Edward Siedle of Forbes reports, Kentucky State Pension Contacts SEC Regarding Millions Paid to “Secret Agents” (h/t, Chris):
Two days ago I submitted to the SEC a report that I had written entitled, Report of Independent Counsel to SEC: Placement Agent Abuses at Kentucky Retirement System.
In a press release today the Kentucky Retirement Systems, angered at the findings in my report, announced to the world that it had forwarded my SEC report …drum-roll … “to the SEC for its consideration.” They could have saved the postage. After 30 years of dealing with public pension boards, I continue to be amazed at their wildly irrational and defensive responses to legitimate, especially expert, criticisms.
In my report, I concluded that approximately $14 million in undisclosed payments made in connection with the state pension’s investments—millions secretly paid to agents that provided little or no services to the pension—should be recovered.
In my opinion, which should come as no surprise (since I am a former SEC attorney), public pensions cannot afford and should not be paying “secret agents” millions for doing virtually nothing. Yet, prior to my independent investigation on behalf of a whistleblower trustee of the fund, KRS and the Kentucky Auditor of Public Accounts, through tortuous reasoning, had concluded that millions in secret payments for doing nothing harmed no one. It seems Kentuckians are incredibly wealthy, generous and forgiving. Unfortunately for KRS and the state auditor, the SEC apparently disagrees and is now investigating the payments to placement agents.
According to the Pew Center on the States 2010, “Kentucky’s six pension systems had a combined funding level of 63.8 percent, and a total liability of $34 billion in fiscal year 2008. The Bluegrass State had an unfunded liability that was 234 percent of payroll. In 2000, the plans were well funded at 110 percent, but years of the state substantially underfunding its actuarially required contribution, plus significant benefit increases, led the funding level to plummet. This problem was compounded by unfunded, automatic cost-of-living adjustments for retirees’ pensions and incentives that were offered for early retirement.”
Add to the list of factors compounding Kentucky’s public pension problems: boards of trustees that would rather defend than resolve ethical oversights.
According to Pensions & Investments, the Kentucky Retirement Systems returned -0.44% last year, outpacing the benchmark return of -1.19%:
The strongest returns for 2011 came from real estate and private equity, which returned 13.33% and 11.03%, respectively. Fixed income returned 7.04% while equities were down 7.98% for the year.
As of Dec. 31, the Kentucky Retirement Systems returned an annualized 10.38% for three years, 1.75% for five years and 5.78% for 10 years.
Chief Investment Officer T.J. Carlson did not return a telephone call by press time for additional comment.
Can’t comment further on their performance but paying millions to agents that provide little or no service when their pensions are grossly underfunded is very suspicious and warrants a full investigation by the SEC.
Below, Phil Moffett discusses how his establishment opponent in Kentucky’s Republican gubernatorial primary election voted to dramatically increase his own pension, creating a scandal that has cost Republicans two seats in the state Senate. Moffett wants to send a message to all professional politicians like his opponent that Kentuckians will not tolerate shenanigans like this that cost taxpayers huge amounts of money and benefit only a few politicians.
Don’t worry Mr. Moffett, the SEC is investigating what looks like the Mother-of-all Kentucky pension scandals. Something really stinks in Kentucky and it ain’t grits. It’s the stench of fried pensions.
It’s the talk of Wall Street and the financial world. Greg Smith wrote an op-ed article for the NYT, Why I Am Leaving Goldman Sachs:
Today is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.
It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.
But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.
I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.
When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.
Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.
How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.
What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.
Today, many of these leaders display a Goldman Sachs culture quotient of exactly zero percent. I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.
It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God’s work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact.
It astounds me how little senior management gets a basic truth: If clients don’t trust you they will eventually stop doing business with you. It doesn’t matter how smart you are.
These days, the most common question I get from junior analysts about derivatives is, “How much money did we make off the client?” It bothers me every time I hear it, because it is a clear reflection of what they are observing from their leaders about the way they should behave. Now project 10 years into the future: You don’t have to be a rocket scientist to figure out that the junior analyst sitting quietly in the corner of the room hearing about “muppets,” “ripping eyeballs out” and “getting paid” doesn’t exactly turn into a model citizen.
When I was a first-year analyst I didn’t know where the bathroom was, or how to tie my shoelaces. I was taught to be concerned with learning the ropes, finding out what a derivative was, understanding finance, getting to know our clients and what motivated them, learning how they defined success and what we could do to help them get there.
My proudest moments in life — getting a full scholarship to go from South Africa to Stanford University, being selected as a Rhodes Scholar national finalist, winning a bronze medal for table tennis at the Maccabiah Games in Israel, known as the Jewish Olympics — have all come through hard work, with no shortcuts. Goldman Sachs today has become too much about shortcuts and not enough about achievement. It just doesn’t feel right to me anymore.
