Sunday, July 31, 2011

Smoking Some Bad Debt Dope?

All week, I've been watching the circus and clowns in Washington make fools out of themselves. The "debt ceiling drama" is annoying me. More smoke & mirrors to scare retail investors away while the big guns load up on risk assets. Let me go over a few key points to convince you to keep buying the dips hard and ignore the debt boogeyman which permeates our mass media every day.

First, take the time to read Peter Coy's article which appears on yahoo Finance (provided by Bloomberg Businessweek), Why the Debt Crisis Is Even Worse Than You Think. I quote the following:

The language we use is part of the problem. Every would-be budget balancer in Washington should read "On the General Relativity of Fiscal Language," a brilliant 2006 paper by economists Laurence J. Kotlikoff of Boston University and Jerry Green of Harvard University (available online from the National Bureau of Economic Research). The authors write that accountants and economists have something to learn from Albert Einstein's theory of relativity, about how measured quantities depend on one's frame of reference. Terms such as "deficit" and "tax," they write, "represent numbers in search of concepts that provide the illusion of meaning where none exists."

The national debt itself is one such Einsteinian (that is, squishy) concept. The Treasury Dept.'s punctilious daily accounting of it -- $14,342,841,083,049.67 as of July 25, of which just under $14.3 trillion is subject to the ceiling and about $10 trillion is held by the public -- gives the impression that it's as real and tangible as the Washington Monument. But what to include in that sum is ultimately a political choice. For instance, the national debt held by the public doesn't include America's obligation to make Social Security payments to future generations of the elderly. Why not?

Suppose that instead of paying Social Security payroll taxes, working people used that amount of money to buy bonds from the Social Security Administration, which they would redeem in their retirement years. In such an arrangement, the current and future cash flows would be identical, but because of a simple labeling change the reported debt held by the public would skyrocket. That example alone should generate a certain queasiness about the reliability of the numbers that are taken for granted by budget combatants on both sides of the aisle.

A more revealing calculation is the CBO's measurement of what's called the fiscal gap. That figure is conceptually cleaner than the national debt -- and consequently more alarming. Boston University's Kotlikoff has extended the agency's analysis from 2085 out to the infinite horizon, which he says is the only method that's invulnerable to the frame-of-reference problem. It's an approach used by actuaries to make sure that a pension system doesn't contain an instability that will manifest itself just past the last year studied. Years far in the future carry very little weight, converging toward zero, because they are discounted by the time value of money. Even so, Kotlikoff concluded that the fiscal gap -- i.e., the net present value of all future expenses minus all future revenue -- amounts to $211 trillion.

Yikes! Douglas J. Holtz-Eakin, a former director of the CBO from 2003 to 2005, says he doesn't favor the infinite-horizon calculation because the result you get depends too heavily on arbitrary assumptions, such as exactly when health-care cost growth slows. But directionally, he says, Kotlikoff is "exactly right."

Which means we've been heading the wrong way for years. Even in the late 1990s, when official Washington was jubilant because the national debt briefly shrank, fiscal-gap calculations showed that the government was quietly getting into deeper trouble. It was paying out generous benefits to the elderly while incurring big obligations to boomers, whose leading edge was then 15 years from retirement. Now the gray deluge is upon us. As Holtz-Eakin, now president of the American Action Forum, a self-described center-right policy institute, says: "We're just in a world of hurt."

The U.S. is in danger of reaching a generational tipping point at which older Americans have the clout to vote themselves benefits that sap the strength of the younger generation -- benefits that can never be repeated. Kotlikoff argues that we may have reached that point already. He worries that the U.S. could become Argentina, which went from one of the world's richest to lower-middle income in a century of chronic mismanagement.

Senior citizens are being told by their own lobbyists, repeatedly, that any attempt to rein in the cost of Social Security and Medicare is an unjust attack on earned benefits. "Stop the liberals from raiding the Social Security Trust Fund once and for all!" says a recent mailing from the National Retirement Security Task Force. Similar messages aimed at Democratic voters make the same charge against Republicans. No wonder Obama and Boehner were rebuffed by their own parties for putting entitlements on the table. In the end neither the House nor the Senate debt-ceiling proposals touched Social Security or Medicare. Not pretty.

So is the US at risk of becoming the next Argentina or worse still, Greece? Of course not!!! This is all nonsense doctored up by the power elite to scare the masses into believing that the US economy is heading down a "path of fiscal destruction" so they can abdicate their duty to pay their fair share of taxes. I watch all these debates on television and think to myself "what a bunch of bullshit!"

On Friday, I spoke to my favorite fixed income senior portfolio manager/analyst at the Caisse -- a guy that PIMCO only wishes would be working for them. As far as brains go, he can take on Bill Gross and any other 'top gun' at PIMCO but he's too nice of a guy to work with sharks there or on Wall Street. He should be working for an elite global macro hedge fund but he's content where he's at and they value him (even though he's probably grossly underpaid relative to his peers at other large Canadian pension funds).

Anyways, this person confirmed a lot of my thinking on the US debt drama, namely, that most people don't have a clue of what they're talking about when it comes to public economics:

  • On the 'balanced budget' proposal we both agreed that this is a stupid and dangerous proposal and President Obama would be nuts to accept it. Running government finances is not the same thing as running a family budget (thank God!). By law, states have to balance their budgets. When states need money, they go to the federal government. Why in the world would the US federal government -- the lender of last resort -- accept an economic straightjacket? "That's just stupid and would effectively mean the end of counter-cyclical fiscal policy and the end of the welfare state." I would go a step further and state that a balanced budget at the federal level would effectively kill the US economy for long time by posing serious economic, social and health risks. Only lunatics would accept such a proposal, ignoring the serious risks it actually entails.
  • We both agreed that this "US debt crisis" is a political crisis, not an economic crisis. The lack of leadership in Washington is disconcerting. It's actually disturbing to see Tea Party representatives sticking to "their principles" with little or no concern as to the harm that a US default will cause not only in the US, but throughout the world. Already billions have been wiped off the stock market this past week, making a lot of investors poorer, but these politicians have no concern. Like religious zealots who think they will end up in heaven if they carry out their god's work, these lunatics are holding the US economy hostage. The only good thing from this entire messy debt debate is that it will set the Tea Party back years. On that front, Obama and his advisors are brilliant.
  • As far as austerity goes, my friend and I are in full agreement. It's a disaster in Greece, it's a disaster in England, and it's pretty much going to be a total disaster everywhere else. My friend told me that the only place austerity worked was in Canada during the 90's but "that's because the economy was growing." Those of you who still cling to this silly notion that austerity works should take the time to listen to Michael Hudson at the end of my comment on the rottenness of the world.
  • We both agree that the debt crisis is way overblown. The August 2nd deadline is not set in stone. "The cost of capital extending it by a week is zero but the stock market will likely slide further on uncertainty. In theory, the Fed could mint a trillion dollar 'platinum' coin and the US government will pay all its obligations." More importantly, we both agree that the real long-term issue for the US and other developed economies remains the jobs crisis. And the real unemployment scandal is how it's impacting certain minorities much harsher than others. Importantly, if you don't tackle the jobs crisis, the debt and deficit will only get worse.
  • As far as Bill Gross and PIMCO, my friend chuckled at his advice to "short Treasuries" when yields were at 3.75%. "Anyone following his advice would have gotten killed, but to be fair to him, he has a fiduciary responsibility to his clients and won't reveal his true positions beforehand." Yields continue to fall as the US economy slows and flight to quality reigns as global investors remain jittery.
  • In Europe, my friend sees this as a long, drawn out mess where yields will gyrate widely over the next year. He joked: "the way spreads are moving, BCA Research should start a new publication call the European Fixed Income Weekly."
  • Finally, my friend thinks universities across the world should "burn standard economics textbooks." Having graduated from McGill University with an M.A. in Economics, I'm somewhat in agreement but also recognize that some of the greatest social thinkers of the 20th century were brilliant economists like Keynes, Hicks, Hayek, Fisher, Friedman, etc. The problem isn't economics, it's what they're teaching students, ignoring a rich history of economic thought (too much mathematics and programming, not enough economics and history!)
I leave you with an excellent roundtable discussion from ABC's This Week (entire show is worth watching online; watch both parts of roundtable discussion below). Pay close attention to what Paul Kruman and Mohamed El-Erian are saying. Cutting spending now will only exacerbate the jobs crisis and will make things much worse. In my opinion, Krugman is wrong about targeted cuts to the federal government, but he's absolutely right that the Obama administration has basically pandered to the Republicans and caved into every one of their demands.

