I'd like to spend one more day on the bond market and the coming crash.....looking today at the public and private pensions. Folks, neo-liberals and neo-cons look at pensions as fodder only meant to boost Wall Street profit.
LOOK AT WHERE YOUR PENSIONS ARE INVESTED BECAUSE MARYLAND IS RUN BY NEO-LIBERALS WORKING FOR WALL STREET PROFIT AND NOT YOU AND ME!
I pointed to Maryland pol Dulaney and his focus on repatriation taxes and bond market for corporations. The timing of this legislation is no accident----the bond market crash will place this market at the bottom ready to climb to profits just as the 2008 crash made the stock market bottom. So, Dulaney is not warning his constituents that the bond market crash is coming and will take away most of the value recovered since the last crash-----he is only thinking of what legislation with maximize corporate profit. THAT'S A NEO-LIBERAL FOR YOU BUT WHY IS HE RUNNING AS A DEMOCRAT????
The second point is that as you can see all of the major news journals are now reporting the crash is coming just as I have written for four years. What I said was the plan-----and everyone knew it. Please consider where you get your information-----all neo-liberal media like MSNBC and NPR never mentioned these policy goals-----
I spoke of the public malfeasance behind the public pension losses last crash were politicians moved public pensions from the then safety of the bond market into a collapsing stock market in 2007 just to buoy the Wall Street banks. THIS WAS ILLEGAL AND PUBLIC MALFEASANCE AND FRAUD. All of the pols in Maryland involved in doing this were simply re-elected and public sector unions simply agreed to cuts rather than take the fraud to court. The failure to address the last fraud has the same thing coming with this bond crash.....public and private pensions have been used to buoy the coming bond market as investment firms jump ship.
DO YOU HEAR YOUR POLS SHOUTING ALL OF THIS IS BAD FOR THE PEOPLE WHO ELECTED THEM??????? I DON'T HEAR A THING!
Below is a UK article that speaks to what is coming. Look how it states the FED is considering making people stay in the bond market to stop a run. It created the conditions for the crash and now it wants to force people to stay in......punitive exit fees. Remember, people went to bonds because the stock market is criminal.......they are now being forced back into this criminal market because Wall Street imploded the only safe investment ------bonds.
Can you save your pension from the great bond bubble? Why a bank rate rise could ruin your retirement...
‘Those limits will be set by each individual fund — they may put a cap on how much you can withdraw, or reduce the value by a percentage.’
By Holly Black Daily Mail Pensions and Retirement
PUBLISHED: 18:34 EST, 17 June 2014 | UPDATED: 03:20 EST, 18 June 2014
About £800billion of savings and investments sitting in bond funds could fall in value if interest rates begin to rise.
An increase in the Bank of England base rate threatens to burst the five-year bond bubble that has seen the value of funds soar by as much as 137 per cent.
It threatens to wipe out a chunk of the life savings of an estimated 500,000 people who have put their money into bond funds, and millions more in company pension schemes.
Bond bubble: When interest rates rise the value of bonds will fall
However, while any rise in rates is likely to cause a fall in bond funds - any increases should be small, giving investors time to react. There are, though, fears that money in bond funds could be locked up.
In the U.S. there are already reports that the Federal Reserve is considering imposing punitive exit fees on anyone trying to take their money out of bond funds to halt a run on the investments.
Brian Dennehy, founder of investment research site Fund Expert, explains: ‘When there is sustained heavy selling there will almost certainly be restrictions, if you’re allowed to sell at all.
‘Those limits will be set by each individual fund — they may put a cap on how much you can withdraw, or reduce the value by a percentage.’
Bonds are essentially IOUs issued by companies and governments. In exchange for your money, they promise to pay you a rate of interest. These are not fixed-rate savings bonds offered by High Street banks and building societies, which keep your capital safe and your interest fixed.
With investment bonds the value can rise and fall, and they were often seen as a safer type of investment, as they don’t change in value very much. But because of poor rates on High Street savings accounts, bonds have become wildly popular and, as a result, prices have surged.