I hope this can be a wake-up call to the board of directors. Make the client the focal point of your business again. Without clients you will not make money. In fact, you will not exist. Weed out the morally bankrupt people, no matter how much money they make for the firm. And get the culture right again, so people want to work here for the right reasons. People who care only about making money will not sustain this firm — or the trust of its clients — for very much longer.
Just a few minutes ago, Goldman Sachs’ CEO and COO, Loyd Blankfein and Gary Cohn, responded to Mr. Smith’s op-ed, dismissing him as a ‘disgruntled employee who doesn’t reflect our views':
By now, many of you have read the submission in today’s New York Times by a former employee of the firm. Needless to say, we were disappointed to read the assertions made by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.
In a company of our size, it is not shocking that some people could feel disgruntled. But that does not and should not represent our firm of more than 30,000 people. Everyone is entitled to his or her opinion. But, it is unfortunate that an individual opinion about Goldman Sachs is amplified in a newspaper and speaks louder than the regular, detailed and intensive feedback you have provided the firm and independent, public surveys of workplace environments.
While I expect you find the words you read today foreign from your own day-to-day experiences, we wanted to remind you what we, as a firm — individually and collectively — think about Goldman Sachs and our client-driven culture.
First, 85 percent of the firm responded to our recent People Survey, which provides the most detailed and comprehensive review to determine how our people feel about Goldman Sachs and the work they do.
And, what do our people think about how we interact with our clients? Across the firm at all levels, 89 percent of you said that that the firm provides exceptional service to them. For the group of nearly 12,000 vice presidents, of which the author of today’s commentary was, that number was similarly high.
Anyone who feels otherwise has available to him or her a mechanism for anonymously expressing their concerns. We are not aware that the writer of the opinion piece expressed misgivings through this avenue, however, if an individual expresses issues, we examine them carefully and we will be doing so in this case.
Our firm has had its share of challenges during and after the financial crisis, but your pride in Goldman Sachs is clear. You’ve not only told us, you have told external surveys.
Just two weeks ago, Goldman Sachs was named one of the best places to work in the United Kingdom, where this employee resides. The firm was the highest placed financial services company for the third consecutive year and was the only one in its peer group to make the top 25.
We are far from perfect, but where the firm has seen a problem, we’ve responded to it seriously and substantively. And we have demonstrated that fact.
It is unfortunate that all of you who worked so hard through a difficult environment over the last few years now have to respond to this. But, our response is best demonstrated in how we really work with and help our clients through our commitment to their long-term interests. That priority has distinguished us in the past, through the financial crisis and today.
Lloyd C. Blankfein
Gary D. Cohn
My take on all this? I’m not as quick to dismiss Mr. Smith as a ‘disgruntled employee’ because I’ve seen with my own eyes the good, the bad and the downright ugly at Goldman Sachs. Yes, they are an exceptional firm, attract some of the best, brightest and most interesting people, deliver exceptional service, but the crisis of 2008 exposed some serious conflicts of interests that have yet to be addressed.
Back in the summer of 2006, I wanted to short the hell of out structured credit products by shorting the ABX indexes. I had just completed research on CDO-squared and CDO-cubed and was certain the U.S. mortgage market was a disaster waiting to explode.
In November 2007, ABX indexes tied to the highest-rated subprime-mortgage bonds fell to new lows, a sign of deterioration in the perceived risk of the securities following a report showing home prices were declining in more than a third of U.S. cities but by that time, I had lost my job for speaking out on the risks of our credit portfolio.
What’s the point? I remember a conversation with our Goldman client representative and some of their analysts where they kept asking me: “Why do you want to do this? Are you sure you want to do this?” It was actually annoying me and I told them “Yes, we are sure, just let me know what is the best way to go about this trade.”
Well, we never put on the trade, but Goldman Sachs did and they made off like bandits shorting subprime mortgage bonds. They weren’t alone. Some well known hedge funds like Paulson & Co. and a handful of others also made a killing. That whole sordid affair still bothers me to this very day. I lost my job, the pension fund lost billions, and Goldman made a killing!
The point is do not believe everything Goldman tells you about Mr. Smith just like you shouldn’t believe everything some of my former employers tell you about me. Am I a disgruntled former employee of a large pension fund? Yes, part of me still is, but remember I’ve been though a lot of professional and personal shit that would have broken most people.
Am I perfect? God no! I can be rash, brash, outspoken, short-fused, but I tell it like it is and couldn’t care less who I offend, especially Canada’s pension plutocrats who continue to discriminate against me and try to marginalize me.
But living with multiple sclerosis for the last 14 years has taught me an important lesson in life. No matter what challenges you confront, you have to believe in yourself and persevere. I’m not going to hide it, it’s tough out there, especially when you’re struggling with a degenerative disease and finding it impossible to land a job in your field, but I try to do the right thing, focus on my blog and trading, and let people judge for themselves whether the material is worth reading.
