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The Big Con: Ohio Pension Manipulation Part I

March 11, 2011

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The Big Con: Ohio Pension Manipulation Part I

I got this one nailed and good. Take a breath and if you are from Ohio and are a union public worker — go to your union and get legal counsel. The good stuff is in Point Two where Lehman Brothers got their sticky fingers on Ohio’s Public Pension funds. Point Three is about Wisconsin and illustrates how pension funds have been mismanaged and likely violated the fiduciary relationship of Wisconsin’s Investment Board with the unions.

You know, state governments use actuaries, comptrollers, treasurers, investment boards, and economic analysts in figuring budgets and pensions. Contrary to what Governor Walker, or Rick Snyder, or Ohio’s John Kasich thinks, it’s not one person behind a desk and a computer figuring out all the angles or making all the decisions. It seems no one is interested in talking about the fact that these pension agreements — legally binding agreements – have been in force for decades with virtually no problems. And most public pensions have been tied to safe, low risk bonds. So, how is it that there is suddenly a crisis? Oh, you say, it’s because of the 2008 Global Financial Collapse. Seems plausible enough, but here are some facts about what is going on that just are not being paid attention to and that actually shows it was not the pensions, but who managed them and many pension still retain multi-billions of dollars. Let’s take a look, eh?

The market has recovered much of its losses, so future years’ pension reports are likely to show that most of the shortfall has already been eliminated.

Dean Baker, CEPR Public Pensions

I quite that to show THERE IS NO PENSION CRISIS.

Point One
The real fallout of the 2008 global financial collapse is unemployment – widespread and deep unemployment — 25 million unemployed or underemployed Americans. This affects tax revenues. Tax revenues are used by states to fund their budgets and are most definitely way down due to widespread unemployment. The answer to that problem is to invest and create jobs – more jobs, more tax revenues. Corporations need to spend money to create jobs. But no, instead they are sitting on close to $3 trillion and show no sign of making the big move to reinvest in America. They are investing overseas; opening plants overseas; creating new mergers; and engaging in acquisitions. So, no investment – no new jobs and tax revenues will remain anemic until we have — Fed Reserve Chairman Bernanke says — 250,000 jobs being created per month, OTHERWISE he has stated that we will remain in stagflation for another 4-10 years. So, where is the money going to come from to run the governments? Oh, I know, let’s raid the public pensions! Just like what is happening in Europe — raiding of PRIVATE PENSIONS – Republicans see that pool of public pension money and lick their chops. They feel entitled to what is not theirs!

Point Two
Some states – like Ohio – decided to tie the pension funds to risky mortgage backed securities offered by the too-big-to-fail banks (Lehman Brothers), and when the house of cards fell, investments linked to MBSs took a nasty hit. So, shame on Governors like Gov. Kasich of Ohio who tries to hide this fact. There is also a little conflict of interest in his case – he worked for Lehman Brothers at one time.

Here is a clip to wet your appetite for the real dirty story involved here. And remember, the crash happened in September and October 2008.

From the Columbus Dispatch:

In late July and early August 2008, Ohio treasurer, Amer Ahmad said he received calls from two senior management officials at Lehman Brothers: Erin Callan, chief financial officer, and Paolo Tonucci, corporate treasurer. “They said, ‘Things are fine at Lehman Brothers. We would encourage you to buy our commercial paper and help us with the liquidity issues we have on Wall Street.’”

But Corday and Ahmad decided to “distance ourselves” from the commercial-paper holdings, Ahmad said. Ahmad said he found it “shocking” that such high-level officials would call to pitch investments to the state.

Shortly after arriving at the Ohio treasurer’s office in early 2008, Amer Ahmad discovered a ticking time bomb: $800 million in risky short-term investments, including some with Lehman Brothers.

Fresh off 12 years working for two large Wall Street firms, the deputy state treasurer and chief financial officer immediately saw red flags.

In less than a week, the treasurer’s office, then headed by Richard Cordray, disposed of all assets that Ahmad considered toxic.

“I made a choice that we should not be investing in these companies,” Ahmad said, “because in the world I just came from, everybody knew these companies were toxic assets.”

But it was a different story at Ohio’s five pension funds. For a number of reasons, the funds could not or did not move quickly enough to sell off questionable assets. As a result, the treasurer’s office, which acts as custodian but does not invest pension monies, calculated that the funds had a combined $480 million loss in market value solely from Lehman investments.

Officials at the pension funds, in response to questions from The Dispatch, calculated direct losses at about $220 million. The difference between the two figures essentially represents the higher value the investments reached before plummeting when the markets fell in September 2008.

