investment officer at Tesco Pension Investment – the principal investment manager for the supermarket giant’s £7bn UK staff pension scheme – told delegates at the National Association of Pension Funds conference yesterday: “Pension funds are the new banks. Everyone sees us as long-term lenders, and that is great. I’m happy to participate. We are the new banks, good banks potentially. But we are not mugs.”
His comments echo those of Martin Mannion, chairman of the NAPF’s investment council and director of finance and risk for GlaxoSmithKline’s £11bn UK pension funds, who warned on Wednesday that governments should not treat pension schemes as “a kind of slush fund that can be dipped into when the going gets tough”.
As long-term investors, pension funds are increasingly being seen as an alternative financing option as banks, under balance sheet pressure, continue to deleverage and decrease lending. The UK government has been urging pension schemes to step in to fund initiatives, such as infrastructure projects, where public investment has dried up.
But pension funds point out that the lack of suitable investment and financing vehicles is limiting their activity.
James Duberly, director of pensions investments at the BBC Pensions Trust, said: “It’s a brilliant idea. It works to the advantage of pension schemes with a long-term horizons.” But he told delegates that there was a shortage of sufficiently simple structures. The BBC has yet to make a big move.
Michelle McGregor Smith, chief executive of British Airways Pension Investment Management, is also interested in the idea, and said consultants had been pushing the concept. “The opportunity is there, but it is difficult to find the right vehicle,” she said.
Pension schemes are looking to diversify their holdings. According to an NAPF conference poll, 78% of defined-benefit scheme delegates confirmed they were moving away from equities.
Mike O’Brien, global head of JP Morgan Asset Management’s institutional client group, said: “There is a structural move away from equities within institutional portfolios worldwide. The next great rotation will be into bricks and mortar.”
He added that sovereign wealth funds were making a big move into direct investment in real estate and infrastructure. No doubt about it, the next great rotation is in bricks and mortar. As financial repression hits pension funds, heaping on liability risks, global pensions are moving assets into private equity, real estate and infrastructure, and some are worried they're taking on too much illiquidity risk at the wrong time.
Nonetheless, faced with historic low bond yields and volatile equity markets, pensions are moving more of their assets in bricks and mortar. In the UK, the government is letting public pension funds raise stakes in infrastructure:
The British government has made it easier for local authority pension schemes to invest in infrastructure by doubling the amount they can invest to up to 30 percent of their assets, paving the way potentially for billions of pounds of investment to be made in projects such as new roads and railways.
The National Association of Pension Funds (NAPF) said on Wednesday that from April local government pension funds will be able to raise the amount they can invest in key infrastructure projects from 15 percent to 30 percent of their assets under new rules set by the government's Department for Communities and Local Government.
Britain's local authority pension schemes had been lobbying the government for more leeway to invest in infrastructure, arguing that current rules were hampering their investment in the sector.
"Many local authority pension funds have told us that they are prevented from making the best decision on investments because of outdated rules which place limits on the amount that can be invested in infrastructure," Darren Philp, policy director at the NAPF, said in a statement.
A new Pensions Infrastructure Platform (PIP) has been launched as a way for pension funds to invest in capital projects with the backing of six large pension schemes, including the London Pension Fund Authority (LPFA), West Midlands Pension Fund and Strathclyde Pension Fund.
Volatile equity markets and rock-bottom interest rates have already caused a surge in new pension fund money going into transport and other major facility projects. It's about time the British government does something to help UK pensions invest in their crumbling infrastructure. Canadian pensioners already own a good chunk of Britain's infrastructure.
And it's not just British pensions that are looking to boost their investments in infrastructure. Dutch News reports, Pension asset manager APG to boost spending on infrastructure:
Asset manager APG, which runs the giant ABP pension fund and construction sector fund bfpBouw, is planning to increase its investment in infrastructure by some 50% over the ‘coming years’, the Financieele Dagblad reports on Tuesday.
The increase will take APG’s investment in building projects up to some €9bn, the FD quotes portfolio manager Jan-Willem Ruisbroek as saying.