Below, William Cohan, author of “Money and Power: How Goldman Sachs Came to Rule the World” and a Bloomberg View columnist, talks about former Goldman Sachs employee Greg Smith’s New York Times Opinion piece. He speaks on Bloomberg Television’s “InBusiness With Margaret Brennan.”
Cohan claims Greg Smith is ‘toast’, which may be true as far as Wall Street is concerned, but Mr. Smith will soon realize that many organizations would love to have a person with his integrity on their team. The financial industry is full of wolves but there are also very good people who still value integrity and whose promises mean something. And if Mr. Smith ever wants to write more, I would invite him to start his own blog and share some of his thoughts.
Marc Lifsher of the Los Angeles Times reports, CalPERS cuts assumed rate of return to 7.5%:
Taxpayers probably are going to be paying more for state government and school district employee pensions beginning in July.
A committee of the California Public Employees’ Retirement System board voted 6 to 2 on Tuesday to cut the assumed annual rate of return on investments that it uses to calculate the contributions that need to be collected from the state and some 2,000 other public agencies.
The committee set the new benchmark at 7.5%, down from a two-decade-old rate of 7.75% but higher than the 7.25% recommended by its own chief actuary, Alan Milligan.
The change, if approved Wednesday by a majority of the 13-member board, would cost the state general fund an additional $167million a year, boosting the total bill for the fiscal year beginning July 1 to about $3.7 billion.
School districts would be tapped for $137million more a year to cover the retirement costs of non-teaching personnel. Cities, counties and special service districts that participate in the CalPERS program would get higher, still-to-be-determined bills July 1, 2014.
Returns have fluctuated greatly over the years, and the fund lost nearly a quarter of its value during the recession. But over 20 years, the fund’s returns have averaged 8.8%.
The benchmark reduction comes as cities and counties across the state struggle with escalating pension costs.
One Northern California city, Vallejo, filed for bankruptcy protection in 2008 after being hit hard by the collapsing housing market. Another, Stockton in San Joaquin County, is threatening to do the same thing.
Gov. Jerry Brown‘s administration has sent the Legislature a 12-point plan to overhaul the state’s increasingly expensive and under-funded public pensions systems.
Howard Schwartz, Brown’s representative on CalPERS’ board, voted for the less-drastic reduction, even though it would add to a projected $9.2-billion deficit in next year’s state budget.
Schwartz, chief deputy director of the Department of Personnel Administration, and other members of the CalPERS Finance and Administration Committee struggled over the financial hit on its member agencies. They had to balance that with their legal duty to keep CalPERS strong enough to meet future obligations.
But critics said they acted irresponsibly by failing to heed Milligan’s advice.
“They’re obviously using funny numbers,” said Marcia Fritz, a Sacramento-area certified public accountant and an advocate for pension reform. “The truth hurts, but it was the truth.”
CalPERS is the largest public pension fund in the nation, with investments valued at $236 billion. Its various retirement funds have 55% to 75% of the money needed for future retirees. Pension experts consider 80% to be a minimum safe funding level.
Milligan’s plan would have forced the state to pay an extra $425million next year and the schools to pay $339million more.
The panel adopted another Milligan recommendation, agreeing to adjust its long-term, assumed inflation rate to 2.75% from 3%.
In voting to reduce the benchmark by a quarter of a percentage point, board members took into consideration testimony from local government officials and labor union representatives.
Peter Ng, the employee benefits director of Santa Clara County, urged the panel not to raise retirement costs. The bigger reduction, he said, would cost his county $68million as it is “just starting to see our financial situation stabilize.”
Board member George Diehr, a Cal State University professor, proposed a middle position between no reduction and a half-point cut. “This is a … true rock-and-a-hard-place situation,” he said. “But, continuing to assume something that probably is not realistic is kicking the can down the road.”
But a colleague called that position imprudent.
“We’re still kicking the can,” said board member Dan Dunmoyer, an executive of Farmers Insurance Group. He is not a finance committee member, so he will be voting Wednesday when the measure comes before the full board.
“If this hole gets bigger and deeper,” Dunmoyer said, “the impact on the counties won’t be bigger numbers: It will be bankruptcy.”
This move is hardly surprising. California’s other large pension behemoth, CalSTRS, is also is thinking of cutting its investment forecast for the second time in barely a year.
Was the chief actuary right to ask for the target to be cut to 7.25%? I think so as the assumed rate of return remains too high, especially when compared to Canadian pension plans whose actuarial rate of return hovers around 6%.
Bernard Dussault, Canada’s former chief actuary, shared his thoughts on CalPERS’ assumed rate of return:
They are actually assuming a real rate of return of 4.5%, i.e. 7.5% for the yield on invested assets minus 3% for inflation. Based on the attached long term data (1923+) on returns on various types of investments (bonds, equities, Treasury Bills), my view is that any assumed real rate of return in excess of 4% is too optimistic and inappropriate for pension valuation purposes.