As I stated before, the world is sinking into a hellhole. We have incompetent fools running our governments, major corporations, banks and yes, alas, our public pension funds (with a few exceptions). It's a total disaster but remember this: the power elite need to continue making profits. These sociopaths will stop at nothing to extend and pretend, which is why I'm not worried about this entire "debt crisis debacle" and keep buying the dips on risk assets. And lo and behold, as I wind down my comment, Bloomberg reports that a deal framework has been reached on raising the debt ceiling. Relax, it should be a great week in the stock market. :)

Friday, July 29, 2011

Oklahoma's AG Launches Pensions Investigation

Michael McNutt reports in NewsOK, Oklahoma AG launches investigation into pension investments:
An investigation was launched Thursday into whether financial institutions are properly handling state pension funds, state Attorney General Scott Pruitt said.

Pruitt said he sent letters to several banks holding pension funds seeking information on investment transactions, including those involving foreign currency exchanges. The pensions include those for state employees, teachers, police officers, firefighters and judges.

The investigation does not involve any Oklahoma bank, a spokeswoman for the attorney general's office said.

Pruitt said he has no evidence of wrongdoing.

“Our investigators in the AG's office will collect that data and we'll make an assessment at that point about the next step, if any,” he said. “If there is any occurrence of fraud, I will take the necessary enforcement steps to recover potential losses of tens of millions of dollars.

“This is something that my colleagues in other states, as well as information we've received heretofore, indicate it's something we need to pay attention to,” Pruitt said.

Investigation urged

The investigation, which could result in criminal charges and civil litigation, is similar to actions taken in California, Virginia and Florida to recover more than $200 million in state pension funds, Pruitt said. Telephone calls to his office prompted the investigation, he said.

“We've been doing quite a bit of homework leading up to today to determine whether it is meritorious for us to initiate an investigation,” Pruitt said.

“This is not something we're doing on a whim. It's not something we're doing blind. We're doing it because we've been informed to the degree that we think it's something we need to pay attention to and look into.”

The investigation will include confirming that banks are following federal guidelines for currency trades for the state's pension funds and are not improperly manipulating foreign currency trade prices to maximize their own profits, Pruitt said.

Claims have been made against some banks, questioning the discrepancy between the time of day the currency transactions are made and the trade price that is charged to the fund.

That could result in a bank's choosing a less favorable exchange rate instead of giving a pension fund the price based on the actual time of the trade, and then keeping the difference, he said.

$21.4 billion invested

Oklahoma's seven pension systems have investment assets of $21.4 billion, said Rep. Randy McDaniel, who is chairman of the House of Representatives Oversight Committee on Pensions. It's expected about 15 percent, or $3 billion, is invested overseas; 20 percent of a portfolio being invested internationally is considered typical.

“I do have reason to believe that there are some recoveries that could be made, and if they are seven figures or larger that could be a great addition to the financial status of the plans,” said McDaniel, R-Oklahoma City. “I am very encouraged by the efforts of the attorney general.”

James Wilbanks, executive director of the Oklahoma Teachers Retirement System, said he was not told in advance of Pruitt's decision to start an investigation. The teachers retirement fund, the state's largest pension fund, represents nearly half the invested pension funds, or about $10.1 billion; the retirement plan has about 153,000 members, including 90,000 active teachers and about 50,000 retirees and beneficiaries.

“I wouldn't say we have concerns,” he said. “We do have a relationship with a custodial bank. To our knowledge, they are behaving in good faith and executing our contract exactly the way they should and not taking advantage of any situation where they could have made some additional money at our expense.”

However, Wilbanks said he welcomes Pruitt's investigation.

“You're never 100 percent sure that somebody who is handling your money for you is not doing something that they shouldn't be,” he said.

Duty to the public

State Treasurer Ken Miller, chairman of the Oklahoma State Pension Commission which oversees each of the pension systems, said public officials have a duty “to scrutinize investments made on behalf of Oklahoma's public pension systems to ensure they are invested ethically and legally.”

“If malfeasance is discovered, damages should be recovered, offenders should be held accountable and pensioners should receive due compensation,” he said.

McDaniel said he will conduct an interim study in October on pension investments. His study will look at whether Oklahoma's pension investments are being handled properly and effectively.

“Investment performance has a significant financial impact on the fiscal health of pension systems,” said McDaniel, a financial adviser.

“The plans are very well-managed, very well-diversified,” he said. “They're doing a good job. Nonetheless, we're still going to look at them and make sure everything is done right.”

I agree with State Treasurer Ken Miller, public officials have a duty to scrutinize investments to ensure they are invested "ethically and legally." A similar investigation with State Street defrauding California's pensions is still ongoing but State Street was re-hired by CalPERS after being likened to 'thugs' (go figure!).

I wouldn't be shocked to discover that the custodian banks raped Oklahoma on F/X transactions. Why do I say this? Because I know senior F/X traders/salespeople who tell me it's too easy to screw clients over, and many corporate and institutional clients are getting raped on F/X transactions because this activity remains unregulated by regulatory authorities. That's why F/X has consistently been one of the most profitable activities at banks.
Basically, it's the Wild West, and clients are at the mercy of unscrupulous banks.

Ask Ray Dalio at Bridgewater if he trusts the banks when it comes to F/X transactions. Bridgewater and other elite global macro hedge funds have operational procedures in place to ensure that nobody is screwing them over. Admittedly, they trade huge volume, so banks give them preferred client status, but this should be the case with everyone, not just elite funds.

Let me end my comment by emphasizing that there is a duty to to scrutinize investments to ensure they are invested ethically and legally. That's why I blasted the Auditor General of Canada and that sham Special Examination of PSPIB earlier this week. There was no mention of Diane Urquhart's excellent analysis of PSP's 2008 annual results on my blog which exposed significant risk management gaps that led to huge losses during that fiscal year.

The entire Special Examination is a rubber stamp approval of PSP's entire operations without critically examining serious governance gaps in that organization. Canadian taxpayers deserve better than a political sham job and our Auditor General should publicly apologize for producing such a superficial report that basically proves my point, namely, when it comes to pension governance, our regulatory authorities and government bureaucrats don't have a clue of what they're talking about or worse still, they're covering up malfeasance, gross incompetence and possible fraud for political reasons. They should be ashamed of themselves and can learn a lot from their counterparts down south.

Thursday, July 28, 2011

Backstopping PSPIB?

Amy Minsky of Postmedia News reports in the Ottawa Citizen, Public-service pension fund's strong profits don't deter critics:
It was one of the most profitable Canadian pension funds in 2010-11, but critics are unwavering that the public service pension fund is unsustainable, going so far as to brand it one of the "biggest drivers of deficit."

The Public Sector Pension Investment Board — which watches over about $58 billion in assets, making it the third-largest pension fund in the country — posted a 14.5 per cent return in 2010-11, resulting in a $7-billion gain after expenses, the board said in an annual report it tabled last week.

But the successful year isn't reassuring for some who still argue the public service pension system is set up in such a way that funding deficiencies will always fall on taxpayers instead of workers.

"Canadians are backstopping the pension shortfalls of public-sector workers," said Niels Veldhuis, vice-president of research with the Fraser Institute.

The investment board manages the pension funds for public-service employees, the RCMP and the Canadian Forces and posted better earnings last year than the other industry beasts.

For instance, the Canadian Pension Plan Investment Board, the largest Canadian pension fund, which oversees $148.2 billion, saw gains of 11.9 per cent during the fiscal year. The Ontario Teachers Pension Plan oversees $104.7 billion and reported 14.3 per cent gains for its fiscal year, which ended Dec. 31, 2010.

Even though the numbers suggest the public service pension fund has been well-managed, some right-leaning critics still aren't buying it.

"We cheer when they have strong returns because government's liability is mitigated," said Gregory Thomas, national director with the Canadian Taxpayers Federation.

It's possible the upward trend will reverse, throwing responsibility for retired public servants and members of the forces and RCMP pensions to the public, he warned.

