Saturday, January 30, 2010

Public Pensions Peril

It really is amazing to see how very little that so-called professional money managers have learned from the financial markets meltdown and the subsequent multi-trillion bailouts. They are still investing as if nothing happened.

Prime examples of this are the managers who run public pension funds for various states, cities, etc. around the country. To see the managers responsible for the pensions of hundreds of thousands of people across the nation attempt to "secure" the future retirement income of these people by increasing their risk is mind-boggling.

One lesson that should be clear to everyone about the financial markets meltdown was that a large part of the problem was too much leverage. In other words, too much debt...borrowing money to invest.

Yet a Wall Street Journal article this week discussed how many public pension funds (they spoke about the state of Wisconsin) are, you guessed it - deciding to use to use leverage and borrow money to invest in an attempt to increase the return on their pension fund.

When I think of the people who run these public pension funds, words come to mind like stupid, incompetent, naive, gullible.....

The Wall Street "consultants" and salespeople are at the ready to offer their latest and greatest "can't miss" strategies to these fools and they seem to have bought the Wall Street sales pitch entirely.

This latest "can't miss" strategy" involves borrowing money to purchase guess what asset? The asset that I have been warning everyone is in a bubble and a bubble that will explode like a supernova, wiping out everyone unlucky enough to be in its path - long-term US Treasury bonds.

When Treasury bonds blow up in their face, the losses will be enormous because these "professional" money managers used debt (leverage) to give them even more exposure to these bonds.

And who will be left holding the bag? Why taxpayers, of course. They will have to bail out the pension plans of public employees in their local state or municipality or whatever.

What should public pension fund managers do? First, get out of these "recommended" Wall Street positions. They are a ticking time bomb.

Second, tell the people who will be receiving these pensions that whatever promises were made (10% a year or whatever), they are totally unrealistic in the current economic environment. Tell them the truth - that the returns of the 1990s and early 2000s were a once-in-a-lifetime bubble brought about by irresponsible Federal Reserve policies and that we will not see these type of returns any time soon. Tell the pension recipients to lower their expectations.
Of course, the only things that will happen are bailouts of public pensions across the country.

No comments:

Post a Comment