‘Our clients want to invest up to 3% of their assets in this investment category. At the moment it is around 2%,’ he said.
This may seem like a small shift, but in absolute terms it means billions of euros extra to be spent on toll roads, wind farms, bridges and utilities, the FD said.
Nevertheless, the Netherlands will not profit enormously from this change in strategy. APG has a minimum investment of €100m and this means Dutch projects will be too small or will not meet other demands, the FD said. The Netherlands will not profit enormously from this change in strategy but APG is a global powerhouse and can invest in infrastructure assets across the world.
It's critical to understand why pensions are becoming the long-term financiers of these infrastructure projects and what risks these assets carry as pensions flood into this space. David Campbell of Citywire Wealth Manager reports, Yield hunters drive infrastructure debt boom:
Income seekers are flooding into the space vacated by deleveraging banks to replace traditional funding sources for infrastructure debt issuance.
The hunt for yield is tempting many institutional and fund investors to consider the asset class, while project managers are casting around for a replacement to reduced bank finance.
In the first six weeks of 2013 alone, around $900 million was raised for new fund issues, a third of the $2.7 billion raised during the whole of 2012, reports research house Prequin.
Funds being marketed are targeting a total raise of more than $8 billion, it said.
That has tempted new entrants to the market, such as JP Morgan and BlackRock, which both poached management teams and announced plans to launch funds in the second half of 2012, while more traditional mixed debt/equity infrastructure funds have flourished.
‘In the past, the infrastructure debt fund market has been a fairly niche part of the asset class, but it is growing in prominence,’ said Prequin.
‘This shift is partially being driven by incoming capital adequacy requirements for banks [Basel III], which are making new debt investments in illiquid infrastructure assets a more difficult prospect and are forcing banks out of the space.
‘This is creating a gap in the infrastructure debt market for non-traditional lenders that are attracted to the stable revenue streams and the long-term liability matching characteristics of infrastructure debt.’
Boe Pahari of AMP Capital Investors added: ‘Banks have a changed appetite in terms of leveraged ratios and tenders after the credit crunch. As a result, there is a space where pension funds can participate on the debt side, particularly in mezzanine [lending].’
The long-term fixed capital structures of infrastructure contracts make them particularly suitable for matching liabilities over potential multi-decade periods and a potential substitute for managers who might be wary of sovereign duration risk.
Infrastructure credit typically offers a premium of around 2.5% to 3% above Treasuries. Apart from credit risk, that prices in some fairly unusual contract risks that investors need to understand, however.
‘In an infrastructure loan, the issuer agrees to pay a floating rate coupon plus spread, based on a fixed principal repayment schedule,’ warned JP Morgan’s sector specialist team. ‘This amortisation schedule cannot be altered without the agreement of the lenders, nor can coupon payments be altered. However, the borrower has the option to repay the loan partially, or in its entirety, at par and would not have to pay any further coupons or compensate the lender for the loss of future spread payments.’
‘Although borrowers have this option, prepayment rates have historically been extremely low. Full prepayment rates for infrastructure, as defined by Standard & Poor’s and maintained on a bank consortia database, have been 1.6% in total in western Europe and virtually 0% in the UK since the database’s inception in the 1980s.’
The relative illiquidity of the market has also been one of the major factors deterring wider take-up of the asset class until now. Harder to quantify are political risks. For instance, in the UK, the government last year pledged to underwrite up to £40 billion in infrastructure credit.
While generating favourable headlines, Capital Economics said it would be prudent to take the commitments with a large pinch of salt.
‘Some of these measures are not quite as generous as they look,’ said the company’s chief UK economist Vicky Redwood. ‘For example, the money for the temporary lending programme will come out of departments’ existing budgets. And the investment in the railways will be funded by fare rises and efficiency savings rather than extra public sector money.
‘Meanwhile, take-up of the guarantees scheme may be limited due to the long list of conditions that companies have to fulfill. To qualify, projects have to be nationally significant, ready to start construction within a year, have equity finance already committed, be good value to the taxpayer and have acceptable credit quality.