"When you take (a public servant's) salary and their extended benefits and their incentives, essentially they're looking at guaranteed payment for life. . . . This is one of the biggest drivers of deficit," Thomas said. "Other Canadians don't enjoy anything remotely similar."

Pitting different working groups against each other, focusing on what one group gets compared to another, is a futile practice, said Patty Ducharme, the national executive vice-president at the Public Service Alliance of Canada, one of the country's largest unions.

"Pointing fingers at each other is frustrating and foolish and doesn't deal with any problem," she said. "The problem is not the cost of these pension plans."

Employees are doing their part for the fund, she said, noting that each year since 2005, public-sector workers have increased their contribution rates, and that they will continue to do so through to 2013.

The average annual pension paid to federal public servants as of March 2009 was $24,506, according to the most recent information available.

"It's a promise government has made to our members, it's a promise the government has made to retirees, and we believe people should be able to retire with dignity and live with respect," Ducharme said.

The opinions at the fiscally conservative Fraser Institute on the pension fund run parallel to those at the Taxpayers Federation.

Private-sector businesses have been moving toward defined contribution pensions, wherein employers and employees contribute to the fund, which remains in the hands of the worker, explained Veldhuis.

On the other hand, public servants have defined-benefit plans, an arrangement under which the employer — the government in this case — agrees to pay a certain benefit upon retirement, regardless of whether the funds are available.

"If public-service pension funds in the federal government don't have enough assets to pay benefits for the workers, the shortfall falls to taxpayers," Veldhuis said.

The public-sector pension-investment board posted modest losses in 2007-08, followed by 22.7 per cent losses in 2008-09, when the markets were hit by the economic downturn.

The economic recovery, coupled with some shuffles in its investment portfolio, has helped the fund recover its losses and begin earning more than prior to the downturn.

Still, at the end of the 2009-10 fiscal year, there was a $224-million liability for all public-sector pensions — those which the public-sector pension-investment board holds as well as those for federally appointed judges and MPs — according to the most recent federal accounting books.

Despite any losses, Ducharme said the public-service pension system weathered the economic downturn better than alternative models.

"If we look at how people were hit during the economic downturn, individuals were hit, but larger plans seemed to weather the storm," she said, suggesting that when a plan covers a larger pool, the risk is not as steep as it is for one individual. "Quite frankly, just saying it's your responsibility . . . I don't think is a solution."

Ms. Ducharme is right, the public-service pension system has weathered the economic downturn better than alternative models such as private defined-contribution plans (read my comment on why the fuss over pensions to understand why this is so).

Having said this, Ms. Ducharme and all public servants have to understand the economic realities of our debt-laden economies and appreciate the fact that public pensions are not a vested right. People are living longer, public budgets are strained and private sector workers are working harder, taking home less pay and are not going to top up underfunded public pension plans. All stakeholders have to give something up in order to preserve our public pension plans.

As for the Fraser Institute and all other right-wing attacks on public pensions, I take whatever they have to say with a shaker of salt. I critically examined PSPIB's FY 20011 results as well as the sham Special Examination conducted by the Auditor General of Canada and Deloitte, but I am not calling for radical changes to the public service pension plan. We need sensible pension reforms, better pension governance, more transparency, not more fear mongering by right-wing lunatics who worry that the debt ceiling will cave in on us (it won't so keep buying the dips!).

Wednesday, July 27, 2011

Private Equity Panacea?

Martin Z. Braun of Bloomberg reports, States Miss Pension Targets by 50% Even With Private Equity (HT: Donald):

In the last decade, as a wave of baby boomers began retiring, America’s biggest state pension systems earned less than half what they needed to keep up with promises made to millions of graying civil servants.

The state of Washington’s 3.92 percent return for the 10 years through June 30, 2010, after fees, was the best in a Bloomberg survey of state pensions with more than $20 billion in assets. That was nowhere close to the average yearly gains of as much as 8 percent that fund managers and public officials count on for meeting obligations to retirees.

“To assume that the median plan will reach 8 percent given this environment, that’s optimistic to say the least,” said Karl Mergenthaler, an executive director in JPMorgan Chase & Co. (JPM)’s securities services group in New York. “Public plans have an incentive to maintain their expected rate where it is. The risk is that they’ll overreach for returns.”

The last decade is forcing public pensions to re-evaluate the projected returns that determine how much money taxpayers and retirees need to pour into retirement funds. Some systems such as New York, Rhode Island and the California State Teachers Retirement System have reduced their assumptions. It’s a tough call because lowering projected gains can widen funding gaps, forcing lawmakers to put even more money into the programs.

Complicating the issue of what returns to expect are the extraordinary reverses of the last 10 years, including the Internet stock bubble, the financial crisis of 2008 and the worst recession since the Great Depression. Returns over 30 years still average more than 8 percent, according to the National Association of State Retirement Administrators. And in the 12 months after June 2010, markets and fund assets surged.

Largest Funds’ Gains

For the fiscal year ended June 30, the California Public Employees’ Retirement System -- the nation’s largest -- said it gained 20.7 percent, and the California teachers program, the second-largest pension plan, 23.1 percent. The third-largest, the New York State Common Retirement Fund, returned an estimated 14.6 percent in the fiscal year ended March 31, according to the state comptroller.

Even though state pension funds posted near-record preliminary returns for the last fiscal year, their 10-year gains are still less than 8 percent. Calpers’s 10-year return increased to 5.36 percent last year from 2.6 percent the previous year, and the California teachers’ fund, to 5.7 percent from 2.5 percent.

The median state pension fund will achieve an annual return of 6.5 percent in the next 15 years, according to a February 2011 study by Wilshire Associates, the Santa Monica, California, investment adviser.

Alternatives Beat Stocks

In outperforming other public funds over the last decade, Washington’s system benefited from investments in real estate and private-equity placements. Private-equity pools may invest borrowed funds, which can amplify returns and losses, and their holdings are often opaque. Calpers cited gains on private-equity investments for its 2011 gains.

“It’s an illiquid, high-risk strategy,” said Tim Friedman, head of communications at Preqin Ltd., a London-based private-equity research firm. “You can lose everything.”

Washington’s program, with $52.7 billion of assets as of June 30, 2010, is setting the pace as other systems are boosting private-equity investments, according to consultants. Pensions are also cutting their holdings of U.S. stocks and buying assets in developing countries such as China, India and South Africa.

Political Backlash

Three of the top five performing funds -- Washington, Oregon, and the Pennsylvania teachers fund -- had more than 30 percent of their assets in private equity and real estate, according to data compiled by the state retirement administrators’ group. Four of the five worst performers -- Maryland, Arizona, the California teachers and Georgia -- had more than 50 percent of assets in publicly traded equities.

State pension funds increased average allocations for private equity to 8.8 percent in 2010 from 3 percent in 2000, Wilshire found in its February study. Meanwhile, the average allocation to U.S. stocks by 126 state pensions declined 13.9 percentage points since 2000.

Retirement funding spurred a political backlash against public workers this year. The meager returns after years of deferred taxpayer contributions magnified funding shortages, forcing legislatures and city councils to divert more money to the pensions. This left less for public services.

Adding to the pressures facing pensions, government workers are accelerating retirements as state budget crises have led to salary cuts. Governors in Wisconsin, New Jersey, Ohio and Florida have attacked unions.

Funding Gap

A quarter of the 363 human resources managers for state and local governments reported a rise in such departures in a 2011 survey by the Center for State and Local Government Excellence. Members of the baby boom generation, born from 1946 to 1964, began turning 65 this year, but many programs allow early retirements for civil servants in their 50s.

Statewide U.S. retirement programs were short $694.2 billion, or 24 percent, of having enough assets to pay future pensions at the end of their 2010 fiscal years, based on data compiled by Bloomberg as of July 15. Hawaii and Wisconsin haven’t reported and weren’t included.

Already, 14 states raised retirement age and length-of- service requirements to help close pension funding gaps, including New Jersey, Florida and Maryland, according to the National Conference of State Legislatures. Fifteen states increased employee contribution requirements in 2011, the conference said.

State judges in Colorado and Minnesota have thrown out lawsuits by retired public employees challenging reductions to cost-of-living adjustments, ruling the increases not protected.

