Monday, August 31, 2009

Time to Clean House at Pensions?

The CBC reports that Ontario cleans house at the OLG:

Ontario's finance minister has fired the head of the Ontario Lottery and Gaming Corporation and accepted the resignations of the entire board of directors in an attempt to head off another scandal.

Dwight Duncan told a news conference at Queen's Park on Monday that he was "taking action to ensure protection of taxpayers money."

Duncan said there had been problems with expenses and they represented "symptoms of much larger problems" at OLG.

The corporation's CEO, Kelly McDougald, was fired "for cause," said the minister. The entire six-member board stepped down.

The provincial auditor general has been asked to conduct a thorough review of OLG expenses.

Both McDougald and the board members were brought in to clean up the scandal-plagued organization.

Duncan released two years' worth of expense claims filed by OLG executives and senior staff that include questionable claims filed by executives going back years.

They included the cancellation of a deposit on a Florida condo by Michael Sharland, the OLG's former vice-president of security and surveillance who took a paid leave of absence in 2007.

Another OLG executive charged the agency nearly $500 for a nanny so that she could attend meetings during a four-month period in 2006.

Other senior staff billed the agency for small items like a $7 pen refill, a $1.12 cloth grocery bag and a $30 car wash.

Hudak calls for Duncan firing

Weekend reports suggested that a freedom-of-information request by the provincial Tories is behind the shakeup.

The Progressive Conservatives made a number of requests concerning the spending habits of OLG executives.

Duncan's announcement on Monday is an apparent attempt to deflect the results of those inquiries.

Shortly after Duncan's announcement, the Conservative leader levelled a number of scathing criticisms at the Liberal government called for the finance minister to be fired.

"The minister came forward with his phony remorse today simply because he got caught," Tim Hudak told reporters Monday afternoon.

The Tories had asked for information on the spending, Hudak said. The Liberals "knew it would be coming up in the opening session of the legislature, [so they] put it out today to head off the scandal," he said.

"But quite frankly, you can switch one Liberal hand-picked CEO with another one. But you're not going to stop the scandalous spending until [Premier Dalton] McGuinty sets the tone by firing one of his ministers.

"There's a concept called ministerial accountability. You can play musical CEOs all you want," Hudak said.

"That's not going to bring an end to this mess. We need the minister to step down."

The changes at OLG also come just a few months after a scandal at the government-run eHealth agency led to the resignation of CEO Sarah Kramer and board chair Alan Hudson.

The eHealth scandal resulted from untendered contracts, as well as lavish spending and picayune expense claims by consultants.

Duncan said Monday that Ontario McGuinty will address the problems at the OLG and outline a "broader set of initiatives" aimed at ending the expense claims problems within the provincial government.

According to the OLG's website, the lotteries generate "approximately $6 billion in annual revenues and $2 billion in annual profit" for the province.

Ten days ago, I posted on how Bonusgate spread to New Brunswick. I specifically mentioned that the Auditor General of Canada should question the bonuses that were recently awarded to senior managers at PSP Investments and relay her concerns to the Treasury Board and Department of Finance.

Moreover, provincial finance ministers should conduct a thorough performance, operational and fraud audit using independent industry experts on every major public pension fund in Canada, including provincial and federal crown corporations like OMERS, Ontario Teachers', and the Canada Pension Plan Investment Board (CPPIB). Some of these funds are hiding much more than others, but they all have secrets they want to keep from the public and they all game their private market benchmarks to reap big bonuses at the end of their fiscal year (again, some are much worse offenders than others).

Last week, the Globe and Mail reported that BC targets salaries for top public executives:

Salaries for top executives who serve on independent B.C. government agencies will be under the microscope as the cash-strapped province hunts for new ways to rein in spending, Finance Minister Colin Hansen says.

The government announced plans to review the fiscal performance of its Crown corporations, health authorities and other arm's-length agencies this week. Yesterday, Mr. Hansen said the often-controversial executive compensation will be part of that review.

"I think those are all issues we have to address," he told reporters in Victoria.

Eight years ago, the B.C. Liberal government launched a core review that aimed to dispense with functions that were not deemed to be essential government services. Now, it is reconsidering what should be arm's-length services, and what could better be delivered as direct government services.

"We want to be pragmatic, we want to look at the most cost-effective way of delivering services to the public ... and if that can be better structured by having an arm's-length organization, then that's what we'll do," Mr. Hansen said.

"If it's better to make sure we have a cohesive and consolidated approach to delivering services by ensuring those are delivered by line ministries, then we will do that."

NDP Leader Carole James said the review of independent government agencies is a bid to distract the public from the province's own mismanagement of public dollars.

"It's the old game of, 'point the finger somewhere else and don't look at us,' " she said yesterday. Ms. James noted that many of the agencies now under review were established by the Liberal government in the name of ending political interference.

The province last year released a list of executive compensation at Crown corporations, health authorities and other arm's-length agencies as it defended wage increases for its own top civil servants.

That list showed close to 150 executives at government agencies such as B.C. Hydro, the Fraser Health Authority and the Insurance Corp. of B.C. who earn more than the $188,000 that Gordon Campbell earned as premier last year.

At the time, the government pointed to those salaries to explain the need to raise the rates for its own senior civil servants.

Salaries at agencies such as the health authorities are approved not by government directly, but by boards that have been appointed by the provincial government.

Some agencies are more arm's-length than others.

Late last month, the province announced fiscal reviews of B.C. Ferries and TransLink, the transit service for Metro Vancouver. Those assessments, conducted by comptroller-general Cheryl Wenezenki-Yolland, may serve as the model for the other agency reviews.

Ms. Wenezenki-Yolland is examining how well the two operators have cut costs and delivered service to the public, and how they compensate senior executives. The announcement came the day the two agencies released details of their top managers' salaries.

B.C. Ferries chief executive officer David Hahn earned more than $1-million when incentives and pension contributions were included, putting him in the upper stratosphere of executives within the broad public service in B.C.

But B.C. Ferries is supposed to be independent of political interference, and officials there have said they will treat the results only as advice.

Meanwhile, the NDP focused its attention yesterday on the government's plans to adopt a harmonized sales tax next July.

Ms. James accused the government of lying to the public about its intentions on the tax during the last provincial election campaign. "Serving the people of British Columbia means telling them the truth," she said. Liberals maintained during the May election campaign that they did not intend to follow Ontario in adopting the HST.

Mr. Hansen told the legislature his government did evaluate the potential change but it wasn't until after the election that his finance analysts persuaded him it was a good move.

I have not covered the British Columbia Investment Management Corporation (bcIMC) much in my blog, but I did go over their 2008-2009 annual report and noticed that its President & CEO, Doug Pearce, got compensated $1,018,323, followed by Lincoln Webb, VP Private Placements who got compensated $616,112 and Bryan Thomson, VP Equity Investments, with a total compensation of $541, 367:

(click on image to enlarge)

Now, these are good compensations but nowhere near what their counterparts are getting in Eastern Canada and bcIMC is one of the largest funds in the country.

How did it perform in 2008-2009? From the annual report, we see that they lost 14.6% in 2008-2009 relative to their benchmark of -11.1%. In other words, they underperformed their benchmark by 3.5%, which is considerable, but their overall results are among the best of the large funds. Interestingly, bcIMC which is known to be "less sophisticated' than its counterparts in Canada, managed to lose a lot less than most of them and its senior managers didn't get paid anywhere near as well as most of their counterparts out east (not that they got paid badly either after losing billions).

Moreover, as shown below, bcIMC clearly presents its benchmarks in its annual report (page 21):

(click on image to enlarge)

I have issues with their private market benchmarks because in the good years, they are easy to beat and in the bad years, they are almost impossible to beat. This will come back to haunt them as private markets suffer a protracted downturn (better to use a spread over public markets to reflect the beta, illiquidity and leverage of private markets).

Finally, I read on Zero Hedge about Michael Moore's Latest Love Story: Capitalism (see video below). I wish Mr. Moore read some of my emails when I was discussing the pension crisis so he could see how the pension crooks steal money legally and get exalted at the same time.

Oh well, you will all have to wait for my movie to come out some time in the future. Till then, I hope politicians will clean house at Canada's public pension funds because while most people are hurting, the pension parrots are laughing all the way to the bank. Come on guys, show us your Lotto 6/49 happy dance!

Sunday, August 30, 2009

Ted Kennedy Jr. On Climbing Hills

The world listened yesterday as Ted Kennedy Jr. remembered his father:

My name is Ted Kennedy Jr., a name I share with my son, a name I share with my father. Although it hasn't been easy at times to live with this name, I've never been more proud of it than I am today.

Your eminence, thank you for being here. You grace us with your presence.

To all the musicians who've come here, my father loved the arts and he would be so pleased for your performances today.

My heart is filled -- and I first want to say thank you -- my heart is filled with appreciation and gratitude. To the people of Massachusetts, my father's loyal staff -- in many ways, my dad's loss is just as great for them as it is for those of us in our family.

And to all of my father’s family and friends who have come to pay their respects, listening to people speak about how my father impacted their lives and the deep personal connection that people felt with my dad has been an overwhelming emotional experience.

My dad had the greatest friends in the world. All of you here are also my friends, and his greatest gift to me. I love you just as much as he did.

Sara Brown, the Taoiseach, President Obama, President Clinton, Secretary Clinton, President Bush, President Carter, you honor my family with your presence here today.