I agree. With 10-year bond yields at 2.2%, CalPERS will need significant added value from risk assets and alternative investments to meet their investment projections. Sure, bond yields might rise significantly in the next decade, but there are still significant risks of debt deflation, which means yields can go lower from here.
But the risks of stagflation (low growth, high inflation) are rising. Interestingly,the panel adopted the recommendation from CalPERS’ chief actuary to adjust its long-term, assumed inflation rate to 2.75% from 3%. If stagflation takes hold, they’ll have to adjust it once again.
Below, will leave you with an interesting interview with Nassim Taleb, author of The Black Swan (h/t, Zero Hedge). I completely disagree with Taleb on many issues but he does raise interesting points that merit consideration.
Importantly, listen to his comments on growth of government and how the system is broken. Also, listen to how he’s positioning his personal portfolio. He’s afraid of hyperinflation, so he owns stocks, real estate and euros because “they’re addressing their budget problems”.
Henry Goldman and Freeman Klopott of Bloomberg report, NYC’s Bloomberg Pays for TV Ads Backing Cuomo’s Pension Overhaul:
New York Mayor Michael Bloomberg, calling pension costs a “ticking time bomb,” said a coalition of local officials will begin a statewide television ad campaign urging lawmakers to cut retirement benefits for future workers.
“Too often in Albany, it is only the special interests who are heard; we want to make sure that the people are heard,” Bloomberg said today at a breakfast sponsored by the Long Island Association, an 85-year-old organization of business groups, unions, nonprofits and government agencies representing Nassau and Suffolk counties, which have each declared fiscal emergencies.
Bloomberg, a 70-year-old independent, spoke in support of a pension overhaul proposed by Democratic Governor Andrew Cuomo, 54, that has run into resistance in the Legislature. Yesterday, the Democratic-led Assembly and the Republican-controlled Senate each approved budget proposals omitting it. Cuomo’s plan, which would affect only future employees, would create a voluntary “defined contribution” retirement benefit similar to a 401(k) plan.
Bloomberg, who heads New York Leaders for Pension Reform, a bipartisan group of 26 mayors and county executives seeking pension-law changes, intends to pay almost all of the “substantial” cost of the ads, said Marc LaVorgna, a spokesman. He declined to say how much money would be spent on the spots, which will begin airing this week.
Vincent Alvarez, president of the New York City Central Labor Council, said traditional pension funds give workers more security than individually managed retirement plans, providing expert money managers and spreading out risk over large numbers of workers during a long period of time.
“An individual account, where a person has to fund his own retirement, that worker has to save at a much higher level,” Alvarez said in an interview. His group represents 1.3 million public and private-industry workers.
The Bloomberg-financed ad campaign follows a similar spate of commercials produced by the Committee to Save New York, a business-backed group formed to support Cuomo’s initiatives. The commercials warned of “massive” layoffs if pension changes aren’t enacted.
In New York City, pension costs have soared almost 600 percent to $8 billion this year from $1.2 billion in 2002, Bloomberg said.
“You’ve seen that same level of growth in pension costs here on Long Island — only worse,” he said, citing statistics showing pensions increasing 865 percent in Nassau County and 904 percent in Suffolk in the past 10 years.
The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.
Democrat and Chronicle also reports, Unions, local governments spar over pension reform:
Public-employee unions on Tuesday railed against proposed cutbacks in pension benefits for new workers, while government leaders warned that retirement costs are crushing local budgets.
As the state faces an April 1 budget deadline, the battle is growing over Gov. Andrew Cuomo’s proposal to add a less generous pension tier for new public workers.
Hundreds of firefighters rallied outside the Capitol, warning that a new pension tier would jeopardize future workers’ ability to retire. Some unions held a brief protest outside Gov. Andrew Cuomo’s office to knock his plans.
“It’s another assault on labor. It’s going to diminish the quality of people we get on the job, the quality of life after retirement,” said Byron Gray, president of the New Rochelle Uniformed Fire Fighters Association in Westchester County.
Meanwhile, local government leaders will begin running ads Wednesday across the state in support of Cuomo’s push, said New York City Mayor Michael Bloomberg. Bloomberg, in a speech on Long Island, said local governments can’t keep up with the growing costs of public pensions.
“If our state legislators fail to act, cities and counties will be forced to raise taxes, lay off police officers, firefighters and teachers,” the ad states. “We can do better.”
Unions were already running ads in opposition to Cuomo’s proposal, while mayors and county executives have come to the Democratic governor’s aid and formed New York Leaders for Pension Reform. They estimate pension costs in New York have increased from $1.7 billion in 2002 to $12.5 billion this year.