Performance Data Opaque

Following the money in public pensions is no easy task for retirees and taxpayers, based on the 10-year performance survey by Bloomberg. Audited results may be published online no sooner than six or nine months after a fiscal year. Returns aren’t reported consistently from fund to fund. Some disclosures may appear in annual reports, or in documents for bond sales that are unrelated to the pension funds themselves.

Bloomberg compiled data from the most recent annual reports of state pension funds with more than $20 billion in assets as of June 30, 2010. Bloomberg made follow-up calls to ensure the returns were after deduction of management fees and to request adjustments when they weren’t. The research also obtained 10- year net returns as of June 30, 2010, for funds that use a different fiscal year-end.

Two of the biggest funds whose fiscal years don’t close on June 30 -- New York’s Common Retirement Fund and Colorado’s Public Employee Retirement System -- said they couldn’t provide returns on that basis.

Median Return

For the 25 programs in the survey, the median 10-year return was 3.15 percent. The pensions did beat the Standard & Poor’s 500 Index, which had an annualized loss of 1.59 percent for the period, according to Wilshire.

Maryland’s fund, which stuck with conventional investments, ranked at the bottom of the survey with annual gains averaging 2.10 percent. The fund had assets totaling $31.9 billion as of June 30, 2010. It posted preliminary returns of 20.04 percent for fiscal 2011, boosting its 10-year return to 5.01 percent.

Top-Performing Washington

Gary Bruebaker was behind Washington’s decision to pour money into alternatives to stocks and bonds. He has been chief investment officer of the State Investment Board since 2001, leading a team of 30 investment professionals. The 56-year-old son of a single mother who worked 29 years for Oregon, Bruebaker says he takes his mission personally. He describes it as getting the best return for 400,000 public employees, retirees and beneficiaries at a “prudent” level of risk.

“Most of these people are people just like my mom,” he says. Before taking over management of the Washington fund, Bruebaker was a civil servant in Oregon for 23 1/2 years, eight of them as deputy treasurer.

At the end of fiscal 2010, the system was fourth-best funded at 92 percent, behind those of New York, North Carolina and South Dakota, according to Bloomberg data.

Alternative investments such as private-equity and hedge funds carry higher risks for retirees and taxpayers than conventional stocks and bonds. Some of the instruments are seldom traded, or not traded at all, so pensions face uncertainty about how much their investments are worth. Investing borrowed funds can amplify losses, which can be hard to limit because money placed with private-equity and hedge funds generally can’t be cashed out on demand.

Private Equity

Public retirement systems don’t disclose most details on their private-equity and hedge-fund portfolios, making it impossible for taxpayers to assess the risks. Pensions themselves may get limited information on holdings from money managers, who argue that disclosing the information could harm their strategy.

Washington was among the first public pension to invest in private equity, Bruebaker says. The state committed $13 million to a 1982 KKR & Co. buyout fund. In 2010, 26 percent of Washington’s assets were in private-equity, Bruebaker said.

They’ve picked some big winners. A placement of $25 million in Menlo Ventures VII, a 1997 Silicon Valley venture capital fund that invested in early Internet companies, was valued at $117.5 million as of Dec. 31, 2010, for a 135.6 percent return, according to fund records.

Investing Advantage

Washington’s 30-year history with private equity gives it an advantage, Bruebaker says. The state has relationships with some of the best-performing funds and takes advisory seats on big investments, allowing it to work closely with the general partner, including sharing investment ideas, he said. Serving on advisory boards enables Washington to closely monitor operations and investments, the investment chief said.

“Whenever they do something special, we want to be one of the first calls,” Bruebaker said.

Washington’s heavier weighting toward private equity gave it a boost from 2004 to 2007, as easy credit enabled buyout funds to borrow cheaply and distribute cash to investors. In 2006, Washington’s private-equity portfolio gained 39.5 percent, compared with 8.6 percent by the S&P 500. Over the decade through June 2010, the fund’s private-equity investments returned 6.6 percent, fund records show.

Index Funds

In asset classes such as U.S. stocks where it believes managers can’t beat the market consistently, Washington has moved to funds that track an index, Bruebaker says. All of Washington’s $10.4 billion of U.S. shares, as of March 31, are in a BlackRock Inc. (BLK) fund matching all American equities, he says. The state has $7 billion of its international developed- market stocks in index funds too, according to the fund’s March 31 quarterly statement.

Washington is also increasing its allocation to emerging markets, Bruebaker says. In April, the state agreed to invest $75 million in a $750 million fund being raised by Prosperitas Real Estate Partners to invest in Brazilian property.

“Growth is clearly not going to come from the U.S.,” Bruebaker said. “That’s not a slap against the United States. It’s the reality of the marketplace.”

Some pensions invested as much as 65 percent in stocks, helping to account for the decade’s low returns, according to Eileen Neill, a Wilshire managing director. The opening 10 years of this century was the first in 70 years in which the U.S. stock market had a negative return, she said.

“If you had a lot of equity-like investments in your portfolio, you certainly didn’t get anywhere near that 8 percent return,” Neill said.

Stocks Betray Maryland

Maryland had 67 percent of its assets in stocks in 2001, a figure that declined to 51 percent by the end of the decade, according to the fund’s reports.

The state’s pension assets at 2010 year-end were 37 percent short of covering pensions promised to 120,247 retirees and 144,343 active vested civil servants, 10th-worst among state systems, according to Bloomberg data.

During the decade, the state’s domestic stock portfolio performed worse than the market, trailing the S&P 500 or the Dow Wilshire 5000 five years out of 10, including four straight from 2005 through 2008, the fund’s financial reports show.

Legislative Critique

The state Department of Legislative Services, a nonpartisan agency that provides research and policy analysis to Maryland’s legislature, has “repeatedly expressed concern” about the performance of the state’s active U.S. equity managers, according to a draft November 2010 presentation to the Joint Committee on Pensions.

For five straight years through 2010, passively managed funds structured to match a stock market index did better than actively managed ones, which collect higher fees, the legislative services analysts found. The percentage of the state’s domestic stockholdings placed with passive funds declined to 45 percent from about 71 percent in fiscal 2008, according to the office.

The performance of active U.S. stock managers has improved this year, beating their benchmark by 0.59 percentage point, said Robert Burd, the deputy chief investment officer for Maryland’s pension system since March.

“We have confidence in our current manager lineup to add value over time,” said Burd, 42, who has been with the system since 2001.

The state’s decision in 2008 to allocate money to a program targeting so-called emerging managers led to the decline in the percentage of passive managers, Burd said. Emerging managers are small firms that may be ignored by large institutional investors and often are women or members of minorities.

Maryland’s New Plan

Manager performance “only slightly explains,” why the fund did worse than its peers, Burd said. “Asset allocation explains 90 percent,” he said.

“A lot of our peers were earlier into private equity,” Burd said. It took the fund’s trustees time to get comfortable with the illiquidity, use of leverage and lack of transparency that are characteristic of private-equity funds, Burd said.

Maryland now aims to put 10 percent of its portfolio in private equity and the same share each into bonds, real estate and “credit opportunities,” which include high-yield instruments and distressed debt, according to Burd. It is also allocating 15 percent to assets that will protect against inflation such as commodities, 7 percent to hedge funds and 2 percent to cash. The program is cutting the proportion for stocks to 36 percent from 51 percent, Burd said.

As Maryland diversifies its investments, it has improved expected returns while reducing portfolio risk, according to an analysis by the investment consulting group Hewitt EnnisKnupp Inc., cited in the Department of Legislative Services report.

Boom, Bust, Reaction

Maryland’s Sharpe Ratio, a measurement of the return that can be expected from each unit of risk, increased to 0.377 as of June 30, 2010, from 0.242 as of June 30, 2007, according to the report.

Although it may not appear achievable based on the last decade, public pensions should be able to return 8 percent a year on average over 30 to 40 years, said Wilshire’s Neill. Stocks have earned about 10 percent annually over the last 70 years, and will continue to produce “high single-digit” returns, she said. The debt weighing on the U.S. government, businesses and consumers will decline over the next 10 years, Neill said.

“There are regular booms and busts, and then there’s reactions,” Neill said. “Ultimately, there’s always recovery, and that’s what you have to keep in mind as you’re looking out over a 10-year period.”