I remember how my dad would tell audiences years ago, "I don't mind not being President, I just mind that someone else is."

There is much to say, and much will be said, about Ted Kennedy the statesman, the master of the legislative process and bipartisan compromise, workhorse of the Senate, beacon of social justice and protector of the people.

There is also much to say and much will be said about my father the man. The storyteller, the lover of costume parties, a practical joker, the accomplished painter. He was a lover of everything French: cheese, wine, and women. He was a mountain climber, navigator, skipper, tactician, airplane pilot, rodeo rider, ski jumper, dog lover, and all around adventurer. Our family vacations left us all injured and exhausted.

He was a dinner table debater and devil's advocate. He was an Irishman and a proud member of the Democratic Party.

Here's one you may not know: Out of Harvard he was a Green Bay Packers recruit but decided to go to law school instead.

He was a devout Catholic whose faith helped him survive unbearable losses and whose teachings taught him that he had a moral obligation to help others in need.

He was not perfect, far from it. But my father believed in redemption and he never surrendered. Never stopped trying to right wrongs, be they the results of his own failings or of ours.

But today I'm simply compelled to remember Ted Kennedy as my father and my best friend. When I was 12 years old I was diagnosed with bone cancer and a few months after I lost my leg, there was a heavy snowfall over my childhood home outside of Washington D.C. My father went to the garage to get the old Flexible Flyer and asked me if I wanted to go sledding down the steep driveway. And I was trying to get used to my new artificial leg and the hill was covered with ice and snow and it wasn't easy for me to walk. And the hill was very slick and as I struggled to walk, I slipped and I fell on the ice and I started to cry and I said "I can't do this." I said, "I'll never be able to climb that hill."

And he lifted me in his strong, gentle arms and said something I'll never forget. He said "I know you'll do it, there is nothing you can't do. We're going to climb that hill together, even if it takes us all day."

Sure enough, he held me around my waist and we slowly made it to the top, and, you know, at age 12 losing a leg pretty much seems like the end of the world, but as I climbed onto his back and we flew down the hill that day I knew he was right. I knew I was going to be OK. You see, my father taught me that even our most profound losses are survivable and it is what we do with that loss, our ability to transform it into a positive event, that is one of my father's greatest lessons. He taught me that nothing is impossible.

During the summer months when I was growing up, my father would arrive late in the afternoon from Washington on Fridays and as soon as he got to Cape Cod, he would want to go straight out and practice sailing maneuvers . . . in anticipation of that weekend's races.

And we'd be out late, and the sun would be setting, and family dinner would be getting cold, and we’d still be out there practicing our jibes and spinnaker sets long after everyone else had gone ashore. Well one night, not another boat in sight on the summer sea, I asked him, "Why are we always the last ones on the water?" Teddy, he said, "Well, you see, most of the other sailors we race against are smarter and more talented than we are. But the reason why we are going to win is that we are going to work harder than them and we will be better prepared."

And he just wasn't talking about boating. My father admired perseverance. My father believed that to do a job effectively required a tremendous amount of time and effort.

Dad instilled in me also the importance of history and biography. He loved Boston and the amazing writers, and philosophers, and politicians from Massachusetts. He took me and my cousins to the Old North Church, and to Walden Pond, and to the homes of Herman Melville and Nathaniel Hawthorne in the Berkshires. He thought that Massachusetts was the greatest place on earth. And he had letters from many of its former senators like Daniel Webster and John Quincy Adams hanging on his walls, inspired by things heroic.

He was a civil war buff. When we were growing up he would pack us all into his car or rented camper and we would travel around to all the great battlefields. I remember he would frequently meet with his friend Shelby Foote at a particular site on the anniversary of a historic battle, just so he could appreciate better what the soldiers must have experienced on that day.

He believed that in order to know what to do in the future, you had to understand the past. My father loved other old things. He loved his classic wooden schooner, the Mya, He loved lighthouses and his 1973 Pontiac convertible.

My father taught me to treat everyone I meet, no matter what station in life, with the same dignity and respect. He could be discussing arm control with the president at 3 p.m. and meeting with a union carpenter on fair wage legislation or a New Bedford fisherman on fisheries policy at 4:30.

I once told him that he accidentally left some money, I remember this when I was a little kid, on the sink in our hotel room. And he replied "Teddy, let me tell you something. Making beds all day is back-breaking work. The woman who has to clean up after us today has a family to feed."

And that's just the kind of guy he was.

He answered Uncle Joe's call to patriotism, Uncle Jack's call to public service, and Bobby's determination to seek a newer world. Unlike them, he lived to be a grandfather, and knowing what my cousins have been through I feel grateful that I have had my father as long as I did.

He even taught me some of life's harder lessons, such as how to like Republicans. He once told me, he said, "Teddy, Republicans love this country just as much as I do." I think that he felt like he had something in common with his Republican counterparts: the vagaries of public opinion, the constant scrutiny of the press, the endless campaigning for the next election, but most of all, the incredible shared sacrifice that being in public life demands. He understood the hardship that politics has on a family and the hard work and commitment that it requires.

He often brought his republican colleagues home for dinner and he believed in developing personal relationships and honoring differences. And one of the wonderful experiences that I will remember today is how many of his republican colleges are sitting here, right before him. That's a true testament to the man. And he always told me that, "Always be ready to compromise but never compromise on your principles." He was an idealist and a pragmatist. He was restless but patient.

When he learned that a survey of Republican senators named him the Democratic legislator that they most wanted to work with and that John McCain called him the single most effective member of the U.S. Senate, he was so proud because he considered the combination of accolades from your supporters and respect from your sometime political adversaries as one of the ultimate goals of a successful political life.

At the end of his life, my dad returned home. He died at the place he loved more than any other, Cape Cod. The last months of my dad’s life were not sad or terrifying, but filled with profound experiences, a series of moments more precious than I could have imagined. He taught me more about humility, vulnerability, and courage than he had taught me in my whole life.

Although he lived a full and complete life by any measure, the fact was he wasn’t done. He still had work to do. He was so proud of where we had recently come as a nation, and although I do grieve for might have been, for what he might have helped us accomplish, I pray today that we can set aside this sadness and instead celebrate all that he was, and did, and stood for. I will try to live up to the high standard that my father set for all of us when he said "The work goes on, the cause endures, the hope still lives, and the dream shall never die."

I love you dad and I always will. I miss you already.

I was moved by Ted Kennedy Jr.'s speech, more than any other speech because I know first-hand about "climbing hills". Multiple Sclerosis has presented me with many challenges, and as the years go by, it doesn't get any easier.

But every time I stumble (both literally and figuratively), I manage to get up, dust myself off and forge ahead. Like Ted Kennedy Jr., I am lucky to have the support of my family and close friends and I will fight as long as I have to because no matter how hard it gets, I consider myself fortunate and blessed.

Finally, what I will remember from Ted Kennedy Sr. is his tenacity, his intellect, his sense of humor and his empathy for those less fortunate than he and his family. We all have our part to play in making this a better world for the short period we are here. Let's hope we can honor this man by continuing to fight for what is just and right in our society.

Enjoy your weekend and please watch Ted Kennedy Jr.'s entire eulogy by clicking here. Below is the passage that moved me.

Thursday, August 27, 2009

Overhaul or Tweak Pensions?

Reporting for the NYT, Mary Williams Walsh asks, An Overhaul or a Tweak for Pensions:
After more than three years of deliberations, the board that sets the accounting rules for state and city governments is still far away from issuing a new standard for public pension funds.

What may seem like tedious labors over technical matters can have a large impact on public employees, taxpayers and investors. Many municipalities around the country are grappling with serious shortfalls in their pension funds caused by the recession and other woes.

Since the deliberations began, San Diego’s finances have been rocked by a pension scandal; Vallejo, Calif., has filed for bankruptcy after promising costly benefits; and New Jersey has warned that it lacks the cash to comply with its actuary’s instructions.

The panel, the Governmental Accounting Standards Board, heard impassioned testimony on Wednesday on the need to make public pension numbers more straightforward, more closely mirroring the pension accounting for corporations. But proponents of an overhaul were countered at every step by state officials and others who testified that broad changes were unnecessary and would disrupt budgets by introducing market volatility.

The board, an independent nonprofit organization that sets the accounting standards for governments, has said that the next step will be the publication, by next May, of a “due process document” to offer possible changes in the rules. That will engender a new round of public comment and revisions, and eventually a new pension accounting standard. The process is expected to take several more years.

“I have concerns that these efforts may, in fact, be too late,” one speaker, Diann Shipione, told the board. She said that the existing accounting rules were too loose, allowing “pension mischief” to go on for many years.

“As a result of the fuzziness and imprecision,” she said, “we now have many large systems that are essentially insolvent.”

Ms. Shipione, a former trustee of the San Diego city pension fund, eventually became a whistle-blower, insisting that the fund’s financial reporting was false, constituting securities fraud. After a long legal battle, the Securities and Exchange Commission agreed with her. She is now earning a master’s degree in public administration at the Kennedy School of Government at Harvard.

Ms. Shipione told the accounting board that she thought revisions were needed to make it easier to see when states and cities were falling behind on their pension contributions, which she hoped would prompt them to pump more money into the plans.

But some members of the board took issue with her goals. William W. Holder, one member of the accounting board, told Ms. Shipione that the board’s duty was to write rules that produced accurate and informative financial reports — not to promote desirable activities like funding pension plans more robustly.