‘Accordingly, it is questionable whether there are many projects that meet these criteria but cannot find full funding from the markets anyway.’ Apart from infrastructure, Sarah McFarlane of Reuters reports, Pension funds join forces to invest in farmland:
Major asset managers, cowed by the cost, the risk and the controversy involved in investing in farmland, are joining forces to increase investment in the historically under-capitalised sector.
In one example, Swiss fund of funds Adveq is in talks with three European pension funds, a private family and a Korean asset manager to buy farmland, in which it will act as the originator and lead investor.
Last year one of the world's largest institutional investors, TIAA-CREF, partnered with pension funds including British Colombia Investment Management Corporation and AP2 to create a $2 billion investment vehicle to buy farmland.
The new approach is likely to attract significant amounts of money from pension funds and other institutional investors into farmland, a sector in which they are reluctant to go it alone.
"We see agriculture and farmland as an asset class that's still being shaped," said Biff Ourso, director and portfolio manager of farmland investments at U.S. asset manager TIAA-CREF.
"It (working together) creates alignment for investors, economies of scale, cost-sharing and the transparency that a lot of investors want today," he added.
Adveq expects three institutional investor club deals to close in the next 12 months, each between $200 million and $400 million in size.
Investors are attracted into farmland by the rising global demand for food and a low correlation of agricultural land prices with traditional asset classes.
Pension funds have been cautious in how they approach the sector, however, because charities worldwide have voiced concern that large-scale land grabs by foreign investors could push up food prices, push farmers off the land and increase hunger.
"Agriculture is a very sensitive subject for two reasons, one is the fundamental human right for food in a food-insecure world, and secondly land is sacred to every country. To sell land in some societies is not acceptable," said independent consultant Mahendra Shah, member of a panel advising Adveq on agricultural investment strategy.
"My personal view is these pension funds are afraid to go into the field alone, and they want to spread their bet or their risk by having partners join them."
FLEDGLING ASSET CLASS
By working together, pension funds aim to create bespoke investment vehicles in a fledgling asset class that meet requirements for responsible investment in a sensitive area.
Research by Macquarie in 2012 showed institutional investment at a meagre $30 billion to $40 billion out of a total global value for farmland of $8.4 trillion.
Most farmland is owned by family farmers, giving institutional investors huge scope for buying up individual properties to form larger operations.
Institutional investors say that by working together they have a much better chance of being successful in terms of social responsibility as well as economic returns.
But some agricultural experts questioned the benefits.
"It's not absolutely clear to me that the simple fact that just a few of them come together is going to produce a better overall result," said David Hallam, director of trade and markets at the United Nations food agency (FAO).
"Unless the nature of the actual investments changes substantially, then I don't see the fact that a few companies get together would necessarily improve things," he added.
RICH SEAM
Institutional investors have generally focused on regions that are net exporters of food including North America, Australia, South America and Central and Eastern Europe.
"We like to be a in a situation where we're not taking food from the local market, where we are not taking food away from its natural value chain for speculation purposes, (where) on the contrary we contribute to increasing food production," said Berry Polmann, executive director at Adveq.
"While doing so, we don't want to undercut local farmers by producing more at lower costs, eroding their competitive power and wiping them out. That's one of the reasons why Africa for us is very difficult."
Adveq's group is looking for farmland assets in North America, Central and Eastern Europe, Latin America and Oceania.
Through partnering, institutional investors aim to become more efficient and share knowledge.
"We prefer to go with other institutional investors," said Ibrahim Abdulkhaliq, portfolio manager, alternative investments at MASIC, a Saudi Arabian institutional family office.
Abdulkhaliq cited two reasons for the trend - more difficult governance and due diligence in farmland and the ability to reduce costs, making investments more viable. I've already covered bcIMC and PSPIB's joint venture in TimberWest and how Harvard is betting big on timberland. Farmland is a bit more tricky as pensions are sensitive about the appearance of gambling on hunger, but here too you will see many club deals in the future.