Public pensions should be able to return 8 percent a year on average over 30 to 40 years? I think this is a dangerous pipe dream, one that got us into the current mess to begin with. An aging society, high debt and unemployment do not bode well for stocks or private equity. There will be growth sectors but you have to pick your spots carefully (ex. alternative energy, medical equipment, software to fight cyber crime, infrastructure, etc.).

And what about private equity? Will it be the great panacea for public pensions? Of course not. As every pension fund around the world listens to their brainless consultants and starts pouring billions into private equity, their collective actions will severely dilute future returns. That's why smart pension funds are focusing more on hiring talent and developing their direct investments and co-investments.

Sure, the top PE funds will continue to outperform, but don't get to enamored by them or else you risk being disappointed. When it comes to the pension crisis, there is no magic bullet that will cure all deficits. Only tough political choices will help avert a total disaster.


Jonathan Jacob of Forethought Risk had these insightful comments to share:

What is worse, in my opinion, is that these private market allocations are being made without regard to the overall liquidity of the fund…what if mature funds (and some of those mentioned may be included in this group) which have a net funding deficit (benefits exceed contributions) put 50-60% in private markets such as real estate, private equity, infrastructure, etc and in a few years another 2008 hits? That means a few years of public market investments providing liquidity to the fund and then a decline in those values could put private allocation above 80% - a very dangerous and illiquid situation for a fund to be in. Just a thought.

Monday, July 25, 2011

PSP Investments Up 14.5% in FY 2011

CNW reports, PSP Investments Reports Fiscal Year 2011 Result:
The Public Sector Pension Investment Board (PSP Investments) announced today that it recorded an investment return of 14.5% for the fiscal year ended March 31, 2011 (fiscal year 2011). The robust overall performance for fiscal year 2011 was driven primarily by strong results in Public Market Equity portfolios as well as in Private Equity and in Real Estate, and follows on the heels of the 21.5% total return recorded in fiscal 2010.
The fiscal year 2011 investment return exceeds the Policy Portfolio return of 12.7% by 1.8%.
Consolidated net assets increased by $11.7 billion, or 25%, to a record level of $58.0 billion. During fiscal year 2011, PSP Investments generated net income from operations of $6.9 billion and received $4.8 billion in net contributions.
"The latest results reflect solid performances and contributions from every part of the organization and point to the success of the diversification strategy we began implementing in 2004, with the introduction of private market asset classes such as Real Estate, Private Equity and Infrastructure. Our Public Market equity portfolios also recorded substantial gains, adding to the strong performance of the previous year," said Gordon J. Fyfe, President and Chief Executive Officer of PSP Investments.
For fiscal year 2011, Public Market equity portfolio returns ranged from 6.6% for the EAFE (Europe, Australasia and the Far East) Large Cap Equity portfolio to 19.7% for the Small Cap World Developed Equity portfolio. The Canadian Equity portfolio return for the year was 19.3%.
In private markets, the Private Equity and Real Estate portfolios posted strong investment returns of 20.9% and 13.8%, respectively. The Infrastructure portfolio earned a slightly negative investment return of 1.6% for fiscal year 2011.
The asset mix as at March 31, 2011 was as follows: Public Market Equities 56.5%, Private Equity 9.6%; Nominal Fixed Income and World Inflation-Linked Bonds 20.7%; Real Estate 9.1% and Infrastructure 4.1%.
Special Examination
During the fiscal year 2011, the Office of the Auditor General of Canada and Deloitte & Touche LLP (the Examiners) jointly carried out a Special Examination in accordance with applicable legislation, which requires such an audit at least once every 10 years.
The Examiners concluded that PSP Investments maintains systems and practices that provide it with reasonable assurance that its assets are safeguarded and controlled, its resources are managed economically and efficiently, and its operations are carried out effectively. This is the best possible conclusion to such an examination.
"Given that PSP Investments has existed for little more than a decade, has experienced tremendous growth, and is engaged in a business where the requisite systems and controls tend to be both complex and constantly evolving, this finding is a testament to the strength and rigour of our organization," said Paul Cantor, Chair of the Board of Directors of PSP Investments.
For more information about PSP Investments' fiscal year 2011 performance and the Special Examination, consult PSP Investments' Annual Report available at
About PSP Investments
The Public Sector Pension Investment Board is a Canadian Crown corporation established to invest the amounts transferred by the Government of Canada equal to the proceeds of the net contributions since April 1, 2000, for the pension plans of the Public Service, the Canadian Forces and the Royal Canadian Mounted Police, and since March 1, 2007, for the Reserve Force Pension Plan (collectively the Plans). The amounts so transferred to the Corporation are to fund the liabilities under the Plans for service after the foregoing dates.
Its statutory objects are to manage the funds transferred to it in the best interests of the contributors and beneficiaries under the Plans and to maximize investment returns without undue risk of loss, having regard to the funding, policies and requirements of the Plans and their ability to meet their financial obligations.

Saturday, July 23, 2011

Euphoria Wanes as Doubts Emerge?

Phillip Inman of the Guardian reports, Bailout rescue: euphoria wanes as doubts emerge:

A rally on European stock markets evaporated on Friday night as investors began to voice concerns about whether the eurozone rescue plan for Greece would be enough to stem the currency bloc's debt crisis.

One leading investment strategist described the new deal as "less sticking plaster and more of a proper bandage", but warned the underlying problems in the Greek economy had not been addressed. Another said the voluntary 21% "haircut" agreed by the banks was less than a third of what was required.

The credit ratings agency Fitch added to worries over the deal after it declared Greece would be in temporary default as the result of the €109bn (£96bn) bailout. The move is likely to be matched by rival ratings agencies.

The FTSE 100 finished up just 35 points at 5935, adding to small gains on the main French and German exchanges following a volatile day that saw most shares sink before a moderate recovery. Markets had initially cheered the deal and pushed up US stock prices overnight.

British and German government bonds, considered a safe haven, ended higher as investors started to have doubts about the scheme, which involves offering Greece, Ireland and Portugal longer to pay off their loans and a cut in interest payments.

Greece was also offered a relatively small one-off reduction in the value of its outstanding loans that will reduce its debt-to-GDP ratio from the 160% it was expected to reach before 2015.

French prime minister François Fillon said the deal guaranteed there would be no default by member states in the 17-nation bloc. However, comments by German banking bosses that the deal would need to be examined added to the air of uncertainty.

Germany's BdB association of private banks said that while an agreement was "an important step," the industry needed more information on its involvement.

The Institute of International Finance, which led talks for private investors, said 90% of creditors will sign up. Deutsche Bank, HSBC, BNP Paribas, Allianz and Axa are among the firms ready to support it.

Holders of Greek debt who are not on the institute's list of supportive firms include Royal Bank of Scotland, Italy's Unicredit and the French Crédit Agricole banking group.

The offer is voluntary, raising the possibility that some investors, such as hedge funds, will not participate and wait to be repaid at the full price.

Standard Life said the deal was a positive move but it would continue to shun European shares and sovereign bonds, leaving it underweight in both.

Richard Batty, the fund manager's global investment strategist, said the bailout package still failed to tackle the economic situation in Greece and other debt-laden countries: "This programme is less sticking plaster and more of a proper bandage but that still doesn't deal with the underlying issues. You have to make these ex-growth economies like Greece and Italy more productive and able to compete in global markets. Without higher productivity and growth it will prove difficult to pay down debts, even with the improved deal."

Gary Jenkins, head of fixed income research at Evolution, argued the compromise to limit private sector bank losses to 21% was not enough to save Greece from years of austerity: "We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date.

"To give Greece a fighting chance they probably need a writedown close to 65%," he said.

Analysts also warned that the need to put the package to a vote in the parliaments of each eurozone member state meant the deal could yet be derailed.

"Some of the euphoria that was in the market as the result of [Thursday's] events has eased off a little bit," said Eric Wand, strategist at Lloyds Corporate Markets.

"Some of the measures that were announced have still got to be passed by national parliaments – particularly with regard to the EFSF [European Financial Stability Facility]. And there may be some concerns about the sustainability of the debt situation given the easing growth backdrop," Wand added.

Germany's Angela Merkel said she was confident the Bundestag would vote through the package after she secured private sector involvement against French fears it would trigger a mass withdrawal of private funds across the eurozone.

France's BNP Paribas is set to take the biggest hit of around €950m, as the largest holder of Greek government debt outside the country.