Someone who put £10,000 into the average strategic bond fund five years ago would have £15,500 today. The best fund would have grown to £23,700.
At risk: A substantial chunk of the £770bn of our pensions is invested in bonds
How £800billion could be trapped
Fears of a fall in value of these funds could now lead to a great bond sell-off. A bond-fund plunge has been widely expected since late 2012.
Then, the value of funds had increased by 50 per cent following the Government’s policy of printing money to boost the economy, known as Quantitative Easing. This involved the Bank of England flooding the economy with cash, by buying bonds — which led them to increase in value.
Now that QE has come to an end, and the economy is recovering, interest rates could soon rise. When this happens, the value of these bonds will fall, and the interest they are paying will suddenly seem less attractive.
Unlike with shares, the money in bonds is tied up. It means that investors may not be able to trade their bonds freely to eager buyers, leaving them trapped because no one will want to buy them.
Retail investors who have relied on bonds for the past six years have a massive £126billion of their savings tied up in these funds. But a substantial chunk of the £770billion of our pensions is invested in them, too, because many stock-market-linked company schemes move savers’ money into bonds the closer they get to retirement.
This is done to protect the cash they have built up over the years by transferring it out of supposedly riskier stocks and shares. The strategy is known as life-styling and happens automatically. But it has meant that workers are being unwittingly exposed to any potential fall in the bond market.
Thousands of investors found themselves stuck in property funds in 2008 when there was a run of people withdrawing cash from these investments. A lack of ready cash available in them meant firms were telling their customers they could not have their money.
Many property funds own entire buildings directly so that if they need to raise money they have to sell them, rather than just sell shares, which is a much quicker and easier process. Bond funds face similar problems.
Bonds have a fixed duration and if funds can’t find a willing buyer to dispose of them, they will have to hold onto the investment. That means they can’t raise any money to give back to investors looking to sell their units in the fund.
Should you hang on or try to sell?
Many fund managers are already selling their bonds. Marcus Brookes, head of multi-manager funds at Schroders’, has reduced his bond holdings to just 10 per cent of his assets and he is planning to sell more.
‘Returns have been amazing for too long and we’re starting to worry,’ he says. And Mr Dennehy points out that with interest rates likely to rise in ‘baby steps’, investors shouldn’t have to rush out of all of their bonds at once.
‘But you should still ask yourself why you are bothered to invest in bonds,’ he adds. ‘At best, they won’t lose any of your money this year, but I don’t think they will make any either.’
Yet this could leave investors with another dilemma. Ben Gutteridge, head of fund research at wealth management company Brewin Dolphin, explains: ‘If you are taking your money out of bonds, where are you going to put it?
‘The obvious choice is equities. But if all of your investments are equities, that’s incredibly risky.’
Because of this, investors may be forced to accept the risk of staying in bonds in a bid to spread the risk in their portfolio.
Or else they may have to pull out of the stock market completely and bide their time in cash just to make sure that they’re not losing any money.
Wall Street and their pols knew people would leave the stock market for the safety of the bond market after the 2008 crash so they started immediately to create the conditions to fleece these bond investors. Congress and Obama created legislation that pushed US bonds to the world market just as they did subprime mortgage loans they knew were fraudulent. Watching the FED and QE create the ballooning of the bond market just to accommodate Wall Street profit knowing a bond collapse would hit Federal, state, and local governments hard.
IT IS A CRIME AGAINST HUMANITY!!!! THESE ARE SOCIOPATHS FOLKS!
Public pensions were never too much to handle for states and local governments-----neo-liberals simply never intended to fund them just as corporations were never made to actually fund their contributions as these benefit packages required. So, there is no pension deficit weighing on governments----it is the fiscal policy schemes that are designed to bring ever more money to Wall Street that are soaking taxpayers. Below you see just another financial instrument that again placed public wealth in harms way. Remember, we went through a fiscal boom last decade albeit fueled by corporate fraud so government coffers should be flush. Rather, billions of dollars were lost to public malfeasance and fraud. The article below shows states using pension investments that were known to be bad policy-----placing bonds into plans at the wrong time and this is not an accident. It takes no rocket scientist to know all of these investment strategies were bad for the public. These neo-liberals did it to hide debt to take on more debt knowing Wall Street would bring in tons of profit.