Ahmad said the types of investments at the treasurer’s office and the pension funds were different. The treasurer had short-term commercial paper, including some from Lehman Brothers, while the pension funds generally had longer-term mortgage- or asset-backed securities, or investments in failed or failing financial institutions.

Third Point.
Some states actually borrowed from their solvent pension funds. What? Yes indeed.
Add to those scenarios the report from the Center for Economic Policy and Research that says for most states there is no pension crisis [see Part II] and then goes on to actually explain the issues surrounding public pensions, and you realize that someone, alot of someones, certain someones, and coincidentally Republican someones, are not telling the truth. And when people do not tell the truth it usually means they are lying to get something, or to cover something up – or both.

Wisconsin Pension Funds – from Stateline

Wisconsin may have a budget deficit, but its pension system does not. Studies show that Wisconsin’s state pension program is one of the most solid in the country and has enough funds to cover the promises made not only to current retirees but to those in the future. Wisconsin was hailed as a “national leader” in managing its long-term liabilities for both pensions and retiree health care in “The Trillion Dollar Gap,” a Pew Center on the States report last year.

“The Wisconsin Retirement System is one of the better funded plans in the nation,” says Jean-Pierre Aubry, a research associate at the Center for Retirement Research at Boston College, which tracks state and local pensions. He says Wisconsin has consistently contributed 100 percent of the amount of money that actuaries calculate is needed each year, and has a funded ratio well beyond the 80 percent benchmark that experts consider healthy.

“It is surprising that this pension debate is happening here,” says Jerry Allen, executive director of the City of Milwaukee’s Employees’ Retirement System. “There is no crisis.”

The thing is, Wisconsin state government borrowed from its solvent pension fund and created the crisis. Here’s the story, after taking a hit on 2008 financial crisis, someone in Wisconsin state government did a no-no.

January 27, 2010 WSJ reports:

Public pension funds needing to boost their returns but frustrated with hedge funds and private-equity investments are turning to one of the oldest investment strategies – using borrowed money to boost performance.

The strategy calls for leveraging pension funds’ safest asset – government or other high-grade bonds – while reducing exposure to stocks.

[Understand what was done. The pensions were invested in low risk bonds that had a low return, so someone decided to BORROW against those bonds]

The State of Wisconsin Investment Board, which manages $78bn (€56bn), became among the first to adopt the strategy when it approved the plan on Tuesday. The fund will borrow an amount equivalent to 4% of assets this year, and as much as 20% of its assets over the next three years.

Fund officials say that use of leverage could eventually go higher – in theory, at least, up to 100% of assets, according to the staff analysis. But chief investment officer David Villa said that level wouldn’t be palatable for the Wisconsin fund. He said the pension fund was advised by four money managers, including Connecticut hedge-fund firms AQR Capital and Bridgewater Associates.

Here’s the warning:

That public pension funds would contemplate the use of borrowed money so soon after a credit crisis stoked by financial leverage is already setting off alarms for some in the industry.

These analysts wonder if this is little more than the latest gimmick peddled by investment consultants. In previous years, consultants pitched a strategy called portable alpha, an aggressive bet involving leverage and hedge funds that magnified returns when the stock market was surging but aggravated losses when the market turned down.

During much of the previous decade, many pensions thought they found the answer in private equity, which put up big numbers. But these funds collapsed in value in 2008 alongside the stock market while locking up pension fund capital for 10 or more years.

“We started talking to the board about this two years ago,” said David Villa, Wisconsin’s investment chief. “It would have been nice to have this in a place prior to the crisis.” That’s because the strategy calls for leveraging assets that held value in 2008, Treasuries and other highly rated bonds.

State of Wisconsin Investment Board
The State of Wisconsin Investment Board is a state owned investment manager. The firm primarily provides its services to Wisconsin retirement system. It also manages accounts for state investment fund and other state trust funds, including injured patients and families compensation fund, state life insurance fund, local government property insurance fund, the state historical society of Wisconsin endowment fund, and tuition trust fund (EdVest). The firm manages focused equity and balanced funds. It also manages index funds. The firm invests in the public equity, fixed income, and alternative investment markets across the globe, with a focus on the United States.

Sources:
Financial News – Public pensions look at leverage strategy
http://www.efinancialnews.com/story/2010-01-27/public-pensions-look-at-leverage-strategy

CEPR
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/public-pensions-101

Columbus Dispatch
http://www.dispatchpolitics.com/live/content/local_news/stories/2010/05/13/copy/pensions-held-risky-assets-for-too-long.html?sid=101

Stateline
http://www.stateline.org/live/details/story?contentId=556976

William S. Lerach
http://www.huffingtonpost.com/william-s-lerach/wall-street-pension-funds_b_828598.html

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