Cuomo is proposing a new Tier VI pension level that would increase contributions from 3 percent of a new employee’s salary to as much as 6 percent. The retirement age would increase from 62 to 65. It would also give employees the option of a 401(k)-type system.
Cuomo estimates it would save $83 billion for local governments over the next 30 years. Cuomo said Tuesday that without pension reform, public employees would face layoffs because governments can’t afford the current costs.
“Here’s the nightmare that’s driving pension reform: Cities and counties in this state could go bankrupt,” Cuomo said on the public radio show, The Capitol Pressroom.
At a news conference, union leaders said Wall Street is to blame for the pension woes. The state Legislature should give the state attorney general the power to go after Wall Street fraud under the sweeping Martin Act on behalf of the state pension system, the unions proposed.
The settlement money would benefit the pension system, the unions said. The state’s pension system, overseen by Comptroller Thomas DiNapoli, has had to increase contribution rates for local governments mainly because of steep declines on Wall Street in recent years.
“We believe the attorney general should be able to sue on behalf of public pensions for losses due to fraud,” said Mario Cilento, president of the AFL-CIO, the umbrella group for the state’s unions. “It’s in the public’s interest because those losses increased pressure on local and state governments. If we can get some of that money back, it would alleviate a lot of that pressure.”
Cilento and other union leaders said they see little room for compromise with Cuomo on a new pension tier, saying Cuomo wants to go after middle-class workers but it’s Wall Street they blame for the state’s pension troubles.
David Holleran, president of the IAFF Local 729, the city of Binghamton’s firefighters’ union, said pensions should be preserved for future employees. He said they would face the same risks on the job as current firefighters.
“We’re worried about the guys and the girls who will be doing the job after us. We want them to be protected like we are now,” Holleran said after the rally.
Assembly Speaker Sheldon Silver, D-Manhattan, said there are “meaningful discussions” that are ongoing about pension reform, but he didn’t elaborate.
Who is right in this brewing pension battle? I’m afraid to say that both parties make good points. Mayor Bloomberg and Governor Cuomo see the costs of pensions skyrocketing and they’re absolutely right to make the case for higher pension contributions.
But labor unions are right to see this as an assault on labor. Why? Because pension reforms are calling for employees to shift out of a safe, secure defined-benefit plans into a less secure, volatile 401 (k) defined-contribution type plan.
Newsday published a letter by Howard Weitzman warning of the danger of altering pensions:
Newsday’s editorial supporting Gov. Andrew M. Cuomo‘s call for pension reform was right on the mark ["Pension myths distort debate," March 8]. It is clear that taxpayers have reached their breaking point. However, the plan to switch from defined-benefit plans (stable government pensions) to defined-contribution plans (forms of 401(k)s) for new government employees needs to be carefully examined.
Retirements were supposed to rest on three legs: pensions, Social Security and private savings. To encourage private savings, the government created 401(k)s and individual retirement accounts. These voluntary, tax-deductible plans were never meant to replace pensions, but to supplement them.
We all know that many corporations are eliminating their pensions in favor of 401(k) plans. But we should be pushing employers to adopt more traditional pensions.
There are many reasons why 401(k)s and IRAs may not provide reasonable security in retirement. First, they transfer the risk of investment losses to the employee. But faced with a wide choice of investment vehicles, employees tend to invest too conservatively, leading to lower yields. This will prevent them from reaching their retirement goals. Some will take on too much risk, leading to the same result. And since these plans are voluntary, some will not invest at all. Government pension funds tend to get higher yields because of their size and lower expense ratios.
Also, 401(k)s and IRAs have much higher fees, leading to much lower investment returns over a long period.
But the main reason for not switching from pension plans is that the ability to retire with reasonable security should not be based on the state of the financial markets at any particular time. Markets go up and down, but over the long run, they should produce a reasonable return. The problem is that individuals don’t retire over the long run, they retire in a specific year. If the markets are down, that could ruin their plans.
For example, many baby boomers are retiring now. Those with 401(k)s and good financial advisers would have planned for a 7 percent annual return. That means money must double every 10 years to reach their goals. The markets are just now returning to levels reached 10 years ago. Many 401(k)s are even lower than they were in 2002. How can these people retire now?
This is an excellent letter which makes a solid case for boosting defined-benefit plans. My biggest concern is that we give the banksters and sharks that caused the crisis bailouts, bonuses and free money, and now we’re asking teachers, firemen, police officers, public and private sector workers with DB plans to switch over to 401 (k) type plans, effectively asking them to forgo a safe and secure retirement and try their luck in this wolf market.
This is pure insanity. It will only accelerate pension poverty. A teacher in Ontario wrote me an email recently, telling me he was thinking of pulling his money out of the Ontario Teachers’ Pension Plan because he was concerned about the deficit and thinks they will cut benefits in the future. I told him not to pull out and I will give the same advice to anyone else who is thinking of pulling out.