The story of Oregon is Maryland's story and Martin O'Malley and the Maryland Assembly are the stars of this public abuse. Now, the same thing was done for private pensions as corporations were allowed to fail to fund and place pensions into ever riskier investments everyone knew would fail.
Just think.......if we all knew years ago that the policies since the 2008 crash would implode the bond market-----do you leave state and local governments exposed to bond leveraging? OF COURSE NOT UNLESS YOU WANT TO IMPLODE GOVERNMENT BUDGETS.
Pension Obligation Bonds: Risky Gimmick or Smart Investment?
Pension obligation bonds have bankrupted whole cities. Yet some governments are still big players. BY: Eric Schulzke | January 2013
“It’s the dumbest idea I ever heard,” Jon Corzine told Bloomberg.com in 2008 when he was still governor of New Jersey. “It’s speculating the way I would have speculated in my bond position at Goldman Sachs.”
Corzine, who followed up his tenure as governor with a $1.6 billion investment debacle as chairman of MF Global, seemed to know a thing or two about risky ventures. In this case, he was speaking of pension obligation bonds. POBs are a financing maneuver that allows state and local governments to “wipe out” unfunded pension liabilities by borrowing against future tax revenue, then investing the proceeds in equities or other high-yield investments. The idea is that the investments will produce a higher return than the interest rate on the bond, earning money for the pension fund. It’s a gamble, but one that a lot of governments are willing to take when pension portfolio returns plummet, causing unfunded liabilities to run dark and deep.
Almost every fund has faced such liabilities from time to time, though current times have been more treacherous than others. As Paul Cleary, executive director of the Oregon Public Employees Retirement System (PERS) points out, since 1970 his state’s pension fund has suffered annual losses only four times. But three of those losses were in the last decade, and one, in 2008, was a catastrophic 27 percent decline.
Faced with such losses -- and with a dearth of state and local revenue to make up for the shortfalls -- POBs have become a favored tool to fix pension woes. Oregon is a big player in the POB market, along with scores of its cities, counties and school districts. Other major POB issuers include California, Connecticut, Illinois and New Jersey.
The bonds took on some notoriety this past summer when two California cities, Stockton and San Bernardino, went bankrupt. Generous pensions awkwardly propped up with ill-timed POBs contributed to both debacles.
Over the years, returns on POBs have often fallen below the interest rate the state or locality paid to borrow the money, digging the liability hole even deeper. Nonetheless, they remain popular with politicians in a revenue pinch. Politically, it is easier to borrow money to pay for pension costs than it is to squeeze an already-stressed budget. While many economists and policy analysts view them as risky gimmicks and question the high market growth assumptions that make them seem viable, POBs have defenders who believe that with careful timing they can pay off.
When Oakland, Calif., launched the first pension obligation bond in 1985, it appeared to be a reasonable strategy. It qualified as a tax-free bond that could be issued at the lower municipal bond rates. A state or city could then pivot and invest the funds in safe securities -- a corporate bond, for instance -- at a slightly higher rate. “That was classic arbitrage,” Cleary says. “You were locking down the difference between nontaxable bonds and taxable bonds.”
The Tax Reform Act of 1986 ended that strategy by prohibiting state and local governments from reinvesting for profit the money from tax-free bonds. When the concept resurfaced, the strategy called for states or localities to issue a taxable bond and leverage the higher interest rate of that bond against higher return but riskier equity market plays. So long as markets boomed, the new tactic seemed savvy. “Some people call this arbitrage, but it’s not,” Cleary says of post-1986 POBs. “It’s really an investment gamble.”
Arbitrage occurs when prices for the same product differ between two markets, allowing a nimble player to exploit the difference. “Real arbitrage is free money,” says Andrew Biggs, a scholar at the American Enterprise Institute. “But it doesn’t hang around very long.”