“We try to avoid bias in setting accounting standards,” he said. “What we don’t try to do is develop some preconceived notion of what that behavior would be, and then write a standard that would encourage it.”

In the corporate world, the Financial Accounting Standards Board writes the rules for pension disclosures. It also seeks to avoid bias, and also works at a slow, deliberative pace.

But FASB has a great deal more power and independence than its governmental cousin. Its rules are enforced by the S.E.C., and it was given an independent funding source in the post-Enron accounting reforms. The corporate pension accounting rules came under harsh criticism at the beginning of this decade, and the FASB has already issued some revisions. Others are still in the works.

The governmental board, by contrast, must still raise its own money. And because no government agency enforces its policies, it must issue rules that states and municipalities will adopt voluntarily. Six of its seven members work on a part-time basis.

Others who spoke on Wednesday sought to assure the accounting board that its existing rules were sound. They acknowledged that some governments had had pension debacles in the last few years but said that was because they did not follow the rules.

Robert A. Wylie, executive director of the South Dakota Retirement System, said that pension woes were largely absent in his state and that his plan had a well-established funding policy.

Mr. Wylie said South Dakota had the ability to reduce promised benefits when times were tight, something forbidden by statute or constitution in many other states. Because of this flexibility, he said, South Dakota had always been able to keep its contributions in line with its benefits. For a state like South Dakota, he said, the existing pension rules were “very workable.”

“Major changes may add to what would be, in our mind, confusion,” he said.

Questions posed by the board members suggested they were leaning toward making narrow changes in the existing rules, like shortening amortization schedules or reducing the number of actuarial methods that plans may use. They did not seem eager to grapple with the question of which discount rate to use to measure public pension obligations — the biggest issue in the minds of critics of the current rules.

A recent study published by the National Bureau of Economic Research found that the discount rates now in use were masking a pension shortfall of $1.2 trillion at the state level.

The questions from the board members also suggested that they were interested in making public pension funds more comparable to each other. The current accounting rules allow so much flexibility that comparisons can be unfair.

Jeremy Gold, an actuary and economist who testified at Wednesday’s meeting, said he expected that when the new standard was finally issued, it would improve the comparability of pension plans.

“The center of gravity is still in favor of sharper pencils, rather than a whole new way of doing things,” said Mr. Gold, who called for radical changes. “This will make Texas, California and New Jersey all comparable while they go to hell in a handbasket.”

The accounting board will reconvene in Washington on Friday for additional testimony.

Some comments on this story. First, I commend Ms. Shipione for stepping forth to speak out at what was going on at San Diego's city pension fund. Last September, I wrote about the need to defend whistleblowers, something which is still not being taken seriously at public pension funds.

San Diego's Retirement System was notorious for taking huge risks in all sorts of alternative investments and lost big money in the Amaranth gamble. But city pension funds across North America are in dire straights and instead of consolidating them into the state funds to save costs, powerful interests want to keep the status quo. When it comes to municipal pension plans, Pennsylvania is king:

Pennsylvania has four times more pension funds than any other state, and more than one-fourth of all the municipal pension plans in the country, according to the Public Employee Retirement Commission, an agency that advises the Legislature on pension issues and oversees the soundness of local plans. The number of local plans is growing by about 30 a year.

Most of the 3,100 retirement systems, for police, firefighters or nonuniformed workers, are small. That's costly for members and taxpayers. Of 2,462 that reported administrative expenses, the cost was $36 million, or $509 annually per member.

The cost per member is $1,519 for administrative expenses for plans with fewer than 10 members, the retirement commission says, and 67 percent of Pennsylvania's local pension systems are that small.

The USA Today asks whether campaign contributions help win pension fund deals:

More than two dozen firms that have surfaced in a broad corruption investigation of public pension funds gave at least $1.97 million in campaign contributions to officials with potential influence over the funds' investments, a USA TODAY analysis shows.

The givers included private-equity giants such as the Blackstone Group, the Carlyle Group and the Quadrangle Group, the firm founded by Steven Rattner, who in July resigned as the White House point man for the auto industry rescue. The contributions are legal, and the firms haven't been accused of wrongdoing related to the giving.

[Note: They should ban these contributions once and for all! Read John Bury's comment, Rules By and For Insiders - Public Pension Plans.]

The Government Accountability Office – the investigative arm of Congress – has laid some of the groundwork for pension reform by publishing a study of the “retirement risks” posed by private pension plans in the United States:

“Many experts agree reforms are needed to make the U.S. private pension system more effective in protecting workers from risks to accumulating and preserving adequate savings for retirement,” says the GAO report. “If no action is taken, a considerable number of Americans face the prospect of a reduced standard of living in retirement."

The July 2009 report is addressed to Rep. George Miller (D-Calif.), chairman of the House Education and Labor Committee. Miller is an advocate of “retirement security.”

As part of its study, the GAO examined the pension systems of the Netherlands, Switzerland and the United Kingdom and found that private pensions in those countries “represent alternative approaches” that could “yield useful lessons for the U.S. experience.”

The GAO also examined four “key” domestic proposals to reform the U.S. private pension system – including a government-sponsored, mandatory system called the Guaranteed Retirement Accounts (GRA) plan.

Under this plan, the federal government (Social Security Administration) would establish and administer a system of retirement savings accounts – guaranteeing a specified rate of return on those accounts.

Currently, pension plans offered by private employers in the United States are voluntary and include tax incentives to encourage participation.

The problem

According to the GAO study, stock market losses and poor economic conditions have put many U.S. workers at risk of not having an adequate retirement income from their private pension plans. Older Americans are less confident in their ability to retire. “Even before the current economic recession, research indicated that pension benefits are likely to be inadequate for many Americans,” the GAO study said.

Pointing to national survey data, the GAO noted that about half of the U.S. workforce was not covered by a pension plan in 2008.
Workers covered by defined contribution plans -- such as 401(k)s and IRAs -- risk making inadequate contributions or earning poor investment returns, the study found, while workers with traditional employer-sponsored, defined-benefit plans risk future benefit losses due to a lack of portability if they change jobs.

Leakage (withdrawing money before retirement), high fees, and “the inappropriate drawdown of benefits in retirement” are other concerns, the GAO said.


The GAO says its study focused on the Netherlands, Switzerland, and the United Kingdom because their private pension systems address many of the risks that U.S. workers face. Those systems also demonstrate “mandatory approaches can be used to increase coverage or contributions,” the GAO said.

But, as the GAO also noted, mandatory approaches – which have produced nearly universal coverage in the Netherlands and Switzerland -- also pose trade-offs. For example, in the Dutch and Swiss systems, sharing investment risk requires assets to be pooled and thus limits individual choice. And requiring annuities as a way for retirees to draw down their benefits limits people’s access to their assets.

Mandatory, government-run pension system here?

Of the four domestic proposals examined in the GAO report, only one is both mandatory and run by the government. Guaranteed Retirement Accounts (mentioned briefly above) would increase retirement savings by low- and middle-income households and provide a basic retirement income for workers, the GAO said.

Under GRA, both workers and employers would pay a mandatory minimum contribution of 2.5 percent each. Borrowing from the plan would be prohibited; and hardship withdrawals would be allowed only in case of disability.

Tax preferences for 401(k) plans and Individual Retirement Accounts would be replaced by a uniform $600 tax credit for all workers, regardless of income. State and local governments would have to notify the federal government of marriages and divorces so that contributions can be apportioned evenly between husbands and wives. State governments also would have to report who is receiving unemployment benefits to the Internal Revenue Service.

A centralized pension plan such as GRA would make “portability” easier and economies of scale would lower administrative costs, the GAO report said. But such a plan “may also be a costly and complex effort that requires new regulatory and oversight efforts. These costs could be passed on to workers, employers, and taxpayers in general.”

Three other domestic pension proposals examined by the GAO were more voluntary in nature. Two of those three were run by the private sector.

The GAO study concluded that no retirement system or pension proposal is perfect: “The challenge for Congress will be to balance the interests and responsibilities of workers, employers, and the government and find the most promising steps to help Americans achieve retirement security.”

Rep. Miller, to whom the GAO report is addressed, promised in October 2008 that his Labor and Education Committee would continue to “examine what measures may be needed to ensure a safe and secure retirement for workers, retirees and their families.”

At a House Education and Labor Committee hearing in February, Miller said it’s time for Congress to address “difficult questions about the state of our nation’s retirement system as a whole and look to see whether we need to create a retirement system that works for all Americans, not just the fortunate few.”

Over in the U.K., Dr. Ros Altman writes Get Real On Public Sector Pensions:

Today's Times suggests ministers are planning significant changes to council workers' pension arrangements – and probably to most other public sector pensions, too. Naturally, unions have reacted angrily, while taxpayer lobby groups welcome the proposals.

In my view, however, change is inevitable. With private sector final salary schemes across the country in deep deficit, employers are desperately looking for ways to reduce future pensions, or are closing schemes altogether. These economic realities cannot escape the public sector. The costs of these pension commitments have soared way beyond all previous expectations, as public sector employment levels and salaries have risen much faster than expected and workers are living ever longer.

Like almost all private sector schemes, local authority pension funds are in deficit (an estimated £60bn) as investment returns have not kept up with rising pension liabilities. Council tax increases alone cannot fund this shortfall, especially as the number of workers retiring will rise sharply in coming years. Already, about a quarter of some areas' council tax receipts is spent on pensions, and there is a limit to how far this can increase without jeopardising services or risking taxpayer revolts.