Finally, as some question whether pensions are the new banks, Neil Weinberg, Editor-in-Chief at American Banker warns, Beware of a New Banking Bubble:
“As long as the music is playing, you’ve got to get up and dance.” With those immortal words, then-Citigroup (NYSE:C) Chief Executive Charles Prince explained in July 2007 what had motivated his managers to steer their bank into insolvency.
The multi-trillion dollar question that regulators and investors ought to be asking is whether bankers are again succumbing to the urge to shimmy while the shimmying is good.
There are a number of reasons to think they’re doing just that. Tops is the fact that with interest rates so low, there’s been a breakdown in the traditional “3-5-3” banking model—pay 3% on deposits, lend the money out at 5% and be on the golf course by 3 p.m.
Compressed net interest margins mean bankers face pressure to under-price risk to win loan business and to look to other questionable tactics to turn a buck.
Regulators’ ever-tightening grip on how bankers run their businesses is taking a bite out of fee revenue, too. Until recently, banks propagated the fiction that they offered “free” services like checking accounts, which in fact cost them around $350 a year to maintain. They recouped their costs and earned a profit by charging fees on the back-end. Some were of the “gotcha” variety, like those for over-drawing accounts, paying card balances late or for credit card payment protection plans of marginal value to buyers. The newly empowered Consumer Financial Protection Bureau has put a plug in many such revenue streams.
In addition to narrow lending margins and increased regulation, bankers are living in a world where animal spirits have returned to financial markets. Stocks and other “risk” assets are back in vogue. Greed is again trumping fear.
In what imprudent ways are bankers likely to respond to these various pressures? Take your pick.
Comptroller of the Currency Thomas Curry warned back in October that regulators were "ready to take action" against banks that boost earnings by releasing reserves with excessive haste. Comptrollers do not tend to talk in such hypotheticals unless there’s a genuine cause for concern behind them. Federal Reserve Governor Sarah Bloom Raskin warned last month that “The pressure to generate enhanced profits through high fees is palpable, and banks may choose to move aggressively down these paths.”
One banking insider also pointed out to me this week that the owners of many small banks are looking to sell. With a high price tag as their beacon, the temptation to pretty the financials is strong. That may help explain the fevered competition to write commercial and industrial loans, he added.
“There are more people in the marketplace and they’re not acting entirely rational, so we all have to end up being more competitive and that means we have to sacrifice margin,” US Bank (USB) Chief Executive Richard Davis said earlier this week of the loan market.
Froth is bubbling up in bank M&A too. Three recent deals involved premiums of 32% to 83% above tangible book value, implying that buyers are willing to bet on the prospect that the targets will be worth more in the future than they are today. "We are seeing in-market [banks buying banks] deals with big expectations around cost savings,” Phil Weaver, a partner at PricewaterhouseCoopers told American Banker recently.
Cost-savings is another term for “synergy,” the buzz-word that over the years has impoverished shareholders and enriched investment bankers in roughly equal measure.
Think this time regulators will remove the punch bowl in time? Don’t fool yourself. Consider how blind they were to JPMorgan Chase’s (JPM) multi-billion dollar London Whale until they read about him in the press. Their early warning systems appear to be no better today than they were when Chuck Prince was leading the dance at Citi. While there are reasons to be concerned about a new banking bubble, I remain favorable on US financials. Steady US job gains and an improving global economy will support their earnings going forward but money for nothing and risk for free can't go on forever as it will inevitably lead to another global banking debacle in the future.
Below, Bloomberg's chief Washington correspondent Peter Cook reports that payrolls increased more than forecast in February and the jobless rate unexpectedly fell to a five-year low of 7.7 percent. He speaks on Bloomberg Television's "In The Loop."
And Bloomberg’s Michael Mckee reports in-depth on the stronger than forecasted jobs report and the details that shed light on the 7.7% unemployment rate. Mckee and Julie Hyman also break down the components of the February jobs report. They speak on Bloomberg Television's "In The Loop."