Below, listen to a fireman tell it like it is. Every hard working individual who contributes to a pension deserves to have peace of mind and retire in dignity and security. It’s an achievable objective but to attain it, stakeholders need to get the funding and governance right.
Reuters reports, JPMorgan passes stress test; dividend rise, buybacks okayed: The bank said it will raise its quarterly dividend by a nickel to 30 cents and buy back as much as $12 billion of stock this year. The announcement came two days before the Federal Reserve was originally scheduled to announce results of stress tests for 19 U.S. bank holding companies. JPMorgan shares surged on the news and closed up more than 7 percent at $43.39. The bank said in a statement that the Federal Reserve has informed the company that it did not object to its plans to distribute capital. “We are pleased to be in a position to increase our dividend and to establish a new equity repurchase program,” chief executive Jamie Dimon said in the announcement. “We expect to generate significant capital and deploy that capital to the benefit of our shareholders.” Dimon has said in the past that many banks will have more capital than they need as customers pay back loans and losses from the financial crisis subside. While his view would seem to contradict requirements that banks meet higher capital thresholds by 2019, the approval of JPMorgan’s distributions indicates regulators decided the bank has enough capital to make the payouts and meet the new thresholds. The bank said it may not buyback all of the stock approved, depending on market conditions. The folks over at Zero Hedge are gasping for air, claiming the Fed had to accelerate bank stress test results following JP Morgan’s disclosure. Zero Hedge also published an open letter to Jamie Dimon by one James Koutoulas who basically called Dimon an ‘egocentric bully’. Investors shrugged off all this nonsense and JP Morgan Chase shares rallied more than 7% today after the news was disclosed (click on image to enlarge): In fact, JP Morgan Chase shares are up more than 52% since November 21st as they’ve been ripping up along with other financials. Stocks in general are doing well, especially homebuilders and financials. What’s the moral of the story? Never mess with banksters, especially Greek banksters. They know how to profit off money for nothing and risk for free and when push comes to shove, they’ll take it all. By the way, that pic up there is someone calling Jamie Dimon telling him about all the useless crap Zero Hedge is posting on their website. Dimon’s response: “Don’t worry, I’ll fuck Tyler Turden and the rest of those ZH short-selling turds when they least expect it!” Below, Christina Romer, former head of President Obama’s Council of Economic Advisers, talks with Aaron Task on Yahoo’s Daily Ticker. Romer thinks the Fed needs to do a lot more to promote growth, lamenting about the Fed’s “missed opportunity”.
The bank said it will raise its quarterly dividend by a nickel to 30 cents and buy back as much as $12 billion of stock this year.
The announcement came two days before the Federal Reserve was originally scheduled to announce results of stress tests for 19 U.S. bank holding companies.
JPMorgan shares surged on the news and closed up more than 7 percent at $43.39.
The bank said in a statement that the Federal Reserve has informed the company that it did not object to its plans to distribute capital.
“We are pleased to be in a position to increase our dividend and to establish a new equity repurchase program,” chief executive Jamie Dimon said in the announcement. “We expect to generate significant capital and deploy that capital to the benefit of our shareholders.”
Dimon has said in the past that many banks will have more capital than they need as customers pay back loans and losses from the financial crisis subside. While his view would seem to contradict requirements that banks meet higher capital thresholds by 2019, the approval of JPMorgan’s distributions indicates regulators decided the bank has enough capital to make the payouts and meet the new thresholds.
The bank said it may not buyback all of the stock approved, depending on market conditions.
The folks over at Zero Hedge are gasping for air, claiming the Fed had to accelerate bank stress test results following JP Morgan’s disclosure. Zero Hedge also published an open letter to Jamie Dimon by one James Koutoulas who basically called Dimon an ‘egocentric bully’.
Investors shrugged off all this nonsense and JP Morgan Chase shares rallied more than 7% today after the news was disclosed (click on image to enlarge):
In fact, JP Morgan Chase shares are up more than 52% since November 21st as they’ve been ripping up along with other financials. Stocks in general are doing well, especially homebuilders and financials.
What’s the moral of the story? Never mess with banksters, especially Greek banksters. They know how to profit off money for nothing and risk for free and when push comes to shove, they’ll take it all.
By the way, that pic up there is someone calling Jamie Dimon telling him about all the useless crap Zero Hedge is posting on their website. Dimon’s response: “Don’t worry, I’ll fuck Tyler Turden and the rest of those ZH short-selling turds when they least expect it!”
Below, Christina Romer, former head of President Obama’s Council of Economic Advisers, talks with Aaron Task on Yahoo’s Daily Ticker. Romer thinks the Fed needs to do a lot more to promote growth, lamenting about the Fed’s “missed opportunity”.