Safe bonds and risky equities are not the same product, but public pension accounting currently permits state and localities to treat them as if they were. “They are counting the return on the stocks before the return is there,” Biggs says. “If you borrowed money to invest in the real world, you would factor the current value of the debt with the current real value of the stocks.”
Given the inherent risks and possible rewards, how have POBs fared? In 2010, a research team led by Alicia Munnell, director of the Center for Retirement Research at Boston College, ran some numbers to find out. The team took 2,931 POBs issued by 236 governments through 2009. They used each bond’s repayment schedule to calculate interest and principal, and then clustered them into cohorts based on the year issued. They assumed a 65/35 investment split between equities and bonds and tracked the results with standard indexes. They then produced two composite graphs -- one at the height of the market in 2007 and the second in 2009, after a crash and before recovery.
In general, bonds issued in the early stages of a stock boom performed well prior to the crash. Thus, POBs issued in the early 1990s were healthy, ranging from 2 to 5 percent net growth. Borrowings in 2002 or 2003 also looked good.
Those issued in the latter years of the 1990s or 2000, however, were in negative territory even before the 2008 crash, having suffered serious losses to their principal in the 2001-2002 downturn. After 2008, all POBs were under water -- except those issued in the trough of the collapse, which by 2009 were already pushing 25 percent gains.
Oregon’s numbers mirror Munnell’s findings. Local government POBs issued in 2002 at the depth of that market collapse and managed by Oregon PERS gained an annual average of 8.84 percent through 2012, before principal and interest on the bond. Less lucky were bonds issued in 2005. The Springfield School District’s POB earned just 5.53 percent, for example. Since that bond carried 4.65 percent interest, it likely earned roughly one point annually -- not much, but slightly above neutral. Oregon’s 2007 issuers earned just 2 percent on their investments through 2012, and are upside down today after debt service.
The same fate befell Stockton, Calif., which also came to market in 2007. Similarly, New Jersey issued a $2.8 billion POB in 1997 -- on the wrong side of another stock bubble.
“The whole thing is the timing,” Oregon’s Cleary says. “You are trying to issue them when the market has bottomed out and when interest rates are reasonable, because really what you are doing is making an investment bet. If people thought when they did POBs that they were refinancing a debt or doing a locked-in arbitrage, rather than an investment play, I’m sure they have been very surprised by the results.”
And yet that is exactly how they were sold. When Oregon voted on new POBs in 2009, the voter education pamphlet argument in favor of issuance explicitly framed the choice as a “refinance” and cast the projected returns as money “saved.”
“Just like many homeowners are refinancing their home mortgages,” the pamphlet read, “the State should take advantage of these historically low rates, which can save Oregon more than $1 billion over the next 25 years. The money saved will help reduce cuts and protect services that all Oregonians rely on.”
Because POBs demand headroom between the interest an issuer pays to borrow and the high returns promised on resulting investments, their investment strategies tend to chafe against safer portfolios. Without a hefty “discount rate” -- as the projected annual gain assumed by a pension fund is known -- the pension bonds would not be possible.
In a 2012 paper, Andrew Biggs argues that the aggressive 8 percent discount used by many states overstates likely earnings and understates risks. A fund that required $100 million in 20 years and employed an 8 percent discount rate would be “fully funded” with $21 million, Biggs notes. But if that same fund were to gain only 5 percent annually, it would need $38 million today to be fully funded in 20 years.
Many experts argue that because public pension obligations are legally binding, pension funds should be discounted at close to zero risk on the front end -- at or near the rates offered by government bonds. “While economists are famous for disagreeing with each other on virtually every conceivable issue,” wrote then-Federal Reserve Board Vice Chairman Donald Kohn in 2008, “when it comes to this one there is no professional disagreement: The only appropriate way to calculate the present value of a very-low-risk liability is to use a very-low-risk discount rate.”