Ultimately, central government – that is, taxpayers across the country – will be forced to make up the difference between what councils can afford and the pension obligations they are committed to. But they already underwrite all other public sector pensions and, unlike local authority pensions, most public sector schemes are unfunded, which means absolutely no money has been set aside to pay the future pensions. Taxpayers in years to come will somehow have to find the money.

Government has not properly budgeted for this, having consistently tried to hide the true costs. When considering public sector pay, comparisons are generally made with the private sector, but the costs of pension accrual are not factored in, almost as if they do not exist. Of course pensions are paid many years hence, but the costs are nevertheless real.

A public sector pension is now probably worth about 30% extra salary, but public workers contribute well below 10% to their pensions, and sometimes nothing at all. Taxpayers have to make up all the difference. Also, unlike state pensions, there is no flexibility in these arrangements. When it comes to national insurance pensions, government can decide to change the parameters in order to control taxpayer costs. Indeed, national insurance pensions have been cut over the years, and pension ages will rise sharply, especially for women, as we are all living longer and healthier lives.

Public sector pensions cannot escape such realities forever, and the leaked proposals may herald a new round of reform. It is important to stress that any changes will not affect existing pensioners and will not reduce pensions that existing workers have already accrued.

However, unrealistic expectations will have to change, and we need transparency on the true costs of public sector pension commitments.

Workers are likely to have to either contribute much more each year or face the choice between working longer or receiving less pension in future.

Yes, of course public sector workers deserve a decent pension, but so do all pensioners. With such a low state pension, is it sustainable for good public sector pensions to be increasingly funded by taxpayers, who themselves have no such generous pension arrangements?

Public sector pensions should not be an alternative social welfare pension that is denied to, yet supported by, other taxpayers.

Finally, Pensions & Investments reports that Kennedy remembered for role in pension policy:

Sen. Edward M. Kennedy, D-Mass., who died of brain cancer Tuesday night, played a leading role in shaping U.S. pension policy, including the Pension Protection Act of 2006, the largest single reform of the U.S. pension system since the Employee Retirement Income Security Act of 1974.

Mr. Kennedy, chairman of the Senate Health, Education, Labor and Pensions Committee, was active even through his final weeks, working on pension-related issues in Congress and with the Obama administration.

He was “known for attracting the best and brightest minds, so it (came) as no surprise that Kennedy staffers would be mentioned for any number of positions” for top pension-related posts in the Obama administration, Anthony Coley, a spokesman for Mr. Kennedy, said in a Nov. 10, 2008, Pensions & Investments story, underscoring Mr. Kennedy's influence on pension policy and legislation in his Senate career, stretching back to 1962.

“Sen. Kennedy was very involved in pension issues and always took a pragmatic approach,” James A. Klein, president of the corporate pension advocacy group American Benefits Council, said in an interview.

In regard to Mr. Kennedy's work last December on the Worker, Retiree and Employer Recovery Act of 2008, providing corporate pension funding relief from the market meltdown and economic downturn, Mr. Klein said, “Sen. Kennedy tried to address issues on funding that wouldn't unduly burden the system.”

While Mr. Kennedy was better known for his work on health care, education and civil rights, “on pension issues that were not in the headlines, he worked very collaboratively with his Republican colleagues,” Mr. Klein said.

Ted Godbout, manager-communications at the ERISA Industry Committee, another pension policy advocacy group, said in a statement, “While we did not always agree with Sen. Kennedy's approach to pension and retirement policy, he was a friend of ERIC's and we always respected and admired his leadership and willingness to work with both parties to find common ground. He truly will be missed.”

”Sen. Kennedy was a national treasure,” Amy Borrus, deputy director of the Council of Institutional Investors, said in a statement. “He was one of the most effective leaders in the Senate and a widely respected voice on pension issues.”

In May, concerning allegations that Charles E.F. Millard, a former PBGC director, was inappropriately involved with the hiring managers to invest $2.5 billion, Mr. Kennedy joined five other senators, Republicans as well as Democrats, to refer the case to the Department of Justice, according to a June 1 P&I report.

The landmark Pension Protection Act toughened corporate funding requirements to strengthen the financial condition of pension plans and encouraged automatic enrollment in 401(k) plans, furthering retirement security.

I was chatting with Diane Urquhart today and we both agreed that even though Senator Kennedy went through some personal tragedies and controversies, he was a once in a lifetime politician - a true national treasure. She told me that the Canadian House of Commons couldn't accomplish a fraction of what he has accomplished in over 50 years.

Indeed, Senator Ted Kennedy's legislative record speaks for itself. He championed many great causes that I hold dear to my heart, including the American Disabilities Act, to prevent discrimination against people with disabilities.

If Senator Kennedy were alive today, he would be spearheading the health care debate as well as the pension crisis. And he wouldn't be tweaking anything, but going for an overhaul of the entire system to ensure everyone retires in dignity and security.

Below, I leave you with one of his greatest speeches ever - his 1978 speech on health care. The Senate's last lion will be sorely missed by everyone. May he rest in peace and may we all remember him and fight for what is right to make our society a better one for all, not just for the privileged few.

Tuesday, August 25, 2009

A Lesson in Liquidity?

I want to follow-up on my last post on Harvard's mea culpa. Last week, James B. Stewart reported in the WSJ that Ivy League Schools Learn a Lesson in Liquidity:

Just a year ago, in the midst of the subprime meltdown, many of the nation's top universities and colleges were reporting significant gains. This year, the University of Pennsylvania is being hailed for Ivy League-leading results—with a decline of 15.7% for its fiscal year ended in June.

Results from other schools are still trickling in, but Harvard University has said it is expecting to report a drop of 30%, and Yale University about 25%. Considering the size of these endowments, these are staggering losses in absolute terms—many billions in the case of both Harvard and Yale.

Students soon will be heading back to larger classes, curtailed extracurricular activities and cheaper dining-hall fare. But the results are also of more than academic interest to investors like me, who have to some degree modeled their portfolios on the diversified asset-allocation model pioneered by Yale's chief investment officer, David Swensen. What I refer to as the Ivy League approach for individuals calls for diversification along similar lines as the large university endowments—equities (domestic and foreign), fixed income, and real assets (which includes commodities and real estate), but with a much higher allocation to so-called nontraditional asset categories: emerging-market equities and debt, energy and commodities. Yale allocated just 10% to U.S. equities and 4% to fixed income, with 15% in foreign equities and 29% in so-called real assets as of June 30, 2008.

The major difference is that most individual investors didn't qualify or otherwise couldn't invest in the hedge funds and private equity and venture-capital partnerships that make up a large part of university endowments. At Yale, 25% of the endowment was in what the university calls "absolute return," mostly hedge funds, and 20% was in private equity.

The irony is that turned out to be a huge advantage for individual investors this past year, when, in the midst of unprecedented market turmoil, many endowment managers learned the true meaning of "illiquid." The exits for most private equity and venture-capital funds slammed shut. Existing positions yielded no cash flow even as investment partnerships made new demands for funding. Many investors were forced to sell their liquid investments into weak markets to fund cash needs and to meet prior commitments to investment funds. Asset allocations went wildly out of balance, overweighted to illiquid partnerships as the value of equities plunged. It's a wonder that last year's results weren't even worse.

Liquidity turned out to be the Achilles' heel of the Ivy League model. But what about its core premise—diversification? True, nearly every asset category declined at some point in 2008, even those that were supposed to be uncorrelated, like equities and high-quality corporate bonds.

But for individuals who followed a diversification strategy—and who weren't forced to sell anything at distressed prices—those values have rebounded sharply, with many of the nontraditional categories, such as emerging-market equities and commodities, outperforming U.S. stock indexes. By sticking to liquid alternatives to private partnerships—such as mutual funds, exchange-traded funds, and real-estate investment trusts and publicly traded stocks and bonds—individual investors should have done far better than even the University of Pennsylvania.

Penn, too, found itself in quite a few illiquid partnerships. But it notched its league-beating return with some old-fashioned market timing. Chief Investment Officer Kristin Gilbertson recently told The Wall Street Journal that in early 2008 she started reducing the portion of the endowment in public equities to 43% from 53% and put about 15% in Treasurys. It turned out to be a shrewd move, and by endowment standards, which rarely stray from predetermined asset allocations, a bold one. The highly liquid Treasurys were one of the few assets to hold their value over the period and also enabled the university to meet capital calls from private-equity firms.

Market timing can be difficult, but I suspect some degree of it will increasingly be worked into endowment-allocation models. It will probably take years for the lessons of 2008 to be absorbed. But you can be sure that liquidity will gain new respect.

I think that in the environment we are heading in, there will be a premium placed on liquidity. Long gone are the days where you tie up your money for ten years in private equity or accept lock-ups of three years with some hedge fund (some are stupid enough to do this).

Investors are thinking long and hard about their liquidity needs as their pension plans mature. Some pension funds are eying commercial property, but the majority are standing pat. Mr. Gilbertson's shrewd move into Treasuries saved Penn's endowment fund from serious losses in 2008 and I happen to think that these type of portfolio shifts will be required if you're going to make money in the next decade. But market timing is a double-edged sword because if you're wrong, you risk seriously underperforming your policy portfolio. Again, focus on what Harvard's Jane Mendillo said, you have to stay liquid and be nimble.