Sam Jones of the FT reports, Few hedge funds gain in Greek bond saga:
It was a high-risk, speculative bet in Greece’s tumultuous bond market: a wager that would pay off if the Greek government faltered in its landmark bond restructuring at the final hurdle.
The gamble was thought to have been popular among the hedge fund denizens of well-heeled Mayfair and leafy Connecticut – that Greece would be forced into an embarrassing repayment of its €14.4bn March 20 bond. But it was taken, at great cost, by Teaypoik, a Greek pension fund, overseeing the retirement funds of, among others, white-collar workers in the ministry of finance.
For hedge fund managers, who for months have been said to have had their fingerprints all over the Greek crisis – be it through bond market machinations such as buying the March 20 bond, or efforts to drive up prices on credit default swaps – it is something of an ironic, if grim, vindication.
Few winners have emerged from the world of trading in Greek bonds, where some of the speculators have turned out to be banks, insurance companies and even pension funds, and the cash-keen risk avoiders, for the most part, the high-rolling hedge funds.
The completion of the bond restructuring on Monday has been welcomed in all quarters, but with an overriding sense that disaster has been averted, rather than fortunes made.
“[The outcome] is pretty much as expected – [Greece] should fade as an issue for a period of time,” says the head of one multi-billion dollar macro hedge fund, a specialist in trading around global economic events.
“[The restructuring] has gone more or less as expected,” echoes another hedge fund manager, who focuses more narrowly on trading debt. “Obviously the triggering of the CDS, which wasn’t certain, was pretty eventful,” he adds. “Though it looks like that’s going to go smoothly too.”
So where were all the hedge fund “sharks”?
One clue lies in the data on the total net notional value of CDS written against Greek bonds. A value of zero would indicate that, overall, the credit default market – where CDS are traded as protection against such an event – was balanced, with an equal value on contracts betting for and against default.
The total net notional CDS on Greek bonds has been on a steady downward slide for the past two years, having peaked in late 2009. In aggregate, the CDS market has gone from being directionally short Greece, to being more neutral. Part of the reason would appear to be that hedge fund managers, who had driven the speculative spike in CDS positions in 2009, began to close their shorts in 2010 and 2011 by either buying Greek bonds, or else writing CDS protection to new, less far-sighted investors who had suddenly woken up to their over-exposure to potentially toxic peripheral eurozone debt.
More recently, however, it has been market volatility that has kept hedge funds away.
“Managers haven’t really had the ability to put on significant directional positions,” explains Andrew McCaffery who runs a $5bn portfolio of investments in hedge fund managers for clients at Aberdeen Asset Management. “Where anyone has made any money, it has been incremental.”
One trade that has worked for some hedge funds has been in exploiting the difference between Greek bond and Greek CDS prices.
“In January there was a very decent basis between CDS and some bonds,” says Galia Velimukhametova, head of GLG Partners’ European distressed debt fund. The arbitrage has since closed.
Longer-dated bonds were trading for significantly less than shorter-dated bonds, reflecting the views of investors such as Teaypoik.
“Prices were inverted,” says Ms Velimukhametova, allowing some funds to construct low-risk trades designed to profit from them equalising in the event of the restructuring playing out to schedule.
Beyond the Greek market itself, Greek bonds, trading at highly distressed prices, have also become attractive as a hedge for funds looking to profit from further deterioration in the prospects of other peripheral European bond markets.
“Most hedge funds have moved on from any directional trades on Greek debt some time ago,” says Jeff Holland, managing director at fund of hedge funds Liongate, but there are funds buying them for “trades between Greek debt and other European sovereigns”, he adds.
Greek bonds offer short-term protection for traders looking to express negative views about the pricing of other European peripheral debt, such as that of Portugal, Spain or Italy.
Having fully priced in a restructuring, Greek bonds are unlikely to sink further in price, traders reason.
Holding them alongside a short position against, say, Portuguese bonds, protects against Europe-wide upside risks, without limiting the downside opportunity.
In the long term, however, few in the hedge fund community have any doubt that Greece’s travails are far from over. Greece has undertaken its first debt restructuring, but there may well be more.
As I wrote yesterday, the new Greek bonds have the same old doubts, which is hardly surprising. Who in their right mind would want to invest in Greek bonds after enduring this endless saga? Are hedge funds using them as a ‘hedge’ versus peripheral debt? Maybe but the truth remains Greece has a Herculean task ahead to attract all investors to buy their bonds.
And while most hedge funds suffered punishing losses during this whole Greek bond saga, I guarantee you that elite funds made off like bandits, exploiting market dislocations across stocks, bonds, commodities and currencies.
And there are plenty of opportunities out there, especially in cyclical stocks like metals, mining and basic materials. Too many people are reading these markets all wrong and are going to severely underperform in 2012.