Fillon said France's debt would increase by €15bn by 2014 taking into account the cost of providing a guarantee. The increase in debt raises the risk that France may overshoot the government's debt targets, which foresee a peak at 87% of GDP in 2012.

Ireland said the reduction in interest rates and extension on much of its lending could save €1bn a year in costs. Prime minister Enda Kenny thanked UK chancellor of the exchequer George Osborne for matching the eurozone plan with a reduction to 3.5% on the interest payments of a separate loan Britain offered last year.

Other sharp investors are also warning against too much bailout euphoria. Stephen L. Jen, managing partner of London-based hedge fund SLJ Macro Partners LLP, told the Wall Street Journal that "ad hoc" measures won't address the fundamental challenges arising from economic and political divergence within the bloc of 17 nations that share the euro:

"We are not closer to the end," said Mr. Jen, who was formerly Morgan Stanley's global head of currency research and has worked as an economist at the International Monetary Fund, World Bank and Federal Reserve. Europe needs to become "a United States of Europe, rather than a collection of countries. Obviously, Europe is far from getting to that stage. This is why there will be problems for a long, long time in Europe."

Euro-zone leaders agreed Thursday to provide €109 billion in new loans for Greece as well as an additional €50 billion through a bond exchange and buyback plan. They also provided sweeping new powers to the €440 billion Financial Stability Facility, the region's bailout mechanism, including the power to buy Greek government bonds in the secondary market and provide credit lines to recapitalize member nations' banks.

Financial markets were initially cheered by the news, but skepticism crept back Friday, reflected in a decline in the euro. Rating agency Fitch said Friday that the role of the private sector in the new Greek bailout plan would constitute a "restrictive default" event.

Mr. Jen said the new measures, including the private sector participation, meant the debt crisis moved from the first stage--no default of any kind--to the second stage of an "orderly default".

"The third stage will be disorderly default when one country may decide not to honor debt obligations in the future," he said, describing a scenario in which bondholders have a "haircut," or losses, imposed upon their portfolio against their will. "The latest measures may be another hard kick of the can, and the can is dribbling."

His favorite trading strategy is to continue buying the Swiss franc and selling the euro, rather than to buy the dollar and sell the euro.

The franc is the "only true safe haven in Europe," he said, adding that the euro-dollar trade is complicated by both the euro zone crisis and the U.S. political impasse on debt-ceiling. The dollar may still falter due to the risks of another round of quantitative easing measures from the Federal Reserve, he added.

Mr. Jen said the euro is likely to trade between $1.30 and $1.48. The common currency, recently at $1.4357 Friday, is trading near the top end of the range with limited room to rise. Mr. Jen said he would sell the euro if it moves up to $1.46 area and he would buy it if the euro slides to the low end of the range.

Another attractive trade for Mr. Jen is to sell the dollar and buy Asian currencies. On top of his favorites are the Singapore dollar, the Malaysian ringgit and the Chinese yuan.

Let me share some thoughts with you. In order to give Greece a "fighting chance," they'll have to write off 75% of the debt or else we're going to see political chaos, debt repudiation and the return of the drachma next year. No matter what happens, I see another 400 years of tyranny ahead for my ancestral homeland.

My friend just came back from Greece and told me, "it's a disaster, very sad to see so many young, smart people unemployed." Indeed, the official youth unemployment rate in Greece stands at 45%, meaning one out of every two is searching for a job and those that are working are typically underemployed and receiving low wages. My friend added: "It's so bad that Albanians and Eastern Europeans are leaving Greece to go back to their countries. Over 50,000 Greeks applied for a US visa and only 50 were accepted." And as if things aren't bad enough, the dumb taxi drivers and sailors in Greece just decided to strike this past week smack in the middle of tourist season! I would throw these idiots, and the shameless politicians from all parties, all in jail for treason and hire unemployed who want to work.

But the "smart geniuses" over at the IMF will tell you not to worry, austerity is working just fine in Greece. I'll tell you that austerity is a total disaster in Greece and elsewhere. I just spoke to a couple from England who recently left Manchester to emigrate to Montreal, Canada. The lady told me Manchester is a "drug infested, gang infested hell on earth where kids as young as 6 years old are killing each other and beating up police officers. They cut the police force by half and crime went up 200%." She told me austerity in the UK is exacerbating income inequality to the point where social chaos will ensue and possibly "civil war." She's obviously exaggerating but she worked for a charity there helping troubled teens, so she was on the front line watching social degeneration.

Scary thought, but Manchester might be the future of all major cities in the developed world. That's why I remain confident that the world's power elite will do whatever it takes to re-liquify capital markets, introduce inflation in the system and try to inflate their way out of this structural debt crisis. That means that even though the overall indexes might trade sideways for a long, long time, there are plenty of trading opportunities in stocks because hedge funds, mutual funds, bank prop desks still need to make money and will trade like animals. They will squeeze the juice out of this sucker until they bleed it dry.

So relax folks, euphoria might wane, Ray Dalio might have mastered the machine, Michael Hudson is right, Wall Street's euthanasia of industry will continue unabated, but the truth is there are powerful interests behind this global "debt crisis" dictating the terms for the rest of us, and they will fight debt deflation tooth and nail. Just remember, they're always trying to screw you any way they can by scaring the shit out of you. It is futile to fight these powerful, rotten interests; much better to understand them and try to protect yourself as best as possible as the world sinks deeper into hell.

Friday, July 22, 2011

Judge Sues N.J. Over Pension Cuts?

Before I get into my latest topic, I was advised by a union member that PSP Investments released its Annual Report 2011. They do this every year around this time because Parliament has to approve it before they post results. Problem is that the fiscal year ended in March (March 31st 2010 to March 31st 2011) and the delay in reporting the results publicly is unacceptable. Most people are away on vacation this time of year so reporters do not cover it.

The overall results are excellent, up 14.5%, or 180 basis points above the benchmark portfolio which returned 12.7% in FY 2011. But I want to take my time and go over PSP's annual report over the weekend, as well as the Special Examination 2011 performed by the Office of the Auditor General of Canada (OAG).

Given that I worked as a senior investment analyst at this organization in the past covering public and private markets, have tremendous respect for some individuals there (most aren't slimy weasels), and know senior people at the Treasury Board and the Office of the Auditor General of Canada, I promise to be fair, professional but ruthlessly critical in my comments covering the annual report and the OAG's special examination (trust me, you don't want to miss it!).

So let me get onto my Friday comment. Lisa Fleisher of the WSJ reports, Judge Sues N.J. Over Pension Cuts:

A New Jersey judge is challenging the state's recent pension and health-care cuts, claiming the state Constitution protects judges' salaries to keep the bench independent.

Judge Paul DePascale, who sits on the Superior Court bench in Hudson County, filed a lawsuit in state court Thursday challenging the laws signed last month by Gov. Chris Christie.

Judges, who must retire at age 70, are now required to contribute 12% of their salary, up from 3%. The state Constitution says that judicial salaries "shall not be diminished during their term of appointment." The lawsuit also said that an earlier draft of the legislation cited the constitutional requirement.

It's at least the second lawsuit filed challenging the cuts, which require current workers to contribute more of their salaries to receive the same pensions.

The Democratic leaders of the Legislature bucked the majority of their own party by putting the bills up for a vote. Unions vowed to take revenge in the November elections.

Michael Drewniak, a spokesman for Mr. Christie, pointed out that judges previously contributed an average of $59,300 to their pensions during their time on the bench. "Judge DePascale should probably just say, 'Thank you' and look forward to a comfortable retirement," he said.

MaryAnn Spoto of covered the story more in depth, reporting that N.J. judge files lawsuit against new pension and health benefit increases for public workers:
New Jersey’s public worker pension and health benefits increases should be revoked for state judges because they unconstitutionally slash their salaries and undermine judicial independence, a state Superior Court judge claims in a lawsuit filed Thursday.

The complaint, filed Thursday by Superior Court Judge Paul DePascale, who sits in Hudson County, is the first legal challenge to the landmark health and benefit law enacted last month. State public employee unions angered by the changes are also vowing to go to court.

The complaint says the law runs counter to the part of the state constitution that says the salaries of the Supreme Court justices and Superior Court judges "shall not be diminished during their term of appointment."