Finally, please take the time to listen to my interview with Steve and the crew at Two Beers With Steve Podcast. It is an informal discussion on pensions where I shared some of my thoughts on the pension crisis and its long-term implications.

Sunday, August 23, 2009

On Blogging Brawls and Bragging Rights

A couple of days ago Yves Smith of Naked Capitalism posted a comment, Who Is Tyler Durden? The post generated over 187 comments (and still counting), most of which were infantile swipes from morons claiming that one blog is better than the other one.

I got carried away too and used language that I shouldn't have, but after sleeping on it, I want to offer you some of my thoughts on these blogging brawls and bragging rights.

First, while I defended Yves from the vitriolic attacks in the comments, her post was stupid and probably done to stir up shit in the blogosphere. As I stated in the comments, who cares who Tyler Durden is? Whether it is one person or a group of people posting anonymously, is irrelevant. As long as Zero Hedge keeps delivering interesting comments, people will read it and make up their own minds as to accuracy of what they are reporting.

That brings up my second point. Everyone has an agenda, including yours truly, and so does Yves Smith of Naked Capitalism. Everyone has their "schtick" and they want to be heard. The thing that gets me is that some people are a lot more transparent than others in their agenda. I use my real name, you can read all about me on my profile, I tell you my agenda right at the top of my blog. I say this because I just found out yesterday that Yves Smith is Susan Webber of Aurora Advisors.

[Note: Admittedly, I am an idiot because when I first started reading Naked Capitalism, I thought Yves was a guy. She then sent me an outline of her new book and I still couldn't figure out who she is. She even emailed me once or twice as Susan Webber and I never put two and two together because at that time, I thought it was someone else. You have to scroll all the way down to the bottom of her blog to see Aurora Advisors. No problem, I wish she told me right off the bat in clear English or posted it on her blog clearly so I can add her company to my list of advisors on my blog, which I gladly did last night.]

Third, your credibility is only as good as what you post. I can easily castigate Yves Smith, citing that she worked for Goldman Sachs or that Lehman Brothers and Soros Fund Management are part of her firm's client list. I can conjure up a conspiracy theory that tells you Goldman Sachs is behind Naked Capitalism to bombard the market with disinformation. But Yves has posted numerous critical comments, some of which are highly critical of the financial establishment. I do not question her credibility, but I would have liked it if she was more upfront of who she is and where she works. If you are selling your services to clients in the financial world, you should disclose it.

Fourth, posting anonymously does not detract from the message but again, please state your qualifications and your agenda. Everyone has their agenda, so just be upfront and state it. Some of us stick our necks out more than others, however, because quite frankly, we got nothing to lose. As I told one former pension bully who kept threatening to sue me, "I know the truth and will disclose it in a court of law. I got nothing to lose." It cost me a future in the pension industry, but I had my fill of pension parrots and pension politicians and their feeble cover-your-ass board of directors.

Fifth, I find it absurd when I read comments like "this blog is the best or that blog is the best". Why do we blog? Because we are fed up with the bullshit that the investment bankers, banks, insurance companies, private funds, mutual funds, and pension funds are feeding us. I consider blogs as another medium to help me gain an edge in what is really going on.

Importantly, the blogosphere has fast become a key medium in the information arbitrage business. There are many excellent blogs out there and none of them have a monopoly on wisdom. Some think they are more important than others, but they are only fooling themselves.

Sixth, we all have our personal tastes when it comes to blogs. For example, when I want to know about markets, I love reading Tim Knight's Slope of Hope, Ben Bittrolff's Financial Ninja, and David Spurr's Displaced EMA. The Kirk Report recently had an excellent Q&A with Tim Knight which put it succinctly:
In fact, every time you visit his blog you can count on Tim saying or sharing something that is likely to amuse you and/or at least get you thinking about something. His perspectives are always fresh, witty, and clearly different than the typical "we're always in a bull market" garbage found within the mainstream financial press.
I do not always agree with Tim, Ben or David, especially recently where I feel their bearish tone totally underestimated the effects of performance anxiety following a horrible Q1. But what I appreciate is their free thinking and the fact that they have "skin in the game". They are individual traders trying to make a living, not some investment bank trying to sell ideas to big institutional clients (so they can front run them or take the opposite side of the trade). I will say it again, in the environment we are heading, small is beautiful and you'd better forget what the claptraps on Wall Street are saying and pay close attention to what the top hedge funds are buying.

As far as big picture ideas, I like reading many blogs, but the best ideas often come from other sources like Hoisington Investment Management and Absolute Return Partners. I especially like reading independent thinkers like Michael Hudson (read his latest on the specter of debt revolt haunting Europe) and Henry Liu who has many excellent articles on his website and on Asia Times' Complete Henry CK Liu. There are academics and numerous other commentators that I place ahead of any blog in my "must read" category. That is why I have placed extensive list of links on my blog so you can access these comments.

Finally, every blogger has his or her own style. I like posting links to articles, often posting the full article and adding comments (short or long) at the end. Yves and Mish like interjecting on some passages. That is their style and their right (I find it too "mish-mash" for my taste). As far as copyrights, the minute someone posts and article on the internet for everyone to view, it is open. I give full credit where credit is due, posting the link and stating the authors and source, but I like posting full articles so people avoid going back and forth. That is my style and I make no apologies for this (okay Mr. Mish?!?!).

On that final note, I will let all my readers know that I decided to stop posting on Naked Capitalism. I thank Yves for the opportunity, but I am an independent thinker who does not like to be edited and to be honest, I have overextended my stay there and helped her out enough while she wrote her book. I decided to join the team over at Zero Hedge, using my real name, and will continue posting my material as I see fit.

I invite all of you to keep reading Pension Pulse regularly as I keep discussing trends in the pension industry and financial markets the way I've been diligently doing for a little over a year now. I still do not allow comments on my blog because I do not have the time nor the inclination to police them. Feel free to email me ( if you have any specific comments on my posts.


Bill Tufts of Fair Pensions For All was kind enough to send me this interesting article, Bloggers hitch wagons to the traditional media.

Saturday, August 22, 2009

The End of a 30-Year Wealth Bubble?

David Leonhardt and Geraldine Fabrikant of the NYT report that the Rise of the Super-Rich Hits a Sobering Wall:

They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. The recent news about resurgent Wall Street pay has seemed to suggest that not even the Great Recession could reverse the rise in income inequality.

But economists say — and data is beginning to show — that a significant change may in fact be under way. The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. And many may not return to their old levels of wealth and income anytime soon.

For every investment banker whose pay has recovered to its prerecession levels, there are several who have lost their jobs — as well as many wealthy investors who have lost millions. As a result, economists and other analysts say, a 30-year period in which the super-rich became both wealthier and more numerous may now be ending.

The relative struggles of the rich may elicit little sympathy from less well-off families who are dealing with the effects of the worst recession in a generation. But the change does raise several broader economic questions. Among them is whether harder times for the rich will ultimately benefit the middle class and the poor, given that the huge recent increase in top incomes coincided with slow income growth for almost every other group. In blunter terms, the question is whether the better metaphor for the economy is a rising tide that can lift all boats — or a zero-sum game.

Just how much poorer the rich will become remains unclear. It will be determined by, among other things, whether the stock market continues its recent rally and what new laws Congress passes in the wake of the financial crisis. At the very least, though, the rich seem unlikely to return to the trajectory they were on.

Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

Bill Gates, Warren E. Buffett, the heirs to the Wal-Mart Stores fortune and the founders of Google each lost billions last year, according to Forbes magazine. In one stark example, John McAfee, an entrepreneur who founded the antivirus software company that bears his name, is now worth about $4 million, from a peak of more than $100 million. Mr. McAfee will soon auction off his last big property because he needs cash to pay his bills after having been caught off guard by the simultaneous crash in real estate and stocks.

“I had no clue,” he said, “that there would be this tandem collapse.”

Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price. In one ZIP code in Vail, Colo., only five homes sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick. In Bronxville, an affluent New York suburb, the decline was to two, from 17, according to Coldwell Banker Residential Brokerage.

We had a period of roughly 50 years, from 1929 to 1979, when the income distribution tended to flatten,” said Neal Soss, the chief economist at Credit Suisse. “Since the early ’80s, incomes have tended to get less equal. And I think we’ve entered a phase now where society will move to a more equal distribution.”

No More ’50s and ’60s

Few economists expect the country to return to the relatively flat income distribution of the 1950s and 1960s. Indeed, they say that inequality is likely to remain significantly greater than it was for most of the 20th century. The Obama administration has not proposed completely rewriting the rules for Wall Street or raising the top income-tax rate to anywhere near 70 percent, its level as recently as 1980. Market forces that have increased inequality, like globalization, are also not going away.

But economists say that the rich will probably not recover their losses immediately, as they did in the wake of the dot-com crash earlier this decade. That quick recovery came courtesy of a new bubble in stocks, which in 2007 were more expensive by some measures than they had been at any other point save the bull markets of the 1920s or 1990s. This time, analysts say, Wall Street seems unlikely to return soon to the extreme levels of borrowing that made such a bubble possible.

Any major shift in the financial status of the rich could have big implications. A drop in their income and wealth would complicate life for elite universities, museums and other institutions that received lavish donations in recent decades. Governments — federal and state — could struggle, too, because they rely heavily on the taxes paid by the affluent.