Let me repeat: the biggest tail risk out there right now is a massive liquidity driven meltup which will leave many investors sitting on the sidelines in utter disbelief.
I guarantee when Q1 13-F filings are made public in mid-May, these elite hedge funds I track will be well positioned for such a tail risk. Others will be playing the catch-up game.
Below, economist Jim O’Sullivan talks about U.S. retail sales and the outlook for Federal Reserve monetary policy. Retail sales rose 1.1 percent in February, the most in five months, Commerce Department figures showed today in Washington. O’Sullivan speaks with Betty Liu on Bloomberg Television’s “In the Loop.”
Clare Mellor of the Nova Scotia Herald News reports, Universities offered pension relief:
Pension solvency relief that the province has offered Dalhousie University in Halifax is also being offered to other provincial universities with defined-benefit plans.
They include Acadia, University of King’s College, Sainte-Anne and St. Francis Xavier.
However, not all will be taking advantage of the new pension plan rules.
“We are not going to take advantage of the changes in the provincial regulations,” Cindy MacKenzie, a St. F.X. spokeswoman, said Monday.
“We have about 150 employees on a defined-benefit plan, which is currently 88 per cent funded. We have made a commitment to honour our union agreement and have the defined-benefit plan fully funded within 10 years, as per the previous regulations.”
The majority of St. F.X. employees — about 700 people, including faculty — are on a defined-contribution plan. That type of plan is not affected by the change.
Provincial regulations require defined-benefit pension plans to meet a specific solvency test so there are enough funds to pay out benefits owed to members if the employer is shut down or goes bankrupt.
But now impending changes to provincial regulations, announced Thursday, mean that universities with these defined-benefit plans will be exempted from more stringent tests for pension solvency that apply to businesses.
“It will really help Acadia and Sainte-Anne, who have been looking for an exemption for a while,” said Barbara Jones Gordon, executive director of labour services for the Labour and Advanced Education Department.
“It’s really hard to estimate (savings to universities) because it is so particular to long-term bond rates and assessing their liabilities and things like that. But if we are correct, we think it will save Saint-Anne an estimated $800,000 and Acadia maybe between one to two million” dollars, she said.
Acadia University spokesman Scott Roberts said the university does not yet know what the financial impact will be.
“We had made a case, along with others, that this was important to us. . . . Clearly it is positive for us. It is something we have been asking for.”
Anne Leavitt, president of King’s College, said her university did not ask the government for solvency relief.
“A couple of years ago, there were considerable discussions and consultations across the campus, and faculty and staff made an agreement with the universities to increase their (pension) contributions and do a number of things so that internally we would take care of (any shortfall).
“We are going to have a bunch of consultations again across the campus to decide whether we change course or stay on the course that we have been on.”
A Sainte-Anne spokesman could not be reached Monday.
Dalhousie University’s pension plan had been calculated as being underfunded by about $270 million before the province’s announcement.
What is going on here? Why will universities with these defined-benefit plans be ‘exempted’ from more stringent tests for pension solvency that apply to businesses? I have friends who are professors and others who work at various universities, including McGill, and they’re not to happy with the way their DB plans have been mismanaged (McGill got sucked into the non-bank asset backed commercial paper –ABCP — scandal that rocked the Caisse and other large Canadian pension funds).
The problem at Canadian universities and other universities is that they hide their pension problems from public scrutiny. Why? Because they’re petrified if the public finds out, it will impact their fundraising as well as their constant cries to increase tuition fees.
Now, I happen to think you can make a case for raising tuition fees marginally, especially here in Quebec where students enjoy the lowest tuition fees in Canada and are asking for “free tuition like in Denmark” (without understanding how the Danish system works). But when I see how Canadian universities are mismanaged — not just their pensions but general mismanagement in their operations – makes me think twice about raising tuition fees.
True, universities are not corporations and shouldn’t be run like corporations. But why should we give their defined-benefit plans less stringent tests for solvency? Who is monitoring their performance and why isn’t this information easily accessible to the public and updated on a regular basis? I can say the same thing about Canadian cities and municipalities, the other pension time bomb which is rarely discussed. Most people haven’t got a clue of what the hell is going on at these city plans.
This is why I think we should consolidate all defined-benefit pension plans — private and public — into larger public DB plans which are operating under more scrutiny and are more transparent and accountable for the decisions they take (not perfect but better than most smaller plans).
Yesterday, Jack Dean of Pension Tsunami tweeted this USA Today editorial on how public pensions remain private in too many places. Unfortunately it’s true, and unless lawmakers detonate a nuclear bomb and legislate transparency, far too many public pensions will go on hiding important facts from taxpayers. They only reveal the good news but hide stuff they don’t want the public to know about.
Below, the Montreal Gazette reports on students protesting rising tuition fees clashed with the Montreal police riot squad in downtown Montreal last Wednesday afternoon. Video by John Kenney.