Posted by Leo Kolivakis at 10:30 AM
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``I have trouble understanding public pension funds' delving into equity tranches, unless they know something the market doesn't know,'' says Edward Altman, director of the Fixed Income and Credit Markets program at New York University's Salomon Center for the Study of Financial Institutions.
That hasn't stopped pension funds from taking high risks with the retirement plans of teachers, firefighters and police.
BELOW IS A 2007 ARTICLE THAT ASKS 'WHY ARE PUBLIC PENSION FUNDS INVESTING IN TOXIC SUBPRIME MORTGAGE WASTE? STOP ALLOWING NEO-LIBERALS TO DENY JUSTICE IN GETTING THESE RETIREMENT FUND LOSSES RECOVERED!
Banks Sell 'Toxic Waste' CDOs to Calpers, Texas Teachers Fund
By David Evans - June 1, 2007 00:03 EDT
Chriss Street, the treasurer of Orange County, Californi
June 1 (Bloomberg) -- Bear Stearns Cos., the fifth-largest U.S. securities firm, is hawking the riskiest portions of collateralized debt obligations to public pension funds.
At a sales presentation of the bank's CDOs to 50 public pension fund managers in a Las Vegas hotel ballroom, Jean Fleischhacker, Bear Stearns senior managing director, tells fund managers they can get a 20 percent annual return from the bottom level of a CDO.
``It has a very high cash yield to it,'' Fleischhacker says at the March convention. ``I think a lot of people are confused about what this product is and how it works.''
Worldwide sales of CDOs -- which are packages of securities backed by bonds, mortgages and other loans -- have soared since 2003, reaching $503 billion last year, a fivefold increase in three years. Bankers call the bottom sections of a CDO, the ones most vulnerable to losses from bad debt, the equity tranches.
They also refer to them as toxic waste because as more borrowers default on loans, these investments would be the first to take losses. The investments could be wiped out.
Fleischhacker, 45, says she doesn't associate toxic waste with the equity tranches she's selling. Pension funds in the U.S. have bought these CDO portions in efforts to boost returns.
Many pension funds, facing growing numbers of retirees, are still reeling from investments that went sour after technology stocks peaked in March 2000. Fund managers buy equity tranches, which are also called ``first loss'' portions, even though those investments are never given a credit rating by Fitch Group Inc., Moody's Investors Service or Standard & Poor's.
`I Have Trouble'
The California Public Employees' Retirement System, the nation's largest public pension fund, has invested $140 million in such unrated CDO portions, according to data Calpers provided in response to a public records request. Citigroup Inc., the largest U.S. bank, sold the tranches to Calpers.
``I have trouble understanding public pension funds' delving into equity tranches, unless they know something the market doesn't know,'' says Edward Altman, director of the Fixed Income and Credit Markets program at New York University's Salomon Center for the Study of Financial Institutions.
``That's obviously a very risky play,'' he says. ``If there's a meltdown, which I expect, it will hit those tranches first.''
Calpers spokesman Clark McKinley declined to comment.
Because CDO contents are secretive, fund managers can't easily track the value of the components that go into these bundles. ``You need to monitor the collateral in your investment and make sure you're comfortable there will be no defaults,'' says Satyajit Das, a former Citigroup banker who has written 10 books on debt analysis.
Tough to Track
Most investors can't do that because it's extremely difficult to track the contents of any CDO or its current value, he says. About half of all CDOs sold in the U.S. in 2006 were loaded with subprime mortgage debt, according to Moody's and Morgan Stanley.
Since CDO managers can change the contents of a CDO after it's sold, investors may not know how much subprime risk they face, Das says.
As the $503 billion-a-year CDO market thrives, CDO marketers like Bear Stearns and Citigroup find buyers for the portions known as toxic waste, the equity tranches.
A typical $500 million CDO requires a $40 million unrated equity tranche, says Fleischhacker, who addressed the 12th annual Public Funds Summit, a meeting of pension fund managers, at the Loews Lake Las Vegas Resort on March 12.