Perhaps the broadest question is what a hit to the wealthy would mean for the middle class and the poor. The best-known data on the rich comes from an analysis of Internal Revenue Service returns by Thomas Piketty and Emmanuel Saez, two economists. Their work shows that in the late 1970s, the cutoff to qualify for the highest-earning one ten-thousandth of households was roughly $2 million, in inflation-adjusted, pretax terms. By 2007, it had jumped to $11.5 million.

The gains for the merely affluent were also big, if not quite huge. The cutoff to be in the top 1 percent doubled since the late 1970s, to roughly $400,000.

By contrast, pay at the median — which was about $50,000 in 2007 — rose less than 20 percent, Census data shows. Near the bottom of the income distribution, the increase was about 12 percent.

Some economists say they believe that the contrasting trends are unrelated. If anything, these economists say, any problems the wealthy have will trickle down, in the form of less charitable giving and less consumer spending. Over the last century, the worst years for the rich were the early 1930s, the heart of the Great Depression.

Other economists say the recent explosion of incomes at the top did hurt everyone else, by concentrating economic and political power among a relatively small group.

“I think incredibly high incomes can have a pernicious effect on the polity and the economy,” said Lawrence Katz, a Harvard economist. Much of the growth of high-end incomes stemmed from market forces, like technological innovation, Mr. Katz said. But a significant amount also stemmed from the wealthy’s newfound ability to win favorable government contracts, low tax rates and weak financial regulation, he added.

The I.R.S. has not yet released its data for 2008 or 2009. But Mr. Saez, a professor at the University of California, Berkeley, said he believed that the rich had become poorer. Asked to speculate where the cutoff for the top one ten-thousandth of households was now, he said from $6 million to $8 million.

For the number to return to $11 million quickly, he said, would probably require a large financial bubble.

Making More Money

The United States economy experienced two such bubbles in recent years — one in stocks, the other in real estate — and both helped the rich become richer. Mr. McAfee, whose tattoos and tinted hair suggest an independent streak, is an extreme but telling example. For two decades, at almost every step of his career, he figured out a way to make more money.

In the late 1980s, he founded McAfee Associates, the antivirus software company. It gave away its software, unlike its rivals, but charged fees to those who wanted any kind of technical support. That decision helped make it a huge success. The company went public in 1992, in the early years of one of biggest stock market booms in history.

But Mr. McAfee is, by his own description, an atypical businessman — easily bored and given to serial obsessions. As a young man, he traveled through Mexico, India and Nepal and, more recently, he wrote a book called, “Into the Heart of Truth: The Spirit of Relational Yoga.” Two years after McAfee Associates went public, he was bored again.

So he sold his remaining stake, bringing his gains to about $100 million. In the coming years, he started new projects and made more investments. Almost inevitably, they paid off.

“History told me that you just keep working, and it is easy to make more money,” he said, sitting in the kitchen of his adobe-style house in the southwest corner of New Mexico. With low tax rates, he added, the rich could keep much of what they made.

One of the starkest patterns in the data on inequality is the extent to which the incomes of the very rich are tied to the stock market. They have risen most rapidly during the biggest bull markets: in the 1920s and the 20 years starting in 1987.

“We are coming from an abnormal period where a tremendous amount of wealth was created largely by selling assets back and forth,” said Mohamed A. El-Erian, chief executive of Pimco, one of the country’s largest bond traders, and the former manager of Harvard’s endowment.

Some of this wealth was based on real economic gains, like those from the computer revolution. But much of it was not, Mr. El-Erian said. “You had wealth creation that could not be tied to the underlying economy,” he added, “and the benefits were very skewed: they went to the assets of the rich. It was financial engineering.”

But if the rich have done well in bubbles, they have taken enormous hits to their wealth during busts. A recent study by two Northwestern University economists found that the incomes of the affluent tend to fall more, in percentage terms, in recessions than the incomes of the middle class. The incomes of the very affluent — the top one ten-thousandth — fall the most.

Over the last several years, Mr. McAfee began to put a large chunk of his fortune into real estate, often in remote locations. He bought the house in New Mexico as a playground for himself and fellow aerotrekkers, people who fly unlicensed, open-cockpit planes. On a 157-acre spread, he built a general store, a 35-seat movie theater and a cafe, and he bought vintage cars for his visitors to use.

He continued to invest in financial markets, sometimes borrowing money to increase the potential returns. He typically chose his investments based on suggestions from his financial advisers. One of their recommendations was to put millions of dollars into bonds tied to Lehman Brothers.

For a while, Mr. McAfee’s good run, like that of many of the American wealthy, seemed to continue. In the wake of the dot-com crash, stocks started rising again, while house prices just continued to rise. Outside’s Go magazine and National Geographic Adventure ran articles on his New Mexico property, leading to him to believe that “this was the hottest property on the planet,” he said.

But then things began to change.

In 2007, Mr. McAfee sold a 10,000-square-foot home in Colorado with a view of Pike’s Peak. He had spent $25 million to buy the property and build the house. He received $5.7 million for it. When Lehman collapsed last fall, its bonds became virtually worthless. Mr. McAfee’s stock investments cost him millions more.

One day, he realized, as he said, “Whoa, my cash is gone.”

His remaining net worth of about $4 million makes him vastly wealthier than most Americans, of course. But he has nonetheless found himself needing cash and desperately trying to reduce his monthly expenses.

He has sold a 10-passenger Cessna jet and now flies coach. This week his oceanfront estate in Hawaii sold for $1.5 million, with only a handful of bidders at the auction. He plans to spend much of his time in Belize, in part because of more favorable taxes there.

Next week, his New Mexico property will be the subject of a no-floor auction, meaning that Mr. McAfee has promised to accept the top bid, no matter how low it is.

“I am trying to face up to the reality here that the auction may bring next to nothing,” he said.

In the past, when his stock investments did poorly, he sold real estate and replenished his cash. This time, that has not been an option.

Stock Market Mystery

The possibility that the stock market will quickly recover from its collapse, as it did earlier this decade, is perhaps the biggest uncertainty about the financial condition of the wealthy. Since March, the Standard & Poor’s 500-stock index has risen 49 percent.

Yet Wall Street still has a long way to go before reaching its previous peaks. The S.& P. 500 remains 35 percent below its 2007 high. Aggregate compensation for the financial sector fell 14 percent from 2007 to 2008, according to the Securities Industry and Financial Markets Association — far less than profits or revenue fell, but a decline nonetheless.

“The difference this time,” predicted Byron R. Wein, a former chief investment strategist at Morgan Stanley, who started working on Wall Street in 1965, “is that the high-water mark that people reached in 2007 is not going to be exceeded for a very long time.”

Without a financial bubble, there will simply be less money available for Wall Street to pay itself or for corporate chief executives to pay themselves. Some companies — like Goldman Sachs and JPMorgan Chase, which face less competition now and have been helped by the government’s attempts to prop up credit markets — will still hand out enormous paychecks. Over all, though, there will be fewer such checks, analysts say. Roger Freeman, an analyst at Barclays Capital, said he thought that overall Wall Street compensation would, at most, increase moderately over the next couple of years.

Beyond the stock market, government policy may have the biggest effect on top incomes. Mr. Katz, the Harvard economist, argues that without policy changes, top incomes may indeed approach their old highs in the coming years. Historically, government policy, like the New Deal, has had more lasting effects on the rich than financial busts, he said.

One looming policy issue today is what steps Congress and the administration will take to re-regulate financial markets. A second issue is taxes.

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

Since 1980, tax rates on the affluent have fallen more than rates on any other group; this year, the top marginal rate is 35 percent. President Obama has proposed raising it to 39 percent and has said he would consider a surtax on families making more than $1 million a year, which could push the top rate above 40 percent.

What any policy changes will mean for the nonwealthy remains unclear. There have certainly been periods when the rich, the middle class and the poor all have done well (like the late 1990s), as well as periods when all have done poorly (like the last year). For much of the 1950s, ’60s and ’70s, both the middle class and the wealthy received raises that outpaced inflation.

Yet there is also a reason to think that the incomes of the wealthy could potentially have a bigger impact on others than in the past: as a share of the economy, they are vastly larger than they once were.

In 2007, the top one ten-thousandth of households took home 6 percent of the nation’s income, up from 0.9 percent in 1977. It was the highest such level since at least 1913, the first year for which the I.R.S. has data.

The top 1 percent of earners took home 23.5 percent of income, up from 9 percent three decades earlier.

One issue that has perplexed economists on both sides of the political spectrum is how to deal with inequalities in wealth. I am not convinced that the rich are not getting richer, but I will concede that the deflation scenario will wipe out many fortunes.

The fact is that the poor are hurting much more than the wealthy in a downturn. The affluent should be paying more in taxes and they should count themselves lucky and remember Pete Peterson's wise words on the meaning of enough.

Friday, August 21, 2009

Bonusgate Spreads to New Brunswick

CBC reports that N.B. pension managers reap bonuses despite big losses:
A group of pension management executives who presided over the loss of $1.6 billion in investment assets for the New Brunswick government last year collected $592,000 in bonuses.

The New Brunswick Investment Management Corporation disclosed in its annual report released Wednesday that a number of its executives were paid the performance bonuses, even though the funds they supervise lost more than 18 per cent of their value in the same year.

The rest of the civil service was placed under a strict governmentwide freeze on bonus payments and similar bonuses were cancelled at other Crown corporations, such as NB Power.

