Monday, April 27, 2009

Why 44 million Americans should get to know PBGC

On the same day that GM announced that it would be trading bonds for equity – a proposition that every pension fund manager must love to hear – it is notable to observe that we’ve had a mysterious one month hiatus in the PBGC stepping into guarantees of illiquid pensions. During the month of March, 4 large pensions were taken over and then, with little explanation, April appears to be passing with no more than a peep.

Now, you all know that I’ve frequently written and spoken on the much-larger-than-the-bank-failure risk in our nation’s pension programs for quite some time and you’ll note that no public official has stepped up to the plate to address this issue head on. In fact, the Obama Administration spent another $30 billion in attempt to bury the reckoning that will be triggered when AIG finally is forced to disclose the fact that it’s managed annuities are no more. But we shouldn’t worry. The Pension Benefit Guarantee Corporation has put the best minds on positioning their obligations for success in the hands of companies with an impeccable reputation for getting the market right. It has contracted management to BlackRock, Goldman Sachs, and J.P. Morgan who manage “very significant real estate and private equity allocations and supplement staff with a full range of services…at a fixed price”.

A little piece of data that would be helpful to realize is that the PBGC actuarial report (the “stress test” if you will for insurance companies) reported that, on September 30, 2008, their single-employer program exposure included $57.32 billion for the 3,850 plans that have terminated and $12.61 billion for the 27 probable terminations. This number was calculated prior to September 30, 2008. There is no evidence that it included things like the Bernard Madoff-triggered pension collapse of East River (taken over by PBGC on March 10, 2009. The anticipation of pension assumptions of Propex (3,300 pensioners on March 23, 2009) and Intermet (4,500 pensioners on March 13, 2009) are also rounding errors in the face of the massive automotive and supply chain challenges that lie ahead in the coming days and weeks.

PBGC seeks to reassure the American public that it’s in good shape (and is obviously well managed with BlackRock, Goldman, and J.P. Morgan) but there are some details that should be considered that may suggest another story. Let’s look past the fiscal year end deficit of $11.5 billion and the current $69 billion in known liabilities. Let’s also look past the recently reported 6.5% drop in returns on professionally managed assets. Rather, let’s look at the fundamentals that drive the actuarial data which is supposed to tell us that all’s in hand.

You’re welcome to review the fine print yourself (I would encourage that by the way) but it’s important to note that over the past nearly two decades, SPARR or the Small Plan Average Recovery Ratio, has dropped from 12.01% in 1991 to 4.26% in 2008. The SPARR is the percentage of assets recovered by the PBGC from plans that they have taken over in the year of termination compared to the outstanding liability assumed. So a dropping SPARR is a BAD thing. And, a dropping SPARR together with a negative asset return on managed funds is a really bad thing.

In short, if you still are scratching your head wondering why you keep hearing about things being “too big to fail”, realize that they are all being propped up to avoid the musical chairs conundrum that will soon be sitting at every dinner table. The real problem, unlike those economists who want to blame 1930’s economic theory for velocity and money problems, is the one no one has the courage or accountability to face. That is that we made a number of promises that are now in default. And, we will all have to understand that we all must find our way, together, out of this mess. It will begin by extending the table to those who are about to find out that what they were planning to live on isn’t going to be there.

Sunday, April 5, 2009

The House Wins

Breathless commentators on the major “news” media outlets over the past week have dared to dream that we may have seen the bottom of the greatest economic downturn since the 1930’s. Could it be that we’ve tested the bottom? Can anyone afford to sit on the sidelines as we see the market so deeply discounted?

A tiny note that is worth considering: finally the Financial Times has put into the public awareness in an April 5, 2009 article (see article here) data that I discussed at the last Arlington Institute SpringSide Chat – namely, the only winners right now are the “house”. What I mean by that is that the only real wealth extraction that was taking place during the last quarter (and if we’re serious, for the past several years) was the money being taken off the table by banks and brokers that charge fees for “managing” investments and trades. It turns out that over 50% of the profitable revenue for many of the world’s leading banks came from transaction and trade fees. This was not creating value for investors. Rather it was charging them for moving investments between equally ephemeral classes.

And here we go again. Just before earnings season when we’ll see the devastating consequence of on-going unemployment and when record numbers of workers around the world will be seeing their unemployment benefits expire – two pending market shocks which will add to the pension collapse that I’ve written about earlier – you’re being asked to put money back into the market. For the record, this advice is for two beneficiaries only. First, it is for the benefit of your broker/banker/fund manager. And second, it’s for the same hedge funds that shorted the market into oblivion before. As investors are lured back into the rock of the sirens, the very professionals who are pumping the market’s value are positioning themselves for the next drop when, you guessed it, they’ll be more than happy to take your cash again.

It feels like Las Vegas because it is. The fundamentals that soured the IBM / Sun Microsystems deal over the weekend are as termite-infested as ever. The massive pending debt refinancings that are necessary on corporate balance sheets – a phenomenon which will emerge in April and May – are as problematic as they were and no amount of accounting wizardry nor accounting obfuscation (just approved this past week by an unconsidered U.S. government reality deferral) can save us from the fact that until the market constituents generate value, investors will keep losing. The winners are those who are trading on quantitative models which profile investor behavior – your behavior – and the bankers and brokers who collect the fees for rearranging the deck chairs on the Titanic. If the Obama Administration really wanted to help the average investor, it would provide an asset balancing tax amnesty where pensions, 401(k) and other tax deferred retirement plans could be really moved and managed by the individual rather than keeping them trapped in the nepotistic cabal where the House is the Winner.