The Coming Run On Banks And Pensions

“There are folks that are saying you know what, I don’t care, I’m going to lock in my retirement now and get out while I can and fight it as a retiree if they go and change the retiree benefits,” he said.  – Executive Director for the Kentucky Association of State Employees,  Proposed Pension Changes Bring Fears Of State Worker Exodus

The public awareness of the degree to which State pension funds are underfunded has risen considerably over the past year.  It’s a problem that’s easy to hide as long as the economy is growing and State tax receipts grow.  It’s a catastrophe when the economic conditions deteriorate and tax revenue flattens or declines, as is occurring now.

The quote above references a report of a 20% jump in Kentucky State worker retirements in August after it was reported that a consulting group recommended that the State restructure its State pension system.   I personally know a teacher who left her job in order to cash completely out of her State employee pension account in Colorado (Colorado PERA).  She knows the truth.

But the problem with under-funding is significantly worse than reported.  Pensions are run like Ponzi schemes.  As long as the amount of cash coming in to the fund is equal to or exceeds beneficiary payouts, the scheme can continue.   But for years, due to poor investment decisions and Fed monetary policies, beneficiary payouts have been swamping investment returns and fund contributions.

Pension funds have notoriously over-marked their illiquid risky investments and understated their projected actuarial investment returns in order to hide the degree to which they are under-funded.  Most funds currently assume 7% to 8% future rates of return. Unfortunately, the ability to generate returns like that have been impossible with interest rates near zero.

In the quest to compensate for low fixed income returns, pension funds have plowed money into stocks, private equity funds and illiquid and very risky investments,  like subprime auto loan securities and commercial real estate.   Some pension funds have as much as 20% of their assets in private equity.  When the stock market inevitably cracks, it will wipe pensions out.

As an example of pensions over-estimating their future return calculations, the State of Minnesota adjusted the net present value of its future liabilities from 8% down to 4.6% (note:  this is the same as lowering its projected ROR from 8% to 4.6%).   The rate of under-funding went from 20% to 47%.

I can guarantee you with my life that if an independent auditor spent the time required to implement a bona fide market value mark-to-market on that fund’s illiquid assets, the amount of under-funding would likely jump up to at least 70%.  “Bona fide mark-to-market” means, “at what price will you buy this from me now with cash upfront?”

For instance, what is the true market price at which the fund could sell its private equity fund investments?   Harvard is trying to sell $2.5 billion in real estate and private equity investments.   The move was announced in May and there have not been any material updates since then other than a quick press release in early July that an investment fund was looking at the assets offered.  I would suggest that the bid for these assets is either lower than expected or non-existent other than a pennies on the dollar  “option value” bid.

At some point current pension fund beneficiaries are going to seek an upfront cash-out. If enough beneficiaries begin to inquire about this, it could trigger a run on pensions and drastic measures will be implemented to prevent this.

Similarly, per the sleuthing of Wolf Richter, ECB is seeking from the European Commission the authority to implement a moratorium on cash withdrawals from banks at its discretion. The only reason for this is concern over the precarious financial condition of the European banking system.  And it’s not just some cavalier Italian and Spanish banks.  I would suggest that Deutsche Bank, at any given moment, is on the ropes.

But make no mistake. The U.S. banks are in no better condition than their European counter-parts.  If Europe is moving toward enabling the ECB to close the bank windows ahead of an impending financial crisis, the Fed is likely already working on a similar proposal.

All it will take is an extended 10-20% draw-down in the stock market to trigger a massive run on custodial assets – pensions, banks and brokerages.  This includes the IRA’s.  I would suggest that one of the primary motivations behind the Fed/PPT’s  no-longer-invisible hand propping up the stock and fixed income markets is the knowledge of the pandemonium that will ensue if the stock market were allowed to embark on a true price discovery mission.

Like every other attempt throughout history to control the laws of economics and perpetuate Ponzi schemes, the current attempt by Central Banks globally will end with a spectacular collapse.   I would suggest that this is one of the driving forces underlying the repeated failure by the western Central Banks to drive the price of gold lower since mid-December 2015.   I would also suggest that it would be a good idea to keep as little of your wealth as possible tied up in banks and other financial “custodians.” The financial system is one giant “Roach Motel” – you check your money in but eventually you’ll never get it out.

12 thoughts on “The Coming Run On Banks And Pensions

  1. Dave,

    I agree with most of what you said however one thing that needs correcting is that the ECB is seeking to implement a moratorium on any withdrawals, including electronic fund transfers, from their bank accounts. Not just cash withdrawals.

    Also in the United States, banks already have the right to temporarily deny people from taking most or all of their money out of the bank. The Federal Reserve’s Regulation D allows banks the right to require that the depositor give at least 7 days written notice to withdraw or transfer all or part of the balance of any savings accounts, negotiable order of withdrawal accounts (NOW), and money market deposit accounts (MMDA).

    Demand deposit accounts, such as checking accounts, are not subject to the 7 days written notice. However many checking accounts consist of two sub-accounts – a checking sub-account and a money market sub-account. The bank has the right to require at least 7 days written notice prior to the withdrawal or transfer of any funds from the money market sub-account.

    Certificate of Deposits (CD), which are time deposit accounts, could require advance notice in cases of an early withdrawal prior to the maturity date. However the bank has the right to deny your request.