The corporation defended the bonuses, noting they were much less than the $1.3 million paid out a year earlier. Additionally, these payments were meant as a reward for good results over a four-year period despite poor results in 2008-09.

"The previous three fiscal years had positive net value added results which help to offset the fiscal 2008-09 performance," said the corporation in explaining the bonus.

However, the report also made it clear that losses in 2008-09 were so bad they wiped out all of the gains in the previous three years and then some, after inflation.

The annual report also states that after the market collapse, the corporation decided in December 2008 to freeze salaries in 2009-2010.

The Department of Finance said it plans to review the operation of the investment corporation, including its bonus program, in the near future.

Progressive Conservative MLA Bruce Fitch, the opposition's finance critic, said the department's review is "too late." Fitch said in a release, "this type of thing sickens New Brunswickers."

Fitch said in an interview on Thursday that he was under the impression that those bonuses were on hold.

"It wouldn't have been the end of the world if the bonuses were deferred or not paid for a year or two, given the circumstances," Fitch said.

Lost $1.6B in market crash

The N.B. Investment Management Corporation is a government agency that manages the retirement funds for its teachers, judges and thousands of civil servants.

It had $8.7 billion in assets under its management at the start of the 2008-09 fiscal year, but lost $1.6 billion of that when stock markets crashed last fall.

The corporation has paid out modest bonuses to certain key executives for several years, but more recently upped the amounts dramatically.

Employee bonuses hit more than $1.3 million in fiscal 2007-08, up from the $134,000 paid out in 2000.

John Sinclair, the corporation's president, is the highest paid employee in the New Brunswick government, earning more than $475,000 last year.

Auditor general questioned bonuses

Auditor General Mike Ferguson raised questions about the bonuses being paid to the investment managers in his last report. He recommended the Department of Finance step in and set some kind of limit on what can be paid out.

"We felt the best approach and still feel the best approach to determining the total amount would be to have a formula agreed on between the province and the corporation," said Ferguson on Wednesday.

I glad to see the N.B.'s Auditor General questioned the bonuses being paid to the investment managers in his last report. I hope the Auditor General of Canada also questions the bonuses that were recently awarded to senior managers at PSP Investments and relays her concerns to the Treasury Board and Department of Finance.

Bonuses to senior pension fund managers must be scrutinized, deferred, limited or abolished altogether, and in some cases, clawed back. They can't keep losing billions of dollars and hide behind some four-year rolling return to collect big bonuses. At one point, this nonsense has to stop and the government has to step in and protect all stakeholders, including Canadian taxpayers.

Thursday, August 20, 2009

A Private Equity Quagmire?

Bloomberg reports pension plans' private equity cash depleted as profits shrink:
U.S. pension funds contributed to the record $1.2 trillion that private-equity firms raised this decade. Three of the biggest investors, state pensions in California, Oregon and Washington, plunked down at least $53.8 billion. So far, they only have dwindling paper profits and a lot less cash to show the millions of policemen, teachers and other civil servants in their retirement plans.

The California Public Employees’ Retirement System, the Washington State Investment Board and the Oregon Public Employees’ Retirement Fund -- among the few pension managers to disclose details of their investments -- had recouped just $22.1 billion in cash by the end of 2008 from buyout funds started since 2000, according to data compiled by Bloomberg. That amounts to a shortfall of 59 percent. In total, they haven’t reaped a paper gain from funds formed in the past seven years.

The wisdom of those investment decisions hangs on the remaining value private-equity firms assign to companies they snapped up in 2006 and 2007, during the peak of the buyout boom. For the California, Oregon and Washington plans, that figure totaled $15.8 billion at the beginning of the year.

While some investors say they’re confident the private- equity industry’s traditional practice of taking over companies will pay off, others have been shaken by a credit contraction that froze deal-making, eroded the value of the assets on private-equity firms’ books and prevented them from cashing out in public share sales.

‘Can’t Eat IRRs’

Now pension managers on both ends of the spectrum are looking skeptically at the so-called internal rate of return buyout firms calculate to gauge their results.

“I work for over 400,000 employees, and they can’t eat IRRs,” said Gary Bruebaker, the chief investment officer of the Washington State Investment Board. “At the end of the day, I care about how much do I give you, and how much money do I get back.”

Private-equity firms pool money from so-called limited partners -- pension funds, endowments, wealthy families and sovereign wealth funds -- and use that cash, along with money borrowed from banks, for corporate takeovers. The buyout managers aim to boost profits through cost cuts, acquisitions or added lines of business, then reap a return for themselves and their investors in a public stock offering or a sale to another buyer.

The buyout firms also levy fees, typically 2 percent of the assets they oversee annually and 20 percent of profits from successful investments. That’s helped make the titans of the industry into billionaires.

Avago IPO

Stephen Schwarzman, the 62-year-old co-founder and chairman of Blackstone Group LP, the biggest private-equity firm, ranked 261st on the 2009 Forbes list of the world’s richest people, with an estimated net worth of $2.5 billion. KKR & Co. LP co- founder Henry Kravis, 65, topped that with $3 billion, while Carlyle Group co-founder David Rubenstein, 60, weighed in at $1.4 billion.

Buyout managers, and some pension funds, downplay their cash returns so far this decade and counsel patience, saying that investments often look worse in the years immediately after they’re made. Blackstone’s Schwarzman told backers on an Aug. 6 conference call he expected his New York-based firm to take some of its companies public in 2010. KKR, also in New York, sold shares in Avago Technologies Ltd. through an IPO earlier this month, raising $648 million.

Harvard’s Sales

Pension funds also say that over time, private-equity returns compare favorably to the Standard & Poor’s 500 Index, which declined 28 percent from the beginning of 2000 through the end of last year. Bruebaker says his Washington fund had an 8.2 percent average annual gain from its buyout investments in the past 10 years, compared with a 3.9 percent drop in the S&P.

While investors can sell publicly traded stocks as needed, buyout funds keep money tied up for years, said Steven Kaplan, a professor at the University of Chicago’s Booth School of Business.

“With private equity, you’re taking on a liquidity risk, which people did miscalculate,” said Kaplan, who has studied takeover returns.

University endowments and philanthropic foundations hurt by the worst economic crisis since the Great Depression have struggled to sell their stakes in private-equity funds to raise cash. Investors including Harvard University, in Cambridge, Massachusetts, planned to raise more than $100 billion through so-called secondary sales of limited partnership interests, some at discounts of at least 50 percent, people familiar with the effort said last year.

‘Money in the Ground’

Rubenstein, of Washington-based Carlyle, acknowledges that the buyout industry faces tough questions.

“People have a lot of money in the ground and today it’s probably not worth what they had intended, but a turn-around in valuations is now beginning,” Rubenstein said in an interview. “You’ll probably see general partners and limited partners focused more on multiples of equity rather than just IRRs.”

Representatives of Washington, Calpers and Oregon all said they remain committed to private equity, and pointed to the long-term nature of the investments.

“The market is in a trough,” Oregon spokesman James Sinks said. “The picture would’ve looked different at the end of 2007.” Calpers spokesman Clark McKinley noted that Calpers in June raised its target commitment to private equity to 14 percent of assets from 10 percent.

“That’s an affirmation of our confidence in the asset class,” he said.

Schwarzman and Kravis declined to comment for this article.

‘A Snapshot’

“We are hopefully toward the end of the absolute worst recession of our lifetimes,” said Washington’s Bruebaker. “If you take a snapshot right now, things might not look good. These are 10- to 12-year investments and we believe they’ll be much better than what we see today.”

Bruebaker’s fund and the Oregon Public Employees’ Retirement Fund warmed to buyouts during the 1980s, and Calpers joined in 1990. Today, among U.S. pension plans, Calpers is the largest investor in private-equity funds, while Washington and Oregon are the third- and fourth-biggest, respectively, according to San Francisco-based consulting firm Probitas Partners Inc.

The three state funds, which serve more than 2 million people, collectively more than doubled their buyout commitments in 2005, to $8 billion from $3.1 billion. They ramped up even more the next year, when commitments climbed to $18.7 billion, the data show.

Chrysler, TXU

All told, private-equity firms raked in $1.2 trillion from 2000 through 2008, according to London-based researcher Preqin Ltd. The influx of money, coupled with cheap debt-funding from Wall Street banks eager to collect fees, fueled record-setting takeovers. Nine of the 10 biggest deals were announced from 2005 to mid-2007 as buyout firms acquired the likes of hotel operator Hilton Hotels Corp. and power producer TXU Corp.

The buyouts ground to a halt after the subprime-mortgage market collapsed in late-2007, extinguishing investor demand for high-yield, high-risk debt. The dollar value of deals has dwindled to $42.2 billion so far this year from $212.2 billion in 2008, according to data compiled by Bloomberg.

Private-equity firms unable to cash out of investments have spent much of the credit crisis reworking the capital structures of their debt-laden companies. Chrysler LLC, the carmaker that Cerberus Capital Management LP bought in 2007 for $7.4 billion, and doormaker Masonite International Corp., which KKR purchased in 2005 for C$3 billion ($2.4 billion), filed for bankruptcy this year.


At the same time, changes in accounting rules have cast a spotlight on the current value of private-equity investments.

The Financial Accounting Standards Board’s so-called Statement No. 157, which went into effect at the end of 2007, requires investors, including private-equity managers, to gauge the fair value of holdings that aren’t traded. While most buyout firms typically carried their investments at cost, FAS 157 mandates quarterly assessments of current value.