`Lipstick on a Pig'
Chriss Street, treasurer of Orange County, California, the fifth-most-populous county in the U.S., says no public fund should invest in equity tranches. He says fund managers are ignoring their fiduciary responsibilities by placing even 1 percent of pension assets into the riskiest portion of a CDO.
``It's grossly inappropriate to take this level of risk,'' he says. ``Fund managers wanted the high yield, so Wall Street sold it to them. The beauty of Wall Street is they put lipstick on a pig.''
Seven percent of all the equity tranches sold in the U.S. in the past decade were purchased by pension funds, endowments and religious organizations, Fleischhacker says.
Public pension funds have bought more than $500 million in CDO equity tranches in the past five years, according to data from public records requests.
The New Mexico State Investment Council, which funds education and government services for children, has $222.5 million invested in equity tranches. The council decided in April to buy an additional $300 million of them. That investment would be 2 percent of the $15 billion it manages.
Broker Suggested Purchases
The General Retirement System of Detroit holds three equity tranches it bought for $38.8 million. The Teachers Retirement System of Texas owns $62.8 million of them. The Missouri State Employees' Retirement System owns a $25 million equity tranche.
Ronald Zajac, spokesman for the Detroit pension fund, declined to comment on the fund's equity tranche investments.
Kay Chippeaux, fixed-income portfolio manager of the New Mexico council, says it decided to buy equity tranches after listening to pitches from Merrill Lynch & Co., Wachovia Corp. and Bear Stearns.
``We got very interested in them just because a broker brought them to our attention,'' Chippeaux, 50, says. She says the investment is worth the risk because the fund may be able to get higher returns than it can from bonds. The council has purchased equity tranches from Bear Stearns, Citigroup, Merrill Lynch and Morgan Stanley.
The council is relying on advice from bankers who are selling the CDOs, Chippeaux says. ``We manage risk through who we invest with,'' she says. ``I don't have a lot of control over individual pieces of the subprime.''
Return: 6.1 Percent
As of March 31, the Texas teachers pension fund's CDO investments had returned a total of 6.1 percent since December 2005, spokeswoman Juliana Fernandez Helton says. They include the fund's $62.8 million in equity tranches, which were purchased from Credit Suisse Group, Goldman Sachs Group Inc., Citigroup and other banks.
The Texas fund also bought $10.1 million in investment-grade tranches from Merrill Lynch and RBS Greenwich Capital Markets, a unit of Royal Bank of Scotland Group Plc.
The Texas fund managers won't put more than 1 percent of the fund's assets into CDO investments, Helton says. They review CDO managers' capabilities and the design of an individual CDO before making a purchase, she says.
Last September, the Missouri retirement system bought half of the equity tranche of the BlackRock Senior Income Series 2006 collateralized loan obligation, managed by New York-based BlackRock Inc. A CLO is a CDO that invests exclusively in loans, not bonds.
`Ahead of Curve'
The Missouri pension system invested $25 million of its $7.7 billion fund. Jim Mullen, fixed-income director of the fund, says he thinks the investment will pay off because he got into that market before most others did. ``We tend to be ahead of the curve,'' he says.
The investment didn't require board approval, Mullen, 60, says, adding that he relied on the fund's 12-year relationship with BlackRock.
Das says banks have good intentions when they create a CDO; what they lack is control of the performance of subprime loans and other bad debt. ``To just rely on somebody's reputation is absolving your own fiduciary responsibility as a manager,'' he says.
Helton declined to comment in response to Das. Charles Wollman, public information officer for the New Mexico fund, says it evaluates the performance of each CDO at least once a month. Citigroup spokesman Stephen Cohen says public funds pick CDOs based on their management. ``The evaluation centers on the track record and expertise of the manager,'' he says.
Orange County Similarities
Fleischhacker says Bear Stearns provides a prospectus on all CDO transactions, including terms, structure and risk. Credit Suisse, Goldman Sachs, Merrill Lynch, Morgan Stanley, RBS Greenwich and Wachovia declined to comment.