    Granted banks normally do not require depositors give them advance notice to withdrawal money from their account but if there is a bank run, the banks could exercise their right and require that the depositor give at least 7 days written notice for most accounts. And in the case of CDs, deny any early withdrawal requests.

    The same goes for credit unions. Regulation D applies to any state or federally chartered financial institution that is federally insured or eligible for federal insurance.

    Some credit union websites that I have seen state that they have the right to require at least 7 days and up to 60 days notice of any withdrawal from certain accounts. One example is below:

    “SECU reserves the right to require a member intending to make a withdrawal from any account (except dividend checking, non-dividend checking, HSA or CPG accounts)
    to give written notice of such intent not less than seven days and up to 60 days before such withdrawal.”

    Another example:

    “We reserve the right to require you to give not less than seven (7) and up to sixty (60) days written notice of your intention to withdraw funds from any account except checking accounts.”

    And some people say credit unions are safer than banks.

    1. I don’t know who said CU’s are safer than any other bank. CU’s are big commercial real estate and risky auto loan lenders. If you go to a car dealer and don’t qualify for OEM-sponsored financing, the next call is to a CU – especially used dealers

    2. Thanks for the valuable info JMiller. I also heard some people comment on articles that talk about the risk of having money in the bank, to take your money out of the bank and put it into a credit union.

  2. …I think fiat $$$ are incompatible with free markets …
    and fiat is incompatible with capitalism as whole too…
    the only stable and efficient economic system is
    …sound money and free market capitalism.

    Every thing else is too unstable to survive or too inefficient to work…
    that is why gold and silver must be the only money allowed…

    see am a network guy /computer guy this ” incompatible” thing for us is a big deal…engineered systems must have the compatible parts to function properly.

    I just think sound money is compatible for the economic system for proper functioning…other systems can use fiat but not free market capitalism…thanks?

  3. Keep what you absolutely need to in your checking
    account to handle monthly expenses. Become your
    own bank(er). Bullion, Crypto and cash and of course
    limit your exposure to the equities markets.

  4. I noticed a few nights ago on television that they were running the Madoff movie AGAIN. I love how they have dubbed Madoff as perpetrating the largest Ponzi scheme ever………..

  5. One thing that I usually stress to people when talking about bank accounts, pensions, etc, is that they are not, in themselves, legal tender. That’s VERY important, since it’s foolish to assume an IOU will be recognized as a valid payment for debt in any bankruptcy court of law. Only cash and coins are stamped with the official seal saying such. Thus, your 401k, IRA, etc, are only as good as the cash they have already paid out. Otherwise, it’s a gamble.

    Of course, we already know that cash is a joke built off of a failing petro-treasury ponzi-scheme, but at least it’s a ponzi that has a legal monopoly in the short term and which, consequently, makes up the shaky foundation of everything else. So anytime you move from a more shaky platform to a more stable one, you’re moving in the right direction anyway even if it’s not precious metals.

    Now…what makes me wonder is…what will the new denominated cash units be like? I propose that they be made pure white, extra soft, two-plied and feature the faces of Bernanke, Greenspan and Yellen with mouths wide open.

  6. Central Banks have NO choice in buying up/propping up all stock markets. If they don’t, all stock markets will sink incredibly fast and all that paper wealth that makes everything financially stable will all evaporate and disappear. All derivatives go bust, all banks and markets close and Financial D-Day implosion happens and the world STOPS. These are incredible times.

  7. This is my favorite sentence in your article.

    “The financial system is one giant “Roach Motel” – you check your money in but eventually you’ll never get it out.”

    This is so true and I am so glad I have most of my net worth in precious metals and cash. Cash is still Legal Tender, whereas gold and silver are presently not, so having a few months’ of living expenses in cash on your person at all times, is extremely wise.

    Having enough cash on hand to live, gives you time to hunt around for the best deal on your gold and silver.

    The hurricanes in the south are living proof why you always need to be prepared, including survival food and water.

    Maybe even a spare drum of gasoline as well, given that everyone who did not have a full tank of gas can’t even buy any now, and they are in the unenviable position of having to rely on government to help them escape.

    Imagine that! The very people who caused the financial part of this problem, are now throwing you a life preserver. Hmmm!

    Disaster can strike at any time and the prepared ones will be okay. Only a fool would have more than a few thousand dollars in their bank, and only a really big fool would have everything with one bank, and only a really, really big fool would have waited until the ATMs didn’t work, just like in Houston two weeks ago.

    Spread it around to dozens of banks. If you want to withdraw large amounts, simply take a bunch of small cash advances on a bunch of Visa cards, and repay them electronically thru your bank accounts with the largest balance.

    This accomplishes the same objective, to wit, getting a large account balance converted to cash without rocking the boat. No bank is going to deny a large payment to Visa but just try and take out the large account balance in cash.

    When Visa stops giving or limiting cash advances, this is why you will want dozens and dozens of visa cards. If you are limited to $500 and you need $3000, you can get it with only six cards.

    There are many ways to do a work-around to get cash but they are closing the net quickly and the system is collapsing. There is little time left to go to cash.

    1. “Disaster can strike at any time and the prepared ones will be okay”

      Yes, disaster can strike any time but no matter how much you prep that does not guarantee that you will be okay.

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