Such marking-to-market means private-equity funds must tell investors how much their stakes are worth at that moment, even if the managers are planning to hang onto them for years.

“Getting carried away by looking at mark-to-market in my personal view can lead you to an incorrect conclusion for the longer term,” Blackstone’s Schwarzman said on the Aug. 6 conference call.

Blackstone spokesman Peter Rose says it’s premature to judge recent investments, such as those made by the $21.7 billion fund the firm set up in 2007.

‘Profound Losses’

Schwarzman, who created Blackstone in 1985 with Peter G. Peterson, has said their unspent capital -- about $29 billion -- will enable them to buy companies at depressed prices and generate profits as the global economy recovers.

Others see signs that the private-equity business is undergoing a transformation. Carlyle’s Rubenstein predicted that deals in the current environment will be smaller and less reliant on debt. Individual funds already being marketed to investors won’t top $10 billion, and subsequent efforts won’t exceed $5 billion to $6 billion, he said.

“These are major structural changes taking place,” said Dayton Carr, founder of VCFA Group, a New York-based firm that buys interests in private-equity and venture-capital funds. “The basic economy has had huge issues. A lot of the funds will be smaller.”

The upheaval is reflected in the attitudes of pension-fund investors, who are watching and waiting for cash to come in the door.

“When managers are forced to put a hard value on their holdings, we’re seeing some profound losses,” said William Atwood, the executive director of the Illinois State Board of Investment, an $9 billion pension fund. “The rubber hits the road when cash is returned.”

Let me share with you some thoughts on private equity. First of all, many of these large pension funds got carried away from 2005 to mid 2007, shoveling billions into private equity. Why did they do this? They will tell you because private equity offers diversification benefits (it doesn't, it's highly correlated to public equities) and true alpha (once you strip away leverage ad liquidity risk, the returns over public equities are not that half as great as they report). The real reason is that pension funds can game their private market benchmarks allowing them to reap big bonuses based on bogus benchmarks.

Second, there are very few private equity funds that are worth investing in. The large pension funds are all trying to get into the latest buyout funds of a handful of general partners. A monkey can write a cheque for $100 or $200 million to get into a "top" buyout fund. Why do they focus on large buyouts instead of venture capital? Because if you need to allocate billions into PE, it doesn't leave you much choice but to try to get into the biggest and (hopefully) the best U.S. and European buyout funds (to a lesser extent Asian funds). The top VC funds are much smaller, typically capped at $300-500 million, and there are only a handful in the world (Sequoia and Kleiner Perkins Caufield & Byers come to my mind but good luck getting an allocation with them). Importantly, there is evidence of performance persistence in private equity and VC, so if you can't get into the best funds, you are better off investing in public equities.

Third, in private equity, vintage year diversification matters. When you are tying up your money for up to ten years, you better make sure you are diversifying properly in terms of strategy, geography and vintage year. A lot of big pension funds are going to get creamed from those 2004-2007 vintage years and some of them are very exposed to particular vintage years.

Fourth, mark-to-market and IRRs are a total waste when it comes to PE returns. What ultimately counts in how much money you put in and how much money you get out (cash on cash returns). For reporting purposes, mark-to-market will just exacerbate the swings, underestimating the true value at market troughs and overestimating the true value at market tops. I understand the new accounting rule is needed to ascribe a value, but it does not necessarily reflect the value at which the GP will sell the asset.

So what is the current state of private equity? I think everyone should carefully read Coller Capital's Global Private Equity Barometer - Summer 2009. In note the following points:
  • The global downturn has reduced investors’ overall private equity returns. 37% of LPs now report overall net returns of 16% or more from the asset class, compared with a high of 45% of LPs in Summer 2007.
  • Three quarters (74%) of private equity investors expect distributions from their portfolios to deteriorate over the next year. This is the most gloomy LPs have been since the
    Barometer began in 2004.
  • For the time being at least, investors are almost equally pessimistic about distributions from funds focussed on different regions.
  • For the first time in years, a significant number of private equity investors are planning to decrease their target allocation to private equity – 20% of LPs plan a reduced allocation in the coming year. (This compares with just 3-6% planning a decrease in previous Barometers.)
  • However, in general, LPs remain strongly committed to the asset class – 80% plan to maintain or increase their target allocation over the next 12 months.
  • A large majority (84%) of LPs have declined to re-invest with one or more of their existing GPs over the last 12 months. Just 45% of LPs had refused re-ups in the Summer 2005 Barometer.
  • Almost all (92%) North American LPs have declined to re-invest with some of their GPs over the last 12 months, compared with 82% of European and 70% of Asia-Pacific LPs.
  • Around half of LPs believe that changes to regulation and/or taxation are likely to damage private equity’s wealth-creating potential in developed markets over the next two years. Just over half (55%) of LPs expect a negative impact in North America and almost half (48%) expect the same in Europe. Fewer investors (just 17%) anticipate a negative impact in Asia-Pacific.
As you can see, private equity is in the doldrums. Is it a bottom for this asset class? That all depends on where public equities are heading. You need robust stock markets, mergers and acquisitions to pick up, the IPO market to open up (so that exits are in place) and last but not least, you need strong bond markets willing and able to finance large buyout deals.

Some large funds are committing more money to private equity over the next year. In early June, the National Post reported that Alberta's investment fund plans $1-billion spending spree:

Canada's fifth largest investment fund manager, Alberta Investment Management Corporation, has been largely flying under the radar since its inception as a Crown corporation at the beginning of last year. But the pension funds manager is gearing up to create some noise.

After 10 months on the job, chief executive Leo de Bever, plans to make Edmonton-based AIMCo Canada's premier investment fund manager, and in the past two months the firm has made some eye-opening investments. These include a 20% stake in Precision Drilling Trust, the Canada's largest oil-and-gas well driller, and a substantial stake in the country's biggest grain handler, Viterra Inc.

"Expect more transactions like Precession Drilling and Viterra," Mr. de Bever told a Bay Street gathering hosted by the Empire Club of Canada in Toronto Thursday.

AIMCo was converted into an independent Crown corporation in January, 2008, to manage the investments of a number of Alberta's public sector assets, the majority of which involve pension plans and provincial endowment funds.

The company plans to allocate about $1-billion in the next year on private-equity investments as stocks rebound. The firm, which manages about $70-billion in assets, plans to make three to four transactions in the next year valued between $100-million to $250-million. Mr. de Bever said the value may exceed that if conditions are right.

Mr. de Bever has served as the chief investment officer for Australian public sector pension fund Victorian Funds Management Corp., as well as the executive vice president at Manulife Financial Corp. and senior vice president of the Ontario Teachers' Pension Plan.

He said the fund, which strives to become the "go-to" partner for high-quality investment projects, concentrates its attention on a narrow list of 40-50 stocks that it can gain an in-depth understanding of.

At present, AIMCo's portfolio has moved to an overweight position in materials, energy as well as agriculture to reflect an expected increase in related prices as the global economy recovers. Mr. de Bever said the global economic downturn was currently bottoming, but it was likely the stock market would take another run lower before conditions improved.

"Stocks, I think in a relative sense on aggregate in the next 10 years, I've no problem," he said. "What they're going to do in the next six months, I have no idea. I still have a suspicion we're in a bear market rally and that there may be one more leg of this because the market has gone up a lot on really not a lot of information."

The funds portfolio is relatively evenly balanced between equities and debt, with corporate bonds beginning to account for a larger portion of assets as government treasuries, which account for about a quarter of AIMCo's managed assets, begin to become a less attractive investment as yields rise.

"Government bonds are starting to be a real problem," Mr. de Bever said. "I think the market's finally waking up. There's so much issuance coming on line."

He said the bond market was concerned the U.S. government will allow inflation to run at above normal levels once the economy begins to recover in order to help it bring debt under control. Higher inflation through wage increases, house price gains, and income tax hikes would increase government revenue and aid the repayment of government debt.

As I stated before, Leo de Bever is one of the smartest guys I've met in the pension industry, so I pay close attention to what he says. If he is right, vintage year 2010 might turn out to be an excellent year for private equity.

But if deflation sets in over the next few years, then all bets are off and private markets are screwed (especially real estate). They will be in a deep freeze that could last years. That prospect terrifies many large public pension funds that have allocated billions into these asset classes.


Reuters reports pension funds support PE on bank takeover issue:

A coalition of U.S. state pension funds is supporting the private equity industry's opposition to new rules on takeovers of troubled lenders, the Financial Times reported on its website.

The measures would have "a chilling effect on private capital participation in the acquisition of failed banks," the state pension funds said in a letter to the U.S. Federal Deposit Insurance Corporation, according to the paper.

The warning by funds from states including New York, New Jersey and Oregon is expected to strengthen the buy-out industry's lobbying against the proposed measures, the paper said.

The FDIC will meet next week to vote on a proposed policy that would force private equity groups to maintain high capital levels and put a large amount of their own money at stake when investing in failed banks.

The FDIC provoked a backlash when it proposed the guidelines in July and is expected to soften the policy when it meets on August 26.

The FDIC, the New York State Office of the State Comptroller, the New Jersey Division of Pension and Benefits and the Oregon Public Employees Retirement System could not immediately be reached for comment outside regular U.S. business hours.

The PE industry is trying to muscle into banking industry because they see ways to make huge profits and have Uncle Sam bail them out if things go awry. No wonder pension funds are backing them up.