Orange County's Street says he sees similarities between that county's 1994 bankruptcy, which was the largest municipal bankruptcy in U.S. history, and investments by pension funds in equity tranches.
In the 18 months before the collapse, Street, 56, who then ran financial advisory firm Chriss Street & Co., alerted the U.S. Securities and Exchange Commission and the Office of the Comptroller of the Currency, or OCC, that the county faced a financial disaster.
The manager of the Orange County fund, which included pension money, had borrowed more than $12 billion and speculated that short-term interest rates would remain low. ``The county was earning 8 percent in what was a 3½ percent world,'' Street recalls telling federal regulators.
`Spiked Up Yield'
Those returns ended when rates rose in 1994. Street's warnings went unheeded. Orange County's investment losses totaled $1.69 billion.
Street says the big risks taken by public pension funds managers to juice up their investment performance with CDO equity tranches could result in big losses. Those tranches are filled with risky debt, which is sometimes in the form of subprime mortgages, he says.
``Very few pension plans could meet their fiduciary duty by buying portfolios of subprime loans,'' he says. ``They spiked up the yield, but that yield means nothing when the defaults start to mount, as we know they will. The funds will take big losses.''
Foreclosure filings in the U.S. jumped to 147,708 in April, up 62 percent from a year earlier, as subprime borrowers stopped making mortgage payments, according to data released by research company RealtyTrac Inc. on May 15.
As foreclosures rise, the subprime-mortgage-backed securities in CDOs begin to crumble.
`Eager to Learn'
At its sales presentation at the pension conference in Las Vegas, Bear Stearns has set up a booth stacked with literature about CDOs, including a 14-page primer titled `Collateralized Debt Obligations (CDOs): An Introduction.' Fleischhacker stands in front of the display of brochures after she speaks.
``They should be looking at these types of asset classes,'' she says. ``They're eager to learn. We're doing lots of education.''
Fleischhacker tells the public pension managers that a CDO is like a financial institution: Both have strict oversight, she says. ``The outside agencies that oversee these structures are the rating agencies,'' she says, comparing them with the Federal Deposit Insurance Corp. and the OCC, which regulates banks.
Fleischhacker's comparison is disputed by Gloria Aviotti, Fitch's group managing director of global structured finance, which includes CDOs. ``It's not accurate,'' she says. ``We don't provide any oversight.''
`A Common Misperception'
Yuri Yoshizawa, group managing director of structured finance at Moody's, says people often think of credit raters as investor advocates or oversight groups. ``It's a common misperception,'' he says. ``All we're providing is a credit assessment and comments.''
Darrell Duffie, a professor of finance at the Stanford Graduate School of Business in Stanford, California, says he's concerned about public pension trustees' getting their CDO education from the banks that are selling the investment.
``Either they need to be very sophisticated themselves or they have to know that they're getting into something that could be quite risky,'' he says. Pension fund managers should get advice from independent financial consultants, Duffie says.
Some public fund investors are forbidden from buying junk-rated or unrated portions of CDOs. Wall Street has come up with ways to sell dressed-up CDO toxic waste so that it qualifies as investment grade. One is called principal protection.
Bear Stearns offered this hypothetical example at its Las Vegas presentation: A pension fund wants to buy $100 of CDO equity. Instead of buying it directly, the fund buys a zero-coupon government bond for $46 that will be redeemed for $100 in 12 years. That bond is paired with a $54 investment in CDO equity.
Zero-coupon bonds pay no interest; the investor is paid the full face amount -- that's $100 in this hypothetical situation -- when the bond matures.
Principal Protection
``Principal protection is guaranteed,'' Fleischhacker says. ``It's AAA since you're buying a U.S. Treasury.'' If there are no defaults, this method of investing in CDO equity would return 9.3 percent annually, she says.
The presence of the zero-coupon bond ensures the pension fund will recover its $100 investment even if the equity tranche becomes worthless. While the fund wouldn't lose any money if that happened, there would be no return on the investment for 12 years.
