Financial Crisis 301 - Pension Fund Ponzi Scheme

The Boogey Man - Yesterday I left off with a promise to talk about the Boogey Man. Well, the Boogey Man is the dark side of the pension funds. Let’s start off with our dear friend Hank Paulson and his latest plan to allow Wall Street to acquire and manage pension funds. I swear to you, I didn’t make that up. Paulson actually sent a plan to Congress to allow Wall Street firms to buy and manage pension funds. These are the same guys that brought us Auction Rate Securities (ARS), Credit Default Swaps (CDS), Collateralized Mortgage Obligations (CMO) and Structured Investment Vehicles (SIV) and all the derivatives and funny-money plans to extort fees from you and me.

Busted Pension Funds – Most pension funds are underfunded and will never be able to meet the obligations they have promised their members. That’s a fact that we can’t avoid. Wall Street and the managers of pension funds can spin it anyway they way, but the bottom line is . . . pension funds are underfunded. READ: The Ponzi Scheme that Tops The Housing Bubble.

The Players - In addition to the usual Wall Street suspects, along with Paulson at the head of Treasury, we have Charles Millard who is the top doggie at the Pension Benefit Guaranty Corp. (PBGC). Millard and his predecessors have not done their jobs over the past 20+ years. If we think Greenspan was the creator of “look-the-other-way” regulatory management, you’ve got to read up on PBGC. By the way, for those of you not familiar with PBGC, this is the Federal Government backing of pension funds, just like FDIC for banks. Basically, we the taxpayers are paying for all the fraud Wall Street executives can heap on us. And nothing will ever be done to stop the thievery, because the guys with power to stop it are paid handsomely to look the other way. Just look at Andrew Cuomo, and his handling of the Auction Rate Securities fraud. He could easily send hundreds of Wall Street boys and girls to jail for fraud. They’ve already admitted it, but they can buy their way out . . . with our money. C’est la vie. Andrew Cuomo will go down in history as one of the World’s Grandest Hypocrites . . . and he will be handsomely rewarded for letting the Wall Street boys and girls off the hook. But let’s get back to the Boogey Man.

Housing Bubble – What financial story would be complete without referring back to the Housing Bubble. One of the problems starting to unravel in the Pension Fund arena, is how much money pension funds have lost as a result of horrible investments in real estate and real estate related securities. Just take a look at the largest pension fund in the country CALPERS – California Public Employees Retirement System - with close to 10% of their assets in real estate and real estate related assets. In fact, I spoke with one person that believes CALPERS has as much as 35% of their assets in real estate related assets. But it gets worse. The boys and girls at CALPERS did deals just to do deals. A perfect example is how Lennar and LNR dumped LandSource on CALPERS. This was a deal CALPERS had no business even getting close to. CALPERS was scalped. And they are not the only pension fund to be scalped by builders, developers, land owners and the boys and girls on Wall Street that did deal after deal after deal after deal . . . to the point most of them had no clue what they were buying or selling.

One-Two Punch - It wouldn't be fair to say all the problems with pension funds are attributable to the housing bubble, greedy Wall Street managers and failed regulation. The second component to all of this . . . is we are living longer and inflation is as reliable as the Eveready Bunny. We should have built the two latter components into all of the models, but we didn't. And all the Kings Men couldn't put Humpty Dumpty together again.

Out of Sight – Out of Mind – For the most part, the pension problem is totally out of sight. It’s long term, down the road for most people. And as with any good Ponzi Scheme, the alarms don’t go off until it is too late. When we finally wake up and realize Wall Street raided the pension funds, it will be too late and the boys and girls with the money will be long gone.

Japan Too – Japan’s public pension fund is the largest public pension fund in the world. Last year it lost almost $6 trillion Yen ($50B US). The fund has more than $150 trillion Yen that is run by Japan’s bureaucrats. Japan is also exploring ways to boost the returns with alternative investments run by outside managers with performance based compensation. This might sound good, but the bottom line doesn’t change. You can’t get more out than you put in. And that is exactly what pension funds around the world are trying to do.

And the UK – The Pension Protection Fund (PPF) in Great Britain just announced that their aggregate funding position for UK defined benefit plans has dropped to a surplus of 8.3B Pounds at the end of June, from surplus of more than $53B Pounds just one month prior! That’s not a warning sign. That’s a big slap in the head. One of the UK’s consulting firms, Redington Partners, released a report showing the FTSE100 pension plans have a $9B Pound deficit, down from a $21B Pound surplus. Startling numbers? You better believe it. And things get worse. Much worse.

On the bright side . . . Yesterday's Trades - We closed out two trades:

1 – 42% Gain - Wachovia Puts - WBVC Purchased July 22 and August 11 at $1.90
SOLD at $2.70 for a 42% Gain

2 – 30% Gain - Toll Brothers Puts - TEPUD Purchased August 12 at $1.20
SOLD at $1.50 for a 30% GAIN

** We added three (3) new positions yesterday. **


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