"It diminishes the salary of all justices and judges appointed before the enactment of the subject legislation during their term of appointment and, by doing so, unconstitutionally and adversely (affects) the public and the independence of the judiciary," DePascale’s attorney, Justin Walder of Roseland, wrote.

Gov. Chris Christie’s spokesman Michael Drewniak fired back, saying judges fare far better than other public workers.

"Of all classes of New Jersey state employees, judges of the Superior Court have enjoyed the lowest pension contribution rate and received the richest pension benefits," Drewniak said. "Judge DePascale should probably just say thank you and look forward to a comfortable retirement."

Set by law, judicial salaries range from $165,000 for Superior Court trial judges, including DePascale, to $192,795 for Supreme Court Chief Justice Stuart Rabner. New Jersey now has 430 judges.

Drewniak said before changes judges’ contributions covered less than 10 percent of their pensions, while other public workers contributed about half. He said the average annual pension for a retired judge in the Judicial Pension System is $107,540.

DePascale, however, said in his court filing that his deductions will increase "steadily and dramatically" over the next seven years. His pension deductions would be hiked $14,849 by 2017, when he would be paying $18,137 into the pension system, according to court filings.

The new law, to be phased in over seven years, will make judges’ pension contributions go from 3 to 12 percent of their annual salaries. The same law will boost the contributions of members of the Public Employee Retirement System from 5.5 percent of their salaries to 7.5 percent over that same period.

DiPascale also said his health benefits contribution would more than double to $5,230.86, based on state estimates that would allow different levels of coverage, according to court papers.

Judges currently pay 1.5 percent of their salaries toward their health care benefits. The new law requires them to pay 35 percent of the premium cost.

The lawsuit concedes no New Jersey court has addressed its contention that increasing benefit contributions constitutes a salary cut, but it noted the Delaware Supreme Court ruled it was.

Drewniak declined to comment on the constitutional question.

Winnie Comfort, spokeswoman for the Administrative Office of the Courts, said Rabner is aware of the suit but has no comment. An initial hearing before Mercer County Assignment Judge Linda Feinberg is set for Sept. 16.

Pension changes took effect July 1. However, actual deductions start Oct. 14, along with health benefits contribution hikes.
I've already expressed my thoughts on this and other similar articles in comment on whether public pensions are a "vested right." I don't think so. While I empathize with public sector employees who contributed to their pensions, I'm also keenly aware that they shouldn't enjoy benefits that their private sector counterparts don't have, namely, retirement security for the rest of their life once they retire.

The state of New Jersey made its share of mistakes too, not topping up its state plan when it should have, but when the money isn't there, I don't think it's reasonable for judges and state workers to challenge the constitutionality of the cuts in benefits. If catastrophe strikes, all the laws in the world will not protect these public sector workers. People have to keep that in mind and stop thinking they're entitled to "gold-plated" pensions. They simply aren't part of this planet if that's what they think.

Thursday, July 21, 2011

Operation AIG II to Save Pensions?

Reid Epstein of Politico reports, The Fed, Wall Street plan for default:

With less than two weeks before the United States cannot borrow more money, the Federal Reserve and Wall Street are making plans to prepare for the country’s possible default on its $14.3 trillion debt.

In the most revealing comments to date, Charles Plosser, the president of the Philadelphia Federal Reserve, told Reuters the nation has for months been in “contingency planning mode” to deal with the fallout when the federal government runs out of money.

“We are developing processes and procedures by which the Treasury communicates to us what we are going to do,” Plosser said. “How the Fed is going to go about clearing government checks. Which ones are going to be good? Which ones are not going to be good? There are a lot of people working on what we would do and how we would do it.”

The Treasury Department has repeatedly denied making plans for default, saying raising the debt ceiling is the lone acceptable option. A spokesman did not comment to Reuters.

Wall Street officials are in the same boat, devising what the New York Times called “doomsday plans in case the clock runs out.”

Meanwhile, the Wall Street firms, the Times wrote, are seeking to reduce their risk related to Treasury bonds while hedge funds are hoarding cash to purchase U.S. debt if the price plummets in the event of a post-default sell-off.

The paper wrote that a full-scale financial panic has not set in but is close.

“The metaphor is a pile of sand,” Mark Zandi, the chief economist at Moody’s Analytics, told the Times. “You keep putting one piece of sand on the pile, nothing happens, and then, all of the sudden it just caves.”

Plosser also told Reuters that, despite the shaky economy, the Fed may raise interest rates before the year is out. He said he expects the unemployment rate, now at 9.2 percent, to fall to 8.5 percent.

“I don’t see the fundamentals of the economy as changed that much,” he said. “Yeah, there’s been some shocks and disruptions, but the underlying forces that are going to cause us to continue a slow, moderate recovery are still in place.”

Hate to tell you, but it's becoming easier and easier to telegraph the Fed, the ECB and the rest of the financial "elite." I literally laugh when I read about a "doomsday scenario" or Wall Street firms "reducing their risk to Treasuries." Who are we kidding here? Wall Street firms are long Treasuries, so is PIMPCO and they're all long risk assets waiting for the Mother of All Short Squeezes. When everyone is bearish, get greedy and become a pig. Contrary to popular belief, pigs often don't get slaughtered and they make out like bandits!

It will be rocky but at the end of the day this sucker has to keep grinding higher or else the risk of debt deflation shoots up tenfold -- something which the financial oligarchs will not mess around with. They'll fight deflation or the perceived threat of deflation tooth and nail to ensure future profits.

And what about public pensions? Mark Heschmeyer of CoStar Group reports, Pension Fund Earnings Skyrocket, But Concerns Temper Gains:
The nation's three largest pension funds reported preliminary gains ranging from 17.5% to more than 23% for their fiscal years ended June 30. While the results represent the funds' best performance in years, fund managers were subdued in their assessments because of current economic uncertainties, and because the returns still were not keeping up with the needs of its members.

Real estate gains for the three funds -- California Public Employees' Retirement System (CalPERS), The California State Teachers' Retirement System (CalSTRS), and The New York State Common Retirement Fund - were mixed. Real estate returns for the California did not match the overall performance, whereas real estate returns exceeded the New York fund's overall gain.

CalPERS Reports 20.7% Return

CalPERS, the nation's largest pension fund, reported a 20.7% return on investments in preliminary estimates for the one-year period that ended June 30, 2011.

"This is our best annual performance in 14 years," said Rob Feckner, CalPERS Board President. "For the second straight fiscal year, the pension fund exceeded its long-term annualized earnings target of 7.75%."

The net-of-fees performance was the strongest since the 20.1% return of 1997 and the highest since the 2007-09 recession.

As of June 30, 2011, the market value of CalPERS assets stood at approximately $237.5 billion. A year earlier, the fiscal year ended with $200.5 billion.

Real estate investments yielded a 10.2% return based on numbers only through March 31 (not June 30, 2011).

"Despite the good news, we're well aware of continuing uncertainties in the global financial markets," said George Diehr, Chair of CalPERS Investment Committee. "Accordingly, our strategy is accounting for such factors as high unemployment, the depressed housing market, and financial turmoil in Greece and other debt-plagued countries. We're moving forward with our risk-focused asset allocation strategy and developing new tools to respond to market conditions."

CalSTRS Earns a 23.1% Return

CalSTRS, the nation's second largest pension fund, posted a remarkable 23.1% return on its investment portfolio, the highest in 25 years.

The return rate soundly beat the actuarial assumed rate of 7.75%. It brought in $29 billion for the fiscal year ending on June 30, 2011. CalSTRS investment portfolio's market value ending June 30 was $154.3 billion.

This marks the second consecutive year of robust performance, after the fiscal year 2009-10 return of 12.2%.

Despite the healthy return in 2010-11, June's stubbornly high unemployment rate, a sluggish housing sector and weak consumer spending, nationally, point to continued challenges for the economy and for investors, highlighting that CalSTRS estimates it cannot invest its way back to financial health.

As of June 30, 2010, the gap between the value of the fund's assets and the value of CalSTRS obligations, or the funding gap, had grown to $56 billion.

"The stock market has rebounded nicely from the economic near-death experience of 2008, but it is far from healthy and it presses the need to put a solid funding solution into place for the long term," said CalSTRS Chief Investment Officer Christopher J. Ailman. "Solid performance in the past two fiscal years puts some wind in our sails, but it doesn't make up for a lost decade of returns."