If a fund manager puts all of the same hypothetical $100 into zero-coupon bonds only, it would more than double its money in 12 years, Das says. ``I would have thought with pension fund money, they don't really want to lose principal,'' Das says of this equity tranche sales technique. ``And clearly here the principal is very much at risk. You've got a highly leveraged bet on no defaults, or very minimal defaults.''
Chippeaux says she concluded the principal-protection plan was good for her fund in New Mexico at a time when the state required that public funds buy only investment-grade debt.
`Smoke and Mirrors'
Chippeaux says she knows there are subprime loans in the New Mexico fund's CDO investments. Wollman says he's confident New Mexico doesn't hold many of the poorest-performing subprime loans that were made at the height of the real estate boom in 2006.
``One of the things that's going to be helpful to us is that we don't have a lot of exposure to 2006 subprime loans,'' he says. ``I think that is going to help us deflect any exposure should subprime collapse.''
Pension fund managers face the same hurdle as all CDO investors: The market has almost no transparency, with both current prices and contents of CDOs almost impossible to find, says Frank Partnoy, a former debt trader who's now a law professor at the University of San Diego.
The murky nature of the CDO market presents danger for the unwary investor, and it's particularly unsuitable for public pension money, Partnoy says.
``I think `smoke and mirrors' in some sense understates the problem,'' he says. ``You can see through smoke. You can see something reflected in a mirror. But when you look at the CDO market, you really can't see enough information to enable you to make a rational investment decision.''
That hasn't stopped pension funds from taking high risks with the retirement plans of teachers, firefighters and police.
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Did you hear about yet another bank fraud that targeted already struggling pension funds. Banks are using them as ATM machines as neo-liberals work to take all public retirements to market! NO JUSTICE FROM FRAUD!
Saturday, August 20, 2011
Big Banks Ripping Off Pension Funds?
My favorite Greek-American whistleblower, Harry Markopolos, is back at it, exposing how big banks are ripping off pension funds:
Amid all the market volatility and weakness in the financial sector of late, you may have missed this WSJ front page story: "States Go After Big Bank on Forex".
The story is about growing scandal in the banking industry centered around banks allegedly overcharging pension funds for currency transactions.
"Attorneys general in Virginia and Florida filed civil suits against BNY Mellon alleging that the bank cheated pension funds in those states by choosing improper prices for currency trades the bank processed for the funds," The WSJ reports. "The Virginia lawsuit, filed in a Fairfax, Va., state court, cites internal bank emails allegedly showing that senior bank officials knew about, and endorsed, a currency-trading method that hurt state pensioners."
In addition to Virginia and Florida, California and Tennessee are also suing BNY Mellon and State Street Corp. over the alleged fraud.
The man who uncovered the alleged scam, Harry Markopolos, expects all 50 states to eventually join the suit. If the name sounds familiar that's because Markopolos was a whistleblower on the Madoff Ponzi scheme, only to have his claims ignored by the SEC for the better par of a decade. (See: Harry Markopolos Says Big Banks Worse Than Madoff)
In this case, Markopolos says BNY Mellon and State Street we're taking about "three tenths of a percent from every forex transaction for pension funds" by back-timing the trade to benefit banks at the detriment of their pension fund clients. "It's almost the exact same scheme as the market timing scandals of 2003," he claims.
When and if these cases go to trial is unknown, but Markopolos sure hopes to avoid a settlement. "I want to see them admit guilt," he tells Aaron Task in the accompanying interview. "If [banks] settle it feel like justice denied because they also will settle without admitting or denying guilt. That's just too easy. "
I have already discussed the topics of defrauding pension funds and how banks are overcharging pension funds on currency transactions (and other transactions). Thank God there are people like Harry Markopolos out there, chasing the Madoffs of this word, and now taking on a much bigger cause.
It was almost three years ago since I wrote a comment on how the pension Ponzi scheme dwarfs the Madoff scam. Watch the interview below and pay close attention to what Markopolos is saying. "Someone has to chase the bad guys" or else they will loot trillions in pensions.
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