In point of fact, the 8 percent discount rate may be on its way out. The Governmental Accounting Standards Board (GASB) is launching a complex hybrid discount standard in 2014, which will affect the assumptions states make with their funds. Some fear the GASB rule will only create more confusion. Bond rater Moody’s is taking a simpler tack in weighing government pension plans, having recently proposed to shift its pension discount rate down to the level of AA taxable bonds, which are now at 5.5 percent. “Currently, discount rates used by state and local governments are all over the place,” says Tim Blake, Moody’s managing director of public finance. “Most are in the range of 7.5 to 8 percent. We need a uniform rate.”
Not surprisingly, 5.5 percent is very close to the rate at which many POBs are sold to investors.
With aggressive 8 percent discount rates now under attack by economists, oversight boards and rating agencies, issuers who counted on rosier outcomes have learned some hard lessons. Five years ago, when Connecticut State Treasurer Denise L. Nappier announced a new $2.28 billion pension bond, she noted that the state had “achieved a favorable borrowing cost of 5.88 percent, which is well below the 8.5 percent assumed long-term return on assets of the Teachers’ Retirement Fund. This will provide significant cash flow savings over the long term and a potential savings to taxpayers of billions of dollars.”
When the bond was issued in April, the Dow Jones average stood just shy of 13,000. By November, the market was in free fall. It bottomed out the following March at just over 6,600. Connecticut’s timing could hardly have been worse. As the market plunged, Pensions & Investments lit into POBs, singling out Connecticut. The editors argued that POBs shove obligations “that should have been paid as earned” onto future generations, along with the risk of the debt.
By 2010, with the market still emerging from the trough, Connecticut’s finances were as messy as ever. But now there was little appetite for more bonds. POBs “are certainly a risky proposition,” Michael J. Cicchetti, chairman of Connecticut’s Post Employment Benefits Commission, told the CT Mirror. “Things are different now than they were then.”
Wall Street has the nerve to state that public sector pensions are too big of a liability for governments. After all, Wall Street fraud caused a loss of 1/2 pension value in 2008 and the rating corporations like Moody's was ground zero for the fraud---they should know pensions are limping along!
Indeed, simply taking the assets of the three major rating corporations and pushing them into bankruptcy for their part in the fraud would have made pensions flush with cash. RULE OF LAW WOULD HAVE SOLVED GOVERNMENT PENSION SHORTFALLS. No one shouted this! Did you hear your pols shouting for recovery of pension losses from fraud to make up the shortfall? They went straight to cutting benefits. They through pensions into bad investments just to claim they were liabilities that needed to be cut.
THAT'S A NEO-LIBERAL FOR YOU-----WORKING TO MAXIMIZE WALL STREET PROFITS AT PUBLIC EXPENSE!
Now, why should all citizens be concerned about pension fraud ----even those with no pensions?
THE SAME THING IS HAPPENING WITH SOCIAL SECURITY! YOUR RETIREMENT PROGRAM IS BEING RAIDED BY THE SAME PEOPLE. DO NOT THINK IT OK FOR SOME PEOPLE TO LOSE THEIR RETIREMENTS WHEN THE PROBLEM IS CORPORATE FRAUD AND CORRUPTION AND NOT THE BENEFIT!
So while neo-liberals like Dulaney are busy making sure legislation places corporations into positions to earn grand profits-----they are setting you and I to take the losses once again.
The policy of risk-free rating is not a bad thing-----what is bad is that it comes at a time when pensions are waiting for recovery from fraud by Moody's and it comes as the bond market is ready to implode from public sector malfeasance. Can you imagine how impossible it will be to meet these obligations after an economic crash bigger than 2008?
THAT'S RIGHT-----THEY DO NOT WANT TO BE ABLE TO MEET THEM! THAT IS WHY THEY ARE IMPLODING THE BOND MARKET FOR GOODNESS SAKE!
A Maryland neo-liberal running for Governor of Maryland Heather Mizeur actually stated-------if public employees gave up pension benefits we could build all these schools in Baltimore. That is what neo-liberals do----pit people in the same Democratic base against one another. It is not an either/or----STOP THE CORPORATE FRAUD AND PROFITEERING!
LABOR AND JUSTICE ARE THE DEMOCRATIC BASE!
Moody’s Playing Dangerous Games With Public Pension Funds
Tuesday, 07 May 2013 09:29 By Dean Baker, Truthout | Op-Ed
The bond-rating agency Moody's made itself famous for giving subprime mortgage backed securities triple-A ratings at the peak of the housing bubble. This made it easy for investment banks like Goldman Sachs and Morgan Stanley to sell these securities all around the world. And it allowed the housing bubble to grow ever bigger and more dangerous. And we know where that has left us.
Well, Moody's is back. They announced plans to change the way they treat pension obligations in assessing state and local government debt.
Instead of accepting projections of pension fund returns based on the assets they hold, Moody's wants to use a risk-free discount rate to assess pension fund liabilities. This will make public pensions seem much worse funded than the current method.
While this might seem like a nerdy and technical point, it has very real consequences. If the Moody's methodology is accepted as the basis for accounting by state and local governments then they will suddenly need large amounts of revenue to make their pensions properly funded. This will directly pit public sector workers, who are counting on the pensions they have earned, against school children, low-income families, and others who count on state supported services.
In other words, this is exactly the sort of politics that the Wall Street and the One Percent types love. No matter which side loses, they win. While public sector workers fight the people dependent on state and local services, they get to walk off with all the money.
Wall Street is expert at these sorts of accounting tricks; it is after all what they do for a living. And this is not the first time that they have played these sorts of games to advance their agenda.
The current crisis of the Postal Service, which is looking at massive layoffs and cutbacks in delivery, is largely the result of accounting gimmicks. In 2006 Congress passed a law requiring an unprecedented level of pre-funding for retiree health care benefits. The Postal Service is not only required to build up a massive level of prefunding, it also is using more pessimistic assumptions about cost growth than any known plan in the private sector.
This requirement is the basis for the horror stories of multi-billion losses that feature prominently in news stories about the Postal Service. The Postal Service would face difficulties adjusting to rapid declines in traditional mail service in any case (it doesn't help that they are prohibited from using their enormous resources to expand into new lines of business), but this accounting maneuver is imposing an impossible burden. The change in pension fund accounting could have a comparable impact on state and local governments.
Moody's change in accounting is not just bad politics, it is horrible policy. The key question is how we should assess the returns that pension funds can anticipate on the assets they hold in the stock market. Moody's and other bond rating agencies did flunk the test horribly in the 1990s and 2000s. They assumed that the stock market would provide the historic rate of return even when price to earnings ratios were more than twice the historic average at the peak of the stock bubble.
While some of us did try to issue warnings at the time (here) and (here) the bond rating agencies were not interested. As a result, when the stock market plunged, many pensions that had previously appeared to be solidly funded, suddenly faced substantial shortfalls.
It is possible to construct a methodology that projects future returns based on current market valuations and projected profit growth that maintain proper funding levels, while minimizing the variation in contributions through time. By contrast, if the pension funds adopted the Moody's methodology as the basis for their contribution schedules, they would find themselves making very large contributions in some years followed by years in which they made little or no contribution.
A state or local government that used the Moody's methodology to guide their contributions would effectively be prefunding their pensions in the same way that it would be prefunding education to build up a huge bank account so that K-12 education was paid from the annual interest. While it would be nice to have the cost of these services fully covered for all time, no one thinks this policy makes sense. We would be hugely overtaxing current workers so that future generations could get a huge tax break.
Even worse, Moody's scoring of pensions may discourage pension managers from holding stock as an asset. They would be held accountable for any losses in bad years, but would not get credit for the higher expected returns on stock. For this reason, risk averse pension managers may decide to hold safe but low yielding bonds.
This would lead to the perverse situation in which collectively invested funds held in pensions only hold safe bonds, even though market timing carries little risk for them. On the other hand individual investors, who are hugely vulnerable to market timing, would be holding stock in their 401(k)s.
That outcome makes no sense. But of course it didn't make sense that subprime mortgage backed securities were Aaa. This is Moody's we're talking about.