"As a result, we have taken steps to generate returns in response to the financial crisis, such as our temporary shifting of 5% of assets from global equities to take advantage of opportunities in distressed markets in fixed income, real estate and private equity. This move alone has yielded returns of about 29% since inception, ahead of the equity market over the respective term," Ailman added.

Real estate investments in FY 2010-'11 yielded a 17.5% return.

New York Pension Fund Earns 14.6% Return

The New York State Common Retirement Fund, the third-largest fund in the nation, earned a 14.6% rate of return for the fiscal year ending March 31, 2011. The estimated value of the fund is $146.5 billion, the highest since the global economic downturn in fiscal year 2008-2009.

"The fund remained resilient during a tough economic period," said New York State Comptroller Thomas P. DiNapoli. "We've come a long way back."

"There still are reasons to be cautious about the ongoing recovery," DiNapoli said, "but the results are a good sign that the fund has weathered the worst of the downturn. We're on the right course."

Real estate investments yielded a 26.7% return.
All this proves to me is that US pensions plans are not out of the woods by any stretch of the imagination and judging from the meager Q2 results, Canadian pension plans are not faring any better. Importantly, if liabilities keep growing faster than investment returns, pensions are screwed and will need to cut benefits down the road.

So what will happen if the US defaults and "disaster strikes"? Absolutely nothing. Business as usual on Wall Street and they're going to be using every piece of negative macro news to buy the dips and make more money. Even if the sky falls, which it won't, the financial oligarchs are already busy preparing for Phase II of Operation AIG. Stay long risk assets throughout the remainder of the year and for all of 2012. If you want to speculate here, pick up some distressed European equities and bonds like National Bank of Greece (NBG).

Wednesday, July 20, 2011

OTPP Swaps Assets With Australia's MAp Group

Sonali Paul and Narayanan Somasundaram of Reuters report, Australia's MAp agrees asset swap with Canadian fund:
Australia's MAp Group has agreed to swap airport stakes with Ontario Teachers' Pension Plan to beef up its holding in Sydney Airport in a deal worth A$1.6 billion ($1.7 billion), and flagged a possible cash return to shareholders.

The operator of Sydney airport will exchange its stakes in Brussels Airport and Copenhagen Airports for OTPP's 11 percent stake in Sydney Airport and A$791 million in cash, as it looks to simplify ownership of Australia's top airport.

The cash component was slightly lower than flagged when the proposal was announced in June, mainly due to the strengthening of the Aussie dollar against the euro.

After the deal, it will own 85 percent of Sydney airport and said it expected to make about A$1.5 billion available to MAp investors when the deal is completed, slated for the fourth quarter of 2011.

While MAp is trading its stakes in Brussels and Copenhagen airports for below their last valuation at A$1.94 billion, giving way to some concern, investors were still satisfied that the group was making progress on its plan to get out of other airports to focus on Sydney.

"It's disappointing they've decided to do it at this particular point in time when we're mid-way through the recovery in asset valuations," said Will Seddon, analyst at White Funds Management, which owns MAp shares.

"But that said, it cleans the structure up a lot and gives them absolute control of Sydney, which is a very good asset."

MAp shares rose 1.5 percent to A$3.44, underperforming the broader market , which rose 1.8 percent.

No decision has been made yet on exactly how MAp may return cash to shareholders, a MAp spokeswoman said.

"I guess they'll probably keep some powder dry for what opportunities may come up with respect to Sydney, but apart from that, the best thing they could do is return it to shareholders," Seddon said.

The biggest block to MAp taking full control of Sydney airport is German construction group Hochtief , which is trying to sell its airport concessions as a whole, including a 12 percent stake in Sydney airport.

OTPP will end up with a 39 percent stake in Brussels Airport and a 30 percent stake in Copenhagen Airport, adding to its airport holdings in Birmingham and Bristol in Britain.

"We believe that Brussels and Copenhagen Airports are excellent opportunities that strongly reflect our investment criteria and our long-term investment horizon," Stephen Dowd, senior vice-president of OTPP's Teachers' Infrastructure Group, said in a statement.

The Danish government remains the single biggest shareholder in Copenhagen Airports with a 39.2 percent stake.

Shares in Copenhagen Airports traded up 2.3 percent at 1,647 Danish crowns ($313.6) by 0724 GMT. ($1 = 0.934 Australian Dollars) ($1=5.252 Danish Crown)
Ontario Teachers' put out a press release on their website, Teachers’ invests in premier European airports:
The Ontario Teachers’ Pension Plan (Teachers’) has reached an agreement with MAp Airports (MAp) to exchange its interest in Sydney Airport and a cash payment for MAp’s interests in Brussels Airport and Copenhagen Airport.

The transaction will result in Teachers’ Infrastructure Group adding to its current airport holdings with ownership of 39 percent of Brussels Airport and 30 percent of Copenhagen Airport. MAp will receive Teachers’ 11 percent interest in Sydney Airport plus a cash payment. The transaction is expected to close in 2011, subject to regulatory approvals.

“We believe that Brussels and Copenhagen Airports are excellent opportunities that strongly reflect our investment criteria and our long-term investment horizon,” said Stephen Dowd, Senior Vice-President, Teachers’ Infrastructure Group. “As experienced airport investors, we look forward to working with the Belgian and Danish governments and other stakeholders to develop the full potential of these airports.”

Teachers’ Infrastructure Group’s other airport investments are Birmingham Airport and Bristol Airport, which are jointly controlled alongside other shareholders. Teachers’ Infrastructure Group makes investments that are subject to a fair and transparent regulatory framework and that generate stable, low-risk, long-term returns to help meet the plan’s pension obligations.

With $107.5 billion in assets as of December 31, 2010, Teachers’ is the largest single-profession pension plan in Canada. An independent organization, it invests the pension fund's assets and administers the pensions of 295,000 active and retired teachers in Ontario. For more information visit

Some comments on this transaction. First, I have never been to Australia (my dream is to swim with Great White Sharks at the Great Barrier Reef). Was at the hospital yesterday morning as part of some research study on transcranial magnetic stimulation in Multiple Sclerosis and one the Master's student shocking me with magnetic pulses was from Melbourne. I asked her why she decided to move to Montreal and she told me she followed her heart, married and moved here but she misses Melbourne and thinks the winters are brutal here (they are but so far we're having an amazing summer).

I do, however, know Brussels well because my mother and stepfather have been living there for the last seven years (he's a diplomat for the government of Quebec). I love that city. It's clean, classy and full of diplomats so most of the people are educated and cultured. You can drive to other cities like Bruges where you can visit museums and walk around to see amazing historical sites. Brussels is the hub of Europe. You can literally go anywhere from there. And the beer, fries and restaurants are awesome. Just writing about it makes me want to go back soon!

As for Copenhagen, it's a busy European airport so this too is a great asset for Ontario Teachers'. The terms of the deal are favorable for Teachers' and we'll see how MAp Group fairs out with its controlling stake in Sydney airport. I was told that group Hochtief, the German infrastructure powerhouse, is fighting off a takeover and is liquidating assets, so this could be a stumbling block for MAP taking full control. And just like Canada, Australia is going through its own bubble, dangerously overheating which could spell big trouble down the road.

All this to say that I think Teachers' did a good move here. However, airports are not always profitable ventures for pension funds. The Caisse de dépôt et placement du Québec, Canada's largest pension fund, took a huge writedown in 2008 from its troubled investment in British Airports Authority (BAA). These deals are complex and if the terms are wrong or all risks are not evaluated properly, pension funds will lose in the high stakes game of infrastructure investments.


A senior pension fund manager was kind enough to share his thoughts:
“High stakes game of infrastructure investing”? These are supposed to be low risk, stable assets serving LDI purposes. They are usually priced to provide enhanced bond like return and duration outcomes. Unfortunately, these assets are often way more cyclical than people chose to believe, and are often financed like LBO’s, which further exacerbate the cyclicality. That’s why not all pension plans believe infrastructure provides for suitable risk/reward. Too bad more pension plans don’t do greenfield projects. That’s where the social need is. Trading and financial engineering built assets is indeed a game. I am not playing a game, I am trying to create profits to pay pensions. It may be a decent investment, I don’t know enough about it. But just reminding how the deal making excitement and profile can eclipse the post deal follow through